Beige Book

November 28, 2007

Summary

Prepared at the Federal Reserve Bank of San Francisco based on information collected on or before

November 16, 2007. This document summarizes comments received from business and other contacts

outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.

Reports from the twelve Federal Reserve Districts suggest that the national economy

continued to expand during the survey period of October through mid-November but at a

reduced pace compared with the previous survey period. Among Districts, seven reported a

slower pace of economic activity while the remainder generally pointed to modest expansion

or mixed conditions.

District reports indicated relatively soft retail spending; most retailers said that they were

expecting a slow holiday season, with only small gains in sales volumes compared with last

year. By contrast, tourist activity expanded further in most Districts. Providers of

nonfinancial services to consumers and businesses generally saw continued solid growth in

demand, although a few Districts pointed to reduced demand for transportation services.

Reports from the manufacturing sector were mixed across Districts and sectors, suggesting

little change in activity on net. Producers in the agricultural and natural-resources sectors saw

robust demand, with sales of agricultural products spurred in part by rapid growth in export

demand. The glut of available homes continued, keeping downward pressure on prices and

construction activity. The demand for commercial real estate remained strong in most areas

but showed signs of leveling off in some. Reports from banks and other financial institutions

suggested slower growth in overall loan demand, with some Districts noting a reduction in

the volume of commercial and industrial lending.

Upward pressures on the prices of final goods and services remained modest overall but were

significant for products and services that rely heavily on food and energy inputs. Increases in

the costs of energy and selected raw materials pushed up production and transportation costs

for firms in various manufacturing and services sectors, although this was offset in part by

price declines for lumber and transportation equipment. Food prices remained on an upward

trajectory. Outside of products and services that rely heavily on energy and food inputs, final

prices were reported to be largely stable or down a bit. Wage increases were moderate in

general; upward wage pressures eased in a few areas where labor markets loosened slightly,

although they remained strong for assorted groups of skilled workers.

Consumer Spending and Tourism

Reports on retail spending were downbeat in general, with several significant exceptions.

Most Districts characterized sales as weak or indicated that they had softened, with a few

reporting that the volume of sales had fallen relative to the preceding survey period or a year

earlier. However, the Boston, Philadelphia, Minneapolis, and Kansas City Districts

highlighted a pickup in retail sales relative to the preceding survey period. Among product

categories, several Districts noted continued solid growth in sales of consumer electronics,

while a few also noted that demand for luxury goods continued to rise at a healthy pace. By

contrast, sales of automobiles and light trucks were flat to down, with contacts from several

Districts expecting declines going forward.

Looking ahead, the reports were slightly pessimistic about prospects for the holiday retail

season. Most Districts reported that retailers expect growth in retail sales to be modest at best

relative to last year, and retailers generally were described as having a "cautious" attitude

about the upcoming holiday season. Consistent with this assessment, the Richmond, Dallas,

and San Francisco Districts reported early-season price discounting by retailers. In the

Boston and Minneapolis Districts, retailers expressed cautious optimism for holiday sales,

but they generally expect consumer spending to weaken in 2008. Several reports indicated

that retail inventories have risen a bit of late and were higher than desired levels during the

survey period.

Activity in the travel and tourism sector generally was at a high level and increased further in

some cases. The Richmond, Minneapolis, and Kansas City Districts reported that tourist

bookings grew or were above normal seasonal expectations during the survey period, and

tourism activity in New York City remained at a high level. The Atlanta District reported that

Florida's tourist trade was up, spurred in large part by foreign visitors. In contrast, visitor

travel and business at major tourist destinations in the San Francisco District, including

Hawaii and Southern California, have declined a bit from the high levels established in 2006.

Nonfinancial Services

Reports on nonfinancial services generally were consistent with expanding economic

activity, with the primary exception of transportation services. Several Districts pointed to

continued strong demand growth for health-care services, while the Richmond, St. Louis, and

Minneapolis Districts noted an ongoing expansion for providers of legal and other

professional services. The Dallas District reported steady demand for legal services but noted

a shift toward litigation related to bankruptcy filings, which may signal a slowing economy.

In the San Francisco District, demand for advertising services was held down by weak

demand from sellers of automobiles and home furnishings. Providers of temporary staffing

services saw strong demand in the Richmond District as well as a pickup from the legal and

financial industries in New York City, but demand for temp workers was reported as

"sluggish" overall by Dallas.

Available reports on the transportation sector suggest that the level of activity declined

somewhat compared with the previous survey period. The Cleveland District reported that

trucking volumes were "steady to declining" and that employment has fallen a bit; Dallas

noted that overall shipping activity has weakened; and Atlanta reported lower shipping

volumes for autos and materials for home construction.

Manufacturing

Manufacturing activity was mixed across subsectors but appeared to be largely stable on

balance. Demand remained weak or fell further for machinery and manufactured materials

related to home construction, such as lumber and concrete, and automakers have scaled back

their production activities this year. By contrast, demand rose solidly for various other types

of capital goods, such as non-automotive transportation equipment, information technology

products, and machinery used in the agriculture, energy extraction, and mining industries.

Chicago reported that steel production increased, in part because of reduced import

competition of late, but Cleveland characterized steel shipping volumes as "flat" in that

District. Among nondurable products, several Districts noted continued robust demand for

food and significant gains for paper and plastics. However, Dallas reported "stable" demand

for food and a drop in sales of corrugated boxes, and St. Louis noted that food manufacturers

plan to lay off workers in that District. The reports generally indicated that increases in

demand were especially strong for products and firms with significant export markets, for

which sales have been boosted in part by the lower exchange value of the U.S. dollar.

Reports on capacity utilization suggested that manufacturers on net were operating near

long-term average levels, albeit with substantial variation evident across sectors depending

on the strength of product demand. The reports also suggested little change in utilization

rates during the survey period. A few Districts reported on capital spending by manufacturers

and other businesses, noting tentative plans for continued moderate capacity expansion, but

with the proviso that actual spending will reflect realized needs as they develop.

Real Estate and Construction

Demand for residential real estate remained quite depressed, with only a few tentative and

scattered signs of stabilization amidst the ongoing slowdown. Most Districts pointed to

further increases in the inventory of available homes, with the earlier tightening of credit

conditions for mortgage lending continuing to create barriers for some buyers. Consequently,

prices on new and existing homes sold were reported to be down on a short-term or

year-earlier basis in most Districts. The pace of homebuilding remained very low in general,

and builders continued to shelve projects and lay off workers in many areas; contacts

generally do not expect a significant pickup in homebuilding until well into next year at the

earliest. Among scattered positive signs, however, co-op and condo sales in New York City

picked up during the survey period, Richmond reported favorable readings on home sales in

a few areas, and Kansas City reported that home inventories fell a bit in the Denver metro

area. Weak home demand had mixed effects on conditions in rental markets: Chicago

reported that builders' conversions of new homes to rental property put downward pressure

on rents, while Dallas noted that demand for apartments picked up, in part because some

potential homebuyers are unable to qualify for mortgages.

Demand for commercial, industrial, and retail space generally remained at high levels and

expanded further in some areas, although signs of leveling off were evident in several

Districts. Vacancy rates on commercial and industrial space remained relatively low in most

Districts and declined in some, even where substantial new space has been added of late.

Rents have risen accordingly in many areas. In the extreme, New York reported a 30 percent

increase in asking rents on Manhattan office space over the past 12 months; however, this

represents a smaller increase than in previous surveys, and a recent increase in vacancy rates

there is likely to further temper that trend going forward. A few Districts reported emerging

signs of declining demand for commercial space: this included assorted indicators of weaker

demand in the major metro areas in the Boston District, reduced leasing activity in

Philadelphia, commercial construction activity that was described as "flat to down slightly

compared with a year ago" in Atlanta, and reduced transactions and rising vacancy rates in

some parts of the San Francisco District. Construction of commercial and public buildings

and infrastructure projects remained high in most Districts, however, partly offsetting low

residential building activity and helping to limit losses in overall construction employment.

Banking and Finance

Lending to businesses generally was at high levels, but the reports suggested a slower rate of

growth than in previous survey periods. Commercial and industrial lending activity changed

little or declined in the Cleveland, Atlanta, St. Louis, Kansas City, and San Francisco

Districts, although it increased noticeably in the Philadelphia District and continued to show

modest growth according to Chicago. Lending standards for construction projects and

commercial real estate transactions tightened further in the New York and St. Louis Districts,

and they remained tight more generally and reportedly held down the volume of lending for

these categories in the Boston District. The reports indicated slight increases in delinquencies

on commercial and industrial loans and slightly larger increases for commercial mortgages in

many areas.

Consumer lending was little changed on net, while residential mortgage lending continued its

downward slide. More stringent credit conditions remained a constraint for residential

mortgage lending in general, with additional tightening during the survey period reported by

Chicago, Kansas City, and Dallas; scattered reports suggested slightly stricter standards on

consumer loans as well. Mortgage delinquencies increased significantly in many areas, and

some Districts pointed to slight deterioration in credit quality for consumer loans.

Agriculture and Natural Resources

Most Districts reported strong demand for agricultural products and favorable production

conditions, with the primary exception of an ongoing drought in the Richmond and Atlanta

Districts. Demand and sales were reported to be quite strong for a wide variety of tree and

row crops, dairy products, and livestock. Several Districts noted that the rise in overall

demand has been propelled in part by the lower exchange value of the U.S. dollar, which has

spurred strong increases in export sales. Harvest and growing conditions were quite favorable

in most areas. High corn production and yields were reported by Chicago, Kansas City, and

Dallas. St. Louis and Minneapolis described healthy early-season conditions for winter wheat

crops, while Kansas City described that crop's progress as normal. By contrast, dry weather

undermined pasture conditions and created a need for supplemental feedings to livestock

herds in the Kansas City and Dallas Districts. Moreover, drought conditions continued in the

Southeast, and this reduced or delayed crop plantings and held down crop yields in the

Richmond and Atlanta Districts.

Reports on the natural-resources sector indicated further growth from very high levels of

activity. High oil prices have stimulated expanded drilling in the Atlanta and Dallas Districts;

Minneapolis reported increased activity in the energy and mining sectors since the last report;

and Kansas City reported that "energy activity remained robust." However, Cleveland

reported a slight decline in production of natural gas.

Prices and Wages

Increases in prices of final goods and services generally remained modest, except for food

and energy. Increases in the costs of energy and petroleum-related materials created upward

pressures on transportation costs and the prices of some manufactured items; many producers

responded by increasing final sales prices, although limited pricing power forced some to

absorb cost increases in profit margins. In addition, food prices continued on their

pronounced upward march, and some Districts highlighted price increases on various

imported goods resulting from the lower exchange value of the U.S. dollar. Increases in final

prices for products related to food and energy were moderate in general, however, and they

were accompanied, in large part, by stable or declining prices for other products and services,

including various construction materials and assorted retail merchandise.

Labor markets remained relatively tight overall but loosened in some areas, and wage

pressures were largely unchanged from the previous survey period. Most reports suggested

that wage increases continued at a moderate pace, with numerical reports in the range of 3 to

4 percent on an annual basis. Dallas and San Francisco reported that labor market tightness

eased somewhat, relieving upward wage pressures in some areas, but Kansas City noted that

wage pressures picked up. Wage gains remained especially rapid for assorted groups of

workers with specialized skills used in expanding sectors, such as engineers in the San

Francisco District.

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First District--Boston

First District businesses contacted in mid-November mostly report continuing revenue gains,

but rising caution. Staffing firms cite steady growth and particular strength in the Boston

area, while software and information technology services firms report a slowdown in revenue

growth. Residential real estate markets remain weak and commercial markets continue to

soften. Manufacturers are raising selling prices to pass along cost increases; they are more

upbeat than retailers about 2008.

Retail and Tourism

Although First District retailers contacted this time mostly report modest year-over-year

increases with some volatility in September and October, the overall sentiment is generally

cautious.

Inventory levels are mixed. Headcounts are also mixed, with some respondents reporting

increased headcount in line with company growth or seasonal hiring, while another reports a

modest layoff. One retailer reports intentionally hiring significantly fewer seasonal

employees than usual, while another notes that finding seasonal employees has been difficult

because more people have fulltime jobs. Several contacts cite price pressures, especially for

dairy products. Some respondents say they are starting to feel the effect of rising oil and

gasoline prices, including increased surcharges and sharply higher prices for plastics. Selling

prices remain mostly stable.

A tourism contact reports that 2007 has been a banner year in the Boston metropolitan area

for leisure, business, and convention travel. International travel has been particularly strong

because of the weak dollar, and is expected to continue to be robust. However, there is a

growing sense of uncertainty about how the increasing price of home heating oil and gasoline

will affect domestic leisure travel and tourism in 2008.

Overall, First District retail respondents are cautious in their outlook for early 2008, although

some are still cautiously optimistic. Most respondents are worried about the impact of rising

energy costs and the recent volatility in financial markets on both consumer confidence and

disposable income. Several retailers express more concern about early 2008 than about the

upcoming holiday period.

Manufacturing and Related Services

Manufacturers and related services providers headquartered in the First District report mixed

revenue trends since midyear. Sales of many types of capital goods continue to show strong

gains from year-earlier levels, boosted in part by robust demand from Asia and Europe, as

well as by surging spending on energy, power, and non-automotive transportation equipment.

However, some capital goods manufacturers are experiencing a slowdown in sales to

semiconductor fabricators, financial services firms, and retailers. For the most part, sales of

housing-related and construction products and automotive components remain sluggish.

Most manufacturers report that materials costs are rising, especially for metals and oil

derivatives, as well as for items priced in currencies that have appreciated against the dollar.

Only a few respondents have experienced rising energy prices in recent months; a couple of

firms indicate they are shifting to natural gas or wind power to reduce their dependence on

oil. Over three-quarters of the manufacturing contacts have responded to higher input costs

by raising their selling prices.

Manufacturers continue to adjust their U.S. headcounts only minimally, but they report

somewhat more new restructuring efforts or caution in hiring than earlier in 2007. Average

wage and salary increases remain in the range of 3 percent to 4 percent. Domestic capital

spending plans are mixed, but generally moderate; U.S. spending will largely reflect whether

and where firms need to add production and product development capacity.

Manufacturers and related services providers are mostly cautiously optimistic about their

business prospects over the coming year. Even those that have a positive sales forecast for

2008 cite downside risks from factors such as weak consumer confidence, depressed housing

markets, higher oil and commodity prices, and constrained credit availability.

Software and Information Technology Services

The majority of software and IT services contacts in the First District report modest revenue

growth for the most recent quarter. While demand from the health care industry continues to

be robust, demand from the financial services sector is mixed; one contact reports no impact

from the credit crunch, another notes that small to mid-sized financial services firms have

curtailed spending, although "the bigger players" are continuing to buy. The majority of

respondents are adding headcount in revenue-generating positions such as sales and

consulting, although at a slower pace than last quarter. Firms continue to say the labor market

is tight for software engineers. All contacted firms have raised pay, generally between 3

percent and 5 percent.

New England software and information technology firms generally project that revenues will

continue growing at current rates. However, several note that the downside risks have

increased.

Staffing Services

Staffing respondents in New England report steady growth throughout the third quarter.

Companies with Boston locations continue to experience marked increases in revenues from

the area, often citing it as their strongest location. Contacts say demand for staffing services

is greatest in high-end sectors including biopharmaceutical, engineering, accounting, and

legal. Demand from financial services firms remains soft and one contact reports that demand

from the IT sector has fallen in the last two months. Supply of skilled labor, which was tight

in the second quarter, has become even more limited. Bill rates and pay rates are steady or up

slightly, with most contacts suggesting that the rise reflects both an increasing proportion of

high-end placements and limited supply. Respondents report stabilizing costs; however, there

is upward pressure in healthcare costs and a few contacts express concern over rising

gasoline prices. Contacts expect current trends to continue through the end of 2007; however,

they are more cautious about 2008. Those with clients in the financial services sector express

concern that firms will hold back on hiring into next year, while contacts with ties to the IT

sector expect further slowing. All are confident that biopharmaceuticals will continue to be

"red-hot" into next year.

Commercial Real Estate

Tighter credit conditions remain in place in New England's commercial real estate markets.

Investors have not returned to the commercial mortgage-backed securities (CMBS) market in

significant numbers, and trust in the ratings agencies is reportedly very low. Since these other

credit sources have dried up, banks and life insurance companies are picking up a

considerable amount of commercial mortgage business. However, their willingness to add

commercial mortgages to their balance sheets is said to be limited by portfolio allocation

considerations. Credit tightening continues to have the biggest impact on loans for

speculative construction. Sales activity and planned construction have continued to decline in

both Boston and Hartford since the last report; sales transactions have held steady in Maine

and Rhode Island, but new construction is expected to decline in those states as well. For

Portland, office-building prices are said to be down 5 percent to 10 percent from their asking

levels since mid-summer, but retail-space prices are holding steady. In other markets, average

prices are not falling, but word is that properties are being withheld from the market to avoid

potential losses. One bright spot is that foreign investor demand for prime Boston properties

remains strong, reinforced by the weakening dollar.

Conditions in the office leasing market are mixed, but overall the mood has turned more

pessimistic. Rental rate increases appear to be slowing in Boston, where absorption and lease

renewals have slowed. Despite increases in "face rents," lessors have begun offering building

improvements and other concessions in order to retain or attract tenants. Such deals, together

with rising energy and construction costs, are squeezing owners' profit margins. Office rents

and vacancy rates have been flat in Hartford and Providence, but rents have reportedly fallen

10 percent in Portland year over year, where absorption is zero or negative. In Rhode Island,

the industrial market remains strong, with declining vacancy and rising rents, but the retail

sector has been mostly "quiet."

Lender reluctance to finance speculative development is expected to continue over the next 6

to 12 months. Construction projects in progress or in the planning stages are likely to be

delayed or downsized (especially if they include condominiums), and "build-to-suit"

structures are expected to be the only new construction. European demand for office

investment is expected to remain active. Contacts now seem less likely than earlier to believe

that liquidity will return to the CMBS/conduit market in force by Q1 2008, although activity

is expected to pick up eventually. Some contacts (in Boston, Providence, and W. Hartford)

expect commercial vacancy rates to continue falling, while others expect absorption to slow

and rent growth to stall or become negative. Still, most contacts do not predict a glut of

commercial space, because supply growth has been restrained over the past few years.

Residential Real Estate

Reports on New England residential real estate markets are mostly negative. In

Massachusetts, available data show double-digit declines (in the mid to high teens) in sales of

single family homes and condos in September compared with a year earlier. Data from the

state realtors' group show steady median home prices in September and a slight increase in

condo prices over the year, while more comprehensive data (including foreclosure sales and

other non-realtor sales as well as sales through realtors) show 3 percent to 4 percent

year-over-year declines in median prices of homes and condos. Contacts hint that October

data will look no better.

Residential markets in the rest of New England similarly show large sales declines and

modest price declines in September. Comprehensive September data from Connecticut

(including foreclosure sales, etc.) show a 3 percent decline year-over-year in median home

prices, along with a 22 percent drop in home sales, after relatively small changes in July and

August. Similar data from Rhode Island show home sales dropping 27 percent year-over-year

in September and prices decreasing 7 percent, but Rhode Island realtors' data show more

modest declines, with home sales down 9 percent and prices down 2 percent. Realtors' data

for New Hampshire and Maine show year-over-year home sales declines of 16 to 18 percent

and median price declines under 3 percent.

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Second District--New York

The Second District's economy has continued to expand since the last report, though at a

somewhat more subdued pace than in recent months. The labor market has remained strong

in October and early November. Manufacturers report ongoing expansion in activity in early

November, with increased price pressures. In contrast, non-manufacturers report some

weakening. But respondents in both sectors express less optimism about the future business

outlook than in recent months. Retailers show mixed sales results for October and some have

scaled back expectations for the holiday shopping season. Tourism activity in New York City

is said to have remained strong, despite a mid-November strike shutting most Broadway

theaters. Housing markets remain mixed, with Manhattan's co-op and condo market showing

continued resilience but single-family housing markets across New York State increasingly

soft. Manhattan's office market, though still fairly tight, eased off a bit in October. Finally,

bankers report weakening loan demand in all categories but particularly for home mortgages;

they also report tightened credit standards on commercial loans and mortgages, and moderate

increases in delinquency rates across all categories, most notably on residential mortgages.

Consumer Spending

Retailers report mixed sales results for October, with unseasonably mild weather hampering

purchases of winter clothing, though some contacts express concern that the weakness is

more than just weather-related. A trade survey conducted in October indicates that New York

State retailers, on balance, expect holiday season sales to be higher than in 2006. However,

two major chains have scaled back their expectations for the holiday shopping season and

now anticipate that sales will be flat to down. Stores in New York City generally continued to

out-perform those elsewhere in the region, which some contacts attribute to tourism. Sales of

home goods, though still generally described as soft, did show some signs of picking up since

the last report. Retail inventories were generally described to be in good shape, though one

large chain reports some overhang; selling prices were characterized as stable, though

promotions have been somewhat steeper than last year; more discounting is anticipated in

advance of and during the upcoming holiday season.

Tourism activity in New York City has been steady at a high level, despite a Broadway

theater strike. Manhattan hotels report that occupancy rates exceeded 90 percent in October,

little changed from last year, while room rates are reported to be up by 16 percent. Broadway

theaters report that attendance and revenues were at high levels in October and early

November but down a bit from a year ago. A strike starting November 10 shut most

Broadway theaters but there is, thus far, no sign of deleterious effects on tourism overall.

Consumer confidence has waned since the last report. The Conference Board's survey of

Middle Atlantic residents indicates a pullback in confidence in October, reversing an increase

in September. Similarly, Siena College's survey of New York State residents shows

confidence falling in October, led by a particularly steep decline in upstate New York.

Construction and Real Estate

New York City's commercial real estate market continued to be fairly tight in October,

though less so than in recent months. Manhattan's office vacancy rate, which had been steady

near a cyclical low at the end of September, rose fairly sharply in October--from 6.8 percent

to 7.6 percent--with most of the increase among non-prime, as opposed to Class A,

properties. Asking rents, however, continued to rise, though at a slower pace; still rents are

up roughly 30 percent from the same time last year.

Manhattan's co-op and condo market showed continued resilience in October and early

November, with prices continuing to run modestly above year-ago levels and sales volume

picking up moderately compared with the third quarter. The inventory of units on the market

is reported to be down by roughly a third from comparable 2006 levels. Long Island's market

is reported to remain somewhat sluggish, though demand remains strong in the pricier

Hamptons area. Reports from Realtors across New York State indicate continued weakness in

the market for single-family homes, with prices down 7 percent from a year ago and unit

sales down nearly 20 percent.

Other Business Activity

A major New York City employment agency, reports that hiring activity has picked up

somewhat in early November--contrary to typical seasonal slowing--following some pullback

in September and October. Demand for workers remains fairly strong in the legal industry;

financial-industry hiring has picked up somewhat as well, though from smaller firms, not the

major institutions. Scattered layoffs on Wall Street have are said to have created only a slight

increase in the supply of available workers.

New York State manufacturers report steady improvement in business conditions in early

November; however, contacts express considerably less optimism about the six month

outlook than in recent months. Firms report increasingly widespread escalation in both

current and expected input prices in early November. Overall, a growing proportion of

non-manufacturing firms in the District report some weakening in general business activity

as of early November, and express a good deal less optimism about the general outlook;

however, considerably more firms continue to report rising than falling employment at their

firms, and the same is true with respect to expected changes in the next six months.

Financial Developments

Small- to medium-sized banks report weakening demand for all types of loans, but most

widely in the residential mortgage category, where more than half of those contacted report

declines in demand. Bankers also report ongoing decreases in refinancing activity.

Respondents indicate tightening credit standards, most notably in the commercial mortgage

category. No bankers reported eased standards in any loan category. For all types of loans,

however, the majority of respondents (two-thirds or more) report no change in standards.

Bankers report a decline in the spreads of loan rates over cost of funds for all types of loans-again, most noticeably in the commercial mortgage category. Reports on delinquencies were

split amongst the different loan types. Bankers indicated a slight increase in delinquencies,

on balance, for consumer and commercial and industrial loans, and a somewhat more

pronounced rise in delinquencies in both the commercial and residential mortgage categories.

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Third District--Philadelphia

Business activity expanded modestly in the Third District in October and early November.

Manufacturers, on balance, reported slight increases in new orders and shipments. Retailers

generally reported somewhat better sales growth in early November than in October. Auto

sales remained slow, and below the year-ago level. Overall bank lending has been rising, with

better growth in business lending than in consumer and real estate lending. Residential real

estate sales remained well off the pace set last year and earlier this year, and home building

continued to decline. Commercial building occupancy and rents have been rising, but

building prices have eased down and leasing activity has slowed since mid-year. Firms

reporting on labor costs generally noted a continuing trend of moderate increase in wages,

but they continued to report large increases in health care benefits costs. Firms reported

increases in input costs and output prices in November, and some noted that prices were

rising for an increasing number of imported goods.

Third District firms generally foresee continued growth, but optimistic views are less

prevalent than they were earlier this fall. Manufacturers expect increases in demand for their

products, on balance, but the number forecasting increases has declined since a month ago.

Retailers generally expect sales for the Christmas shopping period to increase from a year

ago, but only modestly. Auto dealers generally do not expect the sales rate to strengthen.

Bankers anticipate slow expansion in overall lending, with gains coming largely from

commercial and industrial lending while consumer and real estate lending growth slows.

Home builders and residential real estate agents expect sales to remain weak through the

winter, and they are not certain that sales will improve appreciably next spring. Contacts in

commercial real estate anticipate near steady demand for office and industrial space, although

they believe leasing activity will not increase significantly unless employment growth in the

region accelerates.

Manufacturing

Third District manufacturers, on balance, reported only small increases in shipments and new

orders in November. Around one-third of the manufacturers surveyed noted increases and

nearly as many noted decreases. Increases appeared to be concentrated in a few sectors.

Printing firms and producers of food products and textiles reported gains; in most other

manufacturing sectors shipments and orders were off for the month. For the Third District

manufacturing sector as a whole order backlogs declined from October to November and

delivery times decreased. Typical comments from Third District manufacturers are that

"business is really being hurt by the residential construction slowdown," but "export business

has been strong."

The outlook in the Third District manufacturing sector is positive, although not as strongly

optimistic as it had been through most of this year. Around forty percent of the firms

contacted for this report expect increases in new orders and shipments over the next six

months, and twenty percent expect decreases. Manufacturing firms in the region plan to

increase capital spending during the next six months, on balance, but the number of firms

that expect to spend more only slightly exceeds the number that expect to spend less.

Retail

Retailers in the Third District reported that sales growth improved in early November

following scant gains in October. Merchants said the turn to colder weather boosted sales of

winter apparel and that new consumer electronic products also sold well. However, there was

some variation among types of stores. Early markdowns of some product lines at discount

stores gave their total sales a boost, but some specialty stores saw sales growth falter.

Retailers expect sales for the Christmas shopping period to increase moderately from a year

ago. Although most of the store executives contacted for this report believe "consumers have

the capacity to spend when they're motivated," as one retailer phrased it, merchants in the

region expect strong gains only for sales of electronics, such as flat panel televisions and

personal computers. They expect sales of other merchandise lines to move up only slightly, if

at all, for the fourth quarter of this year compared with the same period last year.

Auto dealers in the region generally reported slow sales rates, especially for sport utility

vehicles. Overall sales remained below the year-ago level, and most of the dealers surveyed

for this report do not expect improvement.

Finance

Total outstanding loans at Third District banks rose in October and early November.

Commercial bank lending officers contacted for this report generally indicated that the

increase was stronger for commercial and industrial loans, mainly to middle-market firms,

than for personal and real estate loans. They indicated that credit card lending has been rising

moderately. Banks and other financial companies engaged in residential mortgage lending

reported a large shift toward conforming mortgages and away from sub-prime and jumbo

mortgages. Most bank contacts indicated that asset quality overall has weakened slightly in

the past few months. Some bankers said repayment rates on credit card debt have slowed and

delinquencies have risen. Delinquencies have also increased on mortgage debt, and

foreclosures have risen. Looking ahead, bankers generally foresee slow growth in overall

lending. They expect mortgage and personal lending to move up slightly, at best, and most

expect growth in business lending to continue to move up at around its current pace, although

some banks noted that their "pipeline is low" for new loans to businesses.

Real Estate and Construction

Residential real estate activity continued to be very slow in October and early November,

according to home builders and real estate agents contacted for this report. Builders continue

to make price reductions, but have not been able to boost sales. Builders also reported

continuing high rates of cancellations, and some builders noted that tightened mortgage

lending standards had eliminated some buyers who had contracted for new homes. As sales

have declined builders in the region have stopped work on several projects and laid off

workers. Residential real estate agents also reported a slow pace of sales, especially in the

region's resort areas that had been very active until mid-year. Although real estate agents said

price appreciation was still positive, they indicated that very few house are being sold at

listed prices. One agent said that "there are no more multiple offers" for houses and he has

"price discussions" regularly with sellers whose houses are on the market for more than a few

weeks. Contacts among builders and real estate agents expect sales to remain flat well into

next year, and the most optimistic expect any spring pickup to be slight. According to one

agent "the glory days are over," and a builder said "the pipeline for next year is anemic."

Commercial real estate firms report that office vacancy rates have declined and rents have

increased in most office markets in the Third District in the past few months. However, they

noted that leasing activity has decreased and building prices have edged down. Construction

of educational and health care facilities has been steady or rising throughout the region, but

construction of commercial buildings has slowed. Nevertheless, contacts in commercial real

estate said there are plans for new buildings that could be acted on next year if the region's

supply of large blocks of office space continues to trend down and employment growth

improves.

Prices and Wages

Reports of increases in input costs and output prices from Third District business contacts

were about as prevalent in November as they were in October. Manufacturers noted increases

in prices of food products, chemicals, and machinery, but they reported some declines in

prices of lumber and transportation equipment. Firms in a range of industries reported

increases in energy and transportation costs. Retailers noted spreading price increases for

imported goods. Most of the firms reporting on employment costs in November indicated a

continuing trend of moderate wage increases, but several firms noted that increases in health

care costs continued to be large.

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Fourth District--Cleveland

Economic growth in the Fourth District, although positive, has slowed since our last report.

In general, manufacturing output has been steady while production at auto assembly plants

increased during October. Activity in commercial construction was stable with a few

contractors expecting a slowing in their backlogs going into 2008. Home builders reported

new home sales were unchanged to declining. District retailers experienced relatively weak

sales. Demand for business and consumer loans was steady to declining while the number of

delinquencies rose. Reports on credit quality showed some deterioration, especially on the

consumer side. Oil production was up whereas natural gas production fell slightly. Truck

freight volume was unchanged to declining.

Employment levels across the District were largely unchanged. On balance, staffing firms

reported a slight decrease in job openings while the number of job seekers was flat. Little

wage pressure was reported. With the exception of petroleum-based products, supplier prices

and material costs were relatively stable. Several manufacturers reported raising their prices

during the past six weeks, and some anticipate raising prices in the upcoming months.

Manufacturing

Most District manufacturers told us that production has been steady over the past six weeks

with reports of increased production being offset by slowdowns attributed to seasonal factors

and scheduled maintenance. On a year-over-year basis, contacts reported output has been

unchanged to declining slightly. Steel producers characterized shipping volumes as flat. The

strongest end markets for steel included energy, nonresidential construction, and

aerospace/defense. Looking forward, almost all of our contacts anticipate production and

shipping volume to remain at current levels or decrease slightly. Auto assembly plants within

the District reported higher production during October. Foreign nameplates and their

domestic counterparts shared in the increase. On a year-over-year basis, automakers

experienced a slight production decline.

Most manufacturers reported that capacity utilization is at, or slightly below, normal levels

with little to no change over the past six weeks. Further, capital expenditures were on plan

with the expectation that current spending levels will be maintained in the upcoming months.

With the exception of petroleum-based products and metals, input prices were stable. About a

third of our contacts said they have raised their prices during the past six weeks, and some

anticipate raising prices in the upcoming months. A majority of respondents reported no

change in the size of their workforce. Those citing employment declines attributed them to

organizational restructuring, seasonal factors, and attrition. Hiring in the near future is

expected to be very slow. Wage pressures were minimal.

Real Estate

New home sales in the District were unchanged or declined since our last report. Sales

continue to be down year-over-year. Looking forward, most builders believe a turnaround

will not occur until 2009. Home prices were generally stable; however, several builders

reported increasing their discounting, especially for spec houses. On balance, material costs

remain stable. Almost all contractors told us that the size of their current workforce is in line

with market conditions, and they don't anticipate additional layoffs. Concerns about labor

costs were limited to increases for health care coverage.

Most commercial contractors reported that business has been stable since early October and

has picked-up slightly on a year-over-year basis. Segments showing strong activity include

health care, education, and infrastructure. Looking forward, nearly all contacts said that they

expect activity in 2008 to be at, or near, 2007 levels. When asked to comment on their

backlogs, contractors had mixed responses. Some rated their backlogs as good to very good

while others, although busy at this time, are expecting some slowing going into 2008. For the

most part, material costs were stable during the past six weeks--though fuel costs have risen

significantly. Workforce levels remain largely unchanged. Contractors have not experienced

any wage pressures; however, almost all reported increased health care costs.

Consumer Spending

District retailers reported general merchandise sales were flat to declining since our last

report while sales of food, pharmaceuticals, and personal care products increased. Contacts

told us that the warm autumn weather affected the sales of seasonal merchandise. Retailers

had mixed opinions regarding the upcoming holiday shopping season. Auto dealers reported

a decline in the sales of new and used vehicles during October, and they anticipate a

downward trend in the coming months. Vendor prices were stable during the past six weeks.

Hiring was limited to temporary workers needed for the holiday season, and little wage

pressure was reported.

Banking

In general, demand for business and consumer loans was steady to declining during the past

six weeks. The one exception was an increase in commercial real estate loans by national

banks. Reports on auto loans and home equity lines of credit were mixed while the residential

mortgage market remains sluggish. Core deposits were flat to slightly up. Most of our

contacts told us that their margins continue to decline. Respondents reported an increase in

delinquencies, especially for residential mortgages and commercial real estate loans, and

some decline in credit quality, in particular, on the consumer side. Looking forward, bankers

anticipate a continuing drop in loan demand, restrictive credit conditions, and increased

margin pressures.

Energy

In general, natural gas production has declined slightly while oil production has increased. At

the same time, prices received for crude rose significantly while gas prices were flat. Capital

expenditures remain on plan with little change expected during the next few months. Most of

our contacts said that material and equipment costs have increased over the past six weeks.

Employment levels are largely unchanged. Several contacts reported some wage pressure due

to competition among companies to keep their best employees.

Transportation

Truck freight volume was steady to declining over the past six weeks with the shipment of

construction supplies being singled out as particularly weak. Looking forward to 2008, most

contacts were uncertain about the level of business activity with only a few anticipating

modest growth, at best. Several trucking executives believe there is overcapacity in the

industry, which is keeping shipping prices competitive. Increasing fuel costs were cited as an

issue by most respondents with some reporting that they were unable to recover the entire

amount through surcharges. On net, there has been a slight decrease in employment levels

due to layoffs. Wage pressures are not an issue at this time.

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Fifth District--Richmond

Economic conditions in the Fifth District weakened somewhat in October and early

November as continued softness in retail sales and housing markets trumped stronger

revenue growth at services firms. District retailers said the pullback in sales and shopper

traffic intensified during the early weeks of the holiday shopping season. Housing activity

also softened further as the pace of home sales continued to cool, inventory levels moved

higher, and reports of price reductions became more widespread. Home mortgage demand

softened as well. Adding to the softer tone, extremely dry conditions continued to hamper

farm operations in many areas. Reports from other sectors were more upbeat, however.

District service providers posted stronger revenues during the last six weeks, while tourist

activity advanced at a healthy clip. Manufacturing contacts reported a slight uptick in

production during early November and the leasing of commercial real estate space was

steady. On the employment front, the pace of hiring eased, though District labor markets

remained generally tight and wage growth edged higher. Prices at District firms rose

modestly since our last report.

Retail

Fifth District retail sales activity softened further in recent weeks. Contacts reported that

activity in big-ticket categories--particularly automobiles and light trucks--continued to

slump. Retailers also said a prolonged stretch of mild temperatures in October and early

November had curbed demand for cold-weather items. Shopper traffic drifted lower as well.

Looking ahead, District merchants were less optimistic about their sales prospects for the

upcoming holiday season. In response, contacts reported that big-box chains operating in the

District had already begun to roll out holiday discounts--well ahead of Thanksgiving. A

Richmond, Va. merchant said he was surprised to see the national chains "break price" so

early. Turning to employment, retail wages grew modestly, while the pace of hiring tapered

off somewhat. Retail price growth edged higher since our last report.

Services

Revenue growth at District services firms advanced at a faster clip over the past six weeks.

Contacts at healthcare, administrative and professional services firms, in particular, reported

steady demand in recent weeks. In addition, a contact at a District insurance provider said his

firm was on solid footing following a "very benign hurricane season." Going forward, some

contacts expressed concern about the potential impacts of rising energy costs. On the other

side of the coin, District utility providers told us that a warmer-than-usual autumn had

damped their revenue growth. On the employment front, payrolls expanded at modest pace

and wage growth was tepid. Prices at District service-providers were generally flat.

Manufacturing

District manufacturers reported that activity picked up slightly during the first half of

November, following a pullback in October. Contacts told us shipments and new orders

expanded at a modest pace in recent weeks. Gains were particularly solid at electronics,

machinery, paper and plastics firms. Producers attributed some of the recent increase in

activity to a continued weakening of the dollar. An electronics producer in Maryland, for

example, told us export orders rose "dramatically" in November. Despite the uptick in

production, District factories trimmed payrolls over the past six weeks, while wages grew

somewhat faster. Both raw material and finished good prices increased at a more measured

pace since the end of September.

Finance

Demand for home mortgages generally continued to soften since our last report, though

scattered reports of increased activity emerged in recent weeks. Lending activity slowed

further in Charleston, S.C., and Raleigh, N.C., however, lenders in Washington D.C., and

Richmond, Va., speculated that the pullback in demand might be "close to bottoming out." In

addition, a contact in Greenville, S.C., noted that she was planning to add loan officers in

anticipation of an uptick in business early next year. Furthermore, a lender in Charlottesville,

Va., reported that he had seen lending activity pick up in the final two weeks of October.

Interest rates on mortgages were steady, while lenders continued to scrutinize home loan

applications closely. On the commercial side, reports on lending activity were mixed.

Lenders in Charleston, W.Va., and Charlottesville, Va., reported a slight increase in activity,

while contacts in the Carolinas said demand continued to wane. Commercial mortgage rates

edged lower in most markets and credit standards remained taut.

Real Estate

Residential real estate conditions across the Fifth District eroded further since the end of

September. Realtors said sales activity remained weak, and reports of home price reductions

were more widespread. Inventories continued to swell. An agent on the eastern shore of

Virginia described his local housing market as "very depressed," adding that sales in his area

were down fifty percent from last year. Likewise, a Realtor in Fredericksburg, Va. noted a

further slowdown in sales during October and early November. Reports were similar in the

Washington, D.C. area where a contact described conditions as "dismal." An agent in

Greensboro, N.C. told us the price and condition of properties had to be "just right in order to

sell." Nonetheless, a Richmond, Va. contact said some homes priced well below market "just

aren't selling." Given the prolonged malaise, Realtors told us they continue to advise clients

to "stay put if you can." There were a few brighter spots, however. An agent in Odenton, Md.

reported "decent" activity in recent weeks, and a contact in Greenville, S.C. told us October

sales had been slightly above year-ago levels.

On the commercial real estate front, reports on District office markets were mixed, while

assessments of retail and industrial leasing were generally upbeat. Contacts in Washington,

D.C., Baltimore, Md. and the Carolinas noted slower office leasing activity in October and

early November, though an agent in Raleigh, N.C., suggested that the "the recent slow down

is only temporary." On the other hand, agents in Richmond, Va., Charleston, W.Va., and

northern Virginia reported steady office leasing activity in recent weeks. Demand for retail

space remained generally strong according to contacts in Virginia Beach, Va., and Columbia,

S.C. Assessments of District industrial markets were mostly positive as well. A contact in

Charleston, W.Va., said industrial leasing in his area was in "good shape," and a contact in

Columbia, S.C., said his market was "the tightest it had been in ten years." Vacancy rates and

rents for office and retail space were generally unchanged since our last report, while

industrial vacancies firmed in several markets. Reports on new construction varied. New

retail projects were reported in Richmond Va., Virginia Beach, Va., and Columbia, S.C.,

whereas a contact in Washington, D.C., said retail construction had slowed somewhat.

Tourism

Reports on tourist activity were generally positive. Along the coast, contacts on the Outer

Banks of North Carolina and in Virginia Beach, Va. told us bookings for the Veteran's Day

weekend were somewhat stronger than a year ago. Another contact on the Outer Banks said

tourism was "keeping the community afloat" as real estate and construction activity remained

sluggish. Similarly, a manager at a ski resort in Virginia reported a drop off in sales of time

shares, though he noted bookings were up and tourist spending was steady.

Temporary Employment

Fifth District temporary employment contacts reported generally strong demand for workers

in recent weeks. Taut labor market conditions continued to fuel demand for temporary

workers in Raleigh, N.C., and an agent in Bethesda, Md. reported notably firmer demand for

office and retail workers. Prospects for future hiring activity remained somewhat cloudy,

however. Agents in several markets expressed concern that soft holiday sales could lead to a

fall off in retail hiring.

Agriculture

Drought conditions persisted and water restrictions remained in place in many areas of the

Fifth District during October and early November. In South Carolina, a lack of soil moisture

stalled oat and winter wheat plantings. Additionally, contacts expressed concern about the

adequacy of winter feed supplies. There were a few pockets of improvement, however, as

several areas of the District received light rainfall and experienced cooler temperatures in

mid-November. As a result, pasture conditions improved in parts of Virginia, reducing the

need for supplemental feeding. Moreover, the recent rainfall in sections of Maryland enabled

farmers to make progress on small grain plantings and the harvesting of corn, cotton and

soybeans.

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Sixth District--Atlanta

Reports from contacts for October through mid-November continued to paint a mixed picture

of economic activity in the Sixth District. Retail reports suggested that year-over-year sales

growth had moderated somewhat, and vehicle sales fell short of expectations. In contrast,

tourism reports were generally positive. According to homebuilders and Realtors, new and

existing home sales remained well below year-ago levels in October and the pace of new

home construction continued to decline. The inventory of homes for sale remained high

across much of the District. Manufacturing reports varied by sector; the pace of production

slowed for most manufacturers linked to residential housing, but remained strong for firms

connected to energy, medical, and defense-related industries. Banking contacts noted

moderating loan demand and higher foreclosure and mortgage delinquency rates in many

areas. Labor markets remained tight in parts of the District, but there were reports of

increased layoffs in construction and some housing services industries. Price pressures were

centered on energy and food products. Exceptional drought conditions in areas of Alabama,

Georgia, and Tennessee continued to hamper crop production.

Consumer Spending and Tourism

Reports from District retail contacts indicated that year-over-year sales growth had

moderated somewhat since September. The majority of contacts reported that inventories

were up from a year ago, and several contacts stated that inventories were higher than

desired. Looking ahead, retailers remained cautiously optimistic, with most anticipating

positive year-over-year sales growth over the next several months. October vehicle sales fell

short of expectations for most regional contacts. Domestic-brand sales continued to be soft,

while foreign-brand dealers reported weaker retail sales than in the last report. Vehicle

inventories were generally higher than expected.

Tourism reports were largely positive. Foreign travel has boosted leisure and hospitality

activity in Florida, and industry contacts expect Canadian travel to the Sunshine State to

increase to record numbers this winter because of appreciation in the Canadian dollar. Hotel

and resort occupancies in South Florida increased, in part because of increased business from

Europe and Latin America. A North Florida hotel contact said that the pace of bookings for

next year is solid. Gaming revenue remained strong along the Mississippi Gulf Coast. All

tourism industry contacts indicated that increasing gasoline prices were a significant risk

factor for the outlook.

Real Estate

Homebuilders and Realtors reported that new and existing home sales remained well below

year-ago levels in October and inventories remained at high levels across much of the

District. In addition, the pace of new home construction continued to decline sharply and

contacts noted intensifying downward pressure on new and existing home prices. The

majority of contacts anticipate weakness in home sales will persist, although some builders

remained optimistic that new home sales will improve over the next several months.

October reports on commercial construction indicated that activity was flat to down slightly

compared with a year ago. Most Florida contacts continued to report fewer projects in the

pipeline compared with last year at this time, while outside of Florida there were scattered

reports of declining backlogs. Several contacts noted that high insurance costs remained a

stumbling block for commercial development along the Gulf Coast.

Manufacturing and Transportation

Reports indicated that the pace of production slowed for most manufacturers linked to

residential housing. Contacts supplying building materials for residential housing markets

reported that demand remained weak and inventories were high. A concrete company

producing material for the multi-family housing sector noted that production was down

significantly. More positively, manufacturers producing goods for the defense, medical, and

energy industries reported strong activity. In addition, firms producing for the export market

noted improved business and a positive outlook. Freight service firms reported lower

shipments of housing-related construction goods and autos.

Banking and Finance

Banking contacts reported rising mortgage delinquency and higher levels of foreclosure.

Institutions noted that lending standards and terms had tightened for consumer and C&I

loans. Commercial loan demand also appeared to be softer, according to some reports.

Several contacts reported that the pipeline of new development projects was lower than

earlier in the year, with the exception of medical and public sector projects.

Employment and Prices

Labor market conditions remained generally tight in most parts of the District. Several

employers noted a continuing shortage of skilled labor. Labor costs in southeastern Louisiana

are reportedly starting to climb because of increased demand for labor in the refinery and

petrochemical industries. Contacts reported a lower demand for workers in several housingrelated activities such as construction, building material and fixture manufacturing, the sale

of homes, and landscape services.

Price reports were mixed. Weak housing markets continued to adversely affect District

suppliers of building materials and fixtures. Demand for milled lumber, for example, is weak

and prices have declined further. In contrast, some food prices have risen substantially.

According to one contact, there have been double-digit increases in prices received for flour,

sugar, and soy. Prices are reportedly also increasing for milk and corn products.

Agriculture and Natural Resources

Regional drought conditions continued to trouble the District's farming sector. Crop

production and yields were off sharply for most growing areas except Louisiana. Meanwhile,

greenhouse and nursery growers were challenged by the lower demand caused by slower new

home construction and higher operating costs. One large regional nursery has been forced

into bankruptcy because of reduced demand associated with the drought. Citrus production

estimates are above last year's weak crop that was affected by the hangover from the 2004

and 2005 hurricanes and disease-related losses. However, dry weather predictions and scarce

water supply from two major river basins could seriously limit the near-term outlook for

citrus and other Florida crops. Higher oil prices have led to an increase in exploration as well

as plans to expand refinery operations in the District.

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Seventh District--Chicago

Economic activity in the Seventh District continued to expand in October and early

November, but at a slower pace than in the previous reporting period. Consumer spending

was mixed, and business spending rose at a reduced pace. Labor market conditions varied by

industry and location. Residential construction continued to decline, while nonresidential

construction increased overall. Expansion in manufacturing eased from the previous

reporting period. Credit standards tightened, but this did not appear to crimp household or

business borrowing. Wage and cost pressures changed little from those in the previous

reporting period. Corn and soybean prices moved higher, despite a record corn harvest.

Consumer Spending

Consumer spending was mixed, with slower retail sales in some areas of the District and

slight increases in others. Retailers attributed the declines to households' worries about the

economy, higher gasoline prices, and above normal temperatures. A report from Michigan

indicated that people were spending less when they shopped and ate out. In contrast, a

restaurant chain found demand to be "surprisingly robust" for the Midwest. Furthermore,

consumer electronics, luxury goods, and online sales performed well. Retailers continued to

be cautious about the upcoming holiday season. Auto dealers reported flat sales during

October and early November. Vehicle inventories generally remained a bit elevated, though

had come down to comfortable levels for some dealers. Tourism activity declined slightly

with a contact from Michigan saying that leisure travel was weaker because people were

being more cost-conscious.

Business Spending

Business spending moved somewhat higher during the reporting period. Overall, capital

spending plans for 2008 remained above the levels of 2007. One firm even noted that, unlike

the past several years, they were not curtailing their capital spending for next year from their

initial plans. In contrast, some planned increases in capacity have been delayed or cancelled,

notably in the construction materials and biofuels sectors. Labor market conditions improved

slightly in Illinois, Iowa, and Wisconsin, but declined in Indiana and Michigan. Layoffs were

announced in manufacturing, mainly related to the auto and construction materials industries.

Yet hiring continued in other sectors, and shortages of skilled and professional workers

lingered. A staffing firm experienced flat volume in District states. Traditional seasonal retail

hires lagged those of previous years, as hiring plans shifted toward staffing online sales

departments. Looking ahead, contacts thought that permanent additions to the retail work

force would be limited. In addition, the potential for fallout from the housing and finance

sectors on economic activity was contributing to uncertainty about future hiring needs.

Construction and Real Estate

Residential construction and home sales in the District continued to decline slowly. Many

contacts said that a tightening of credit has contributed to declines in local housing markets.

Showroom traffic slowed throughout the District. Cancellations began to edge up again in

both Illinois and Michigan, as customers had to withdraw from new home contracts after

failing to sell their existing homes. Residential rents came under pressure, as builders put

vacant homes up for rent. Contacts projected that building conditions would be weak until at

least mid-2008. However, there was some positive news. Several contacts thought that

activity may be bottoming out in some areas. Another contact said that the declines in home

prices in Michigan have begun to pull some buyers into the market. The rate of increase in

overall nonresidential development slowed, though infrastructure construction quickened.

Contacts said that the ongoing volatility in financial markets has decreased the financing

available for nonresidential development projects. One contact reported that construction of

retail space was still strong; another commented that banks were still being built. One builder

thought that nonresidential construction would become more competitive as residential

construction companies move into the market. Nonresidential rents rose gradually, though in

Michigan office rents were flat from the last reporting period.

Manufacturing

Manufacturing growth eased compared with the previous reporting period. Manufacturers in

many industries reported increases in the already strong demand for exports. An electronics

manufacturer reported "phenomenal" growth to the point that they had to turn away business.

Domestic steel production continued to move ahead, especially with the moderation of

imports. Demand for large agricultural machinery, energy extraction, and mining equipment

continued to be robust. In contrast, domestic demand for other types of heavy equipment,

including construction machinery and trucks, was weak. Aerospace production schedules

slowed, though backlogs for some aircraft parts, which are as high as a year for engines,

persisted. Automakers lowered expectations for light vehicle sales, especially for less fuel

efficient vehicles and older models. In response, third shifts will end at some assembly plants

in the near future with repercussions likely for parts suppliers. Gypsum wallboard capacity

and utilization declined, even as older plants were being shut down to make room for more

efficient operations.

Banking and Finance

Credit markets tightened again during October and early November. Mortgage originations

showed stability in some areas, but were subject to tighter lending guidelines and more likely

to have fixed-rate terms. Inquiries picked up for refinancing to fixed rate mortgages, though

there was less demand for cash-out refinancing. Home equity loans and lines of credit drew a

little more interest due to lower interest rates. A bank reported reduced competition in the

market for mortgages as restricted access to credit forced out some competitors who lacked

adequate liquidity. Business loan demand continued to show modest growth despite slightly

higher credit standards, and lending from banks increased to meet the needs of commercial

and industrial borrowers. The commercial paper market improved some, as pricing structures

adjusted to changes in the market environment. However, there was general concern and

uncertainty about how prolonged declines in real estate prices would affect the lending

industry.

Prices and Costs

Pressure from wages and costs did not change much compared to the previous reporting

period. Manufacturers indicated that most input costs were stable, but they were waiting for

increased costs due to higher oil prices and metal prices continued to be volatile. The

slowdown in construction has led to further declines in wallboard prices and held down price

increases for some other construction materials. More expensive raw materials have started

catching up to firms that had successfully hedged against earlier cost increases. The ability to

pass higher wholesale prices onto consumers varied by product category. Concerns were

expressed about higher food costs resulting from the increased use of agricultural products to

produce fuels. Wage pressures were evident in areas experiencing shortages of skilled labor,

but were minimal in other sectors. Contacts cited union wage increases in the construction

industry as a factor in the cost base of new homes. A few contacts reported that health

insurance cost increases were a major issue.

Agriculture

Corn and soybean prices moved higher during the reporting period, despite a record corn

harvest. The District corn harvest was boosted by both a large increase in acres planted and

by higher yields; the District soybean harvest was smaller than a year ago due to both a

reduction in acreage and lower yields. Cash prices for both corn and soybeans rose enough

relative to futures prices to reduce incentives to store crops into 2008. More farmers than

usual have sold corn and soybeans from future harvests. Demand from local ethanol plants

helped to ease transportation problems for crops. Cattle prices were stable; milk and hog

prices moved down. The pace of hog slaughter firmed compared to September. There was a

shortage of pastures, and hay was at a premium.

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Eighth District--St. Louis

Economic activity in the Eighth District expanded more slowly in the period since our

previous report. Retail and auto sales in October and early November were down, on

average, compared with year-ago levels. While the services sector continued to expand,

manufacturing activity softened. Home sales and residential construction continued to

weaken throughout the District, but commercial real estate market conditions remained

positive. Overall lending activity at a sample of District banks was mostly unchanged in the

three-month period ending in October.

Consumer Spending

Contacts reported that retail sales in October and early November were down, on average,

over year-earlier levels. Half of the retailers saw decreases in sales, while 38 percent saw

increases. Approximately 23 percent of the retailers noted that sales levels met their

expectations, 65 percent reported that sales were below what they had anticipated, and 12

percent reported sales that were above expectations. Men's apparel and office products were

strong sellers, while women's apparel and furniture were moving more slowly. Two-thirds of

the contacts noted that inventories were at desired levels, while 25 percent reported higherthan-desired inventories and 8 percent reported lower-than-desired inventories. About 54

percent of contacts expect that sales for the rest of 2007 will increase over 2006 levels and

another 17 percent expect sales to be similar to last year, but 29 percent expect decreased

sales.

Car dealers in the District reported that, compared with last year, sales in October and early

November were down, on average. About 52 percent of the car dealers surveyed reported a

decrease in sales, while 32 percent reported an increase. About 24 percent of the car dealers

noted that used car sales had increased relative to new car sales and 28 percent reported an

increase in low-end vehicle sales relative to high-end vehicle sales. About 28 percent of the

respondents reported recent increases in rebates and incentives. About 20 percent of the car

dealers surveyed reported that their inventories were too high (mostly on trucks and sport

utility vehicles), while 16 percent reported that their inventories were too low. About 60

percent of the car dealers expect increased sales over 2006 for the remainder of the year, and

another 12 percent expect unchanged sales, but 28 percent expect decreased sales.

Manufacturing and Other Business Activity

Manufacturing activity softened since our previous survey. While some contacts reported

plans to open plants and expand operations in the near future, a larger number of contacts

reported plans to close plants or lay off workers. Firms in the plastics and the furniture

manufacturing industries reported plans to hire workers, and firms in the sanitary paper

product and the chemical manufacturing industries reported plans to open new facilities and

hire workers. In contrast, a number of firms in the fabricated metal product industry reported

plans to close plants and lay off workers. Firms in the motor vehicle parts and the

transportation equipment manufacturing industries also reported similar plans to downsize.

Firms in the wood product and the food manufacturing industries reported plans to lay off

workers.

The District's service sector continued to expand steadily in most areas since our previous

report. Contacts in the business support services and health care industries reported plans to

expand operations and hire additional workers in the District.

Real Estate and Construction

Home sales continued to slow throughout the Eighth District. Compared with the same

period in 2006, September 2007 year-to-date home sales declined 14 percent in Memphis, 8

percent in St. Louis, and 2 percent in Little Rock; they were virtually unchanged in

Louisville. Residential construction continued to decline throughout most of the District.

September 2007 year-to-date single-family housing permits fell in most District metro areas

compared with the same period in 2006. Permits declined 27 percent in Memphis, 18 percent

in Little Rock and St. Louis, and 6 percent in Louisville.

Commercial real estate market conditions were generally positive throughout the District.

The third quarter 2007 industrial vacancy rate decreased from the second quarter rate in St.

Louis, Louisville, and Little Rock, while Memphis's industrial vacancy rate increased

slightly. During the same period, office vacancy rates decreased in St. Louis, Louisville,

Little Rock, and Memphis. Contacts in Little Rock reported that the number of new

commercial building permits for year-to-date September 2007 are more than double the

number for the same period last year. Contacts in Memphis and Louisville reported a strong

outlook for commercial construction projects, while a contact in Madison County, Tennessee,

reported that new commercial construction permits were at their lowest level in three years.

Banking and Finance

A survey of senior loan officers at a sample of District banks showed little change in overall

lending activity in the three months ending in October. Credit standards and demand for

commercial and industrial loans remained unchanged for both large and small firms. Credit

standards for commercial real estate loans tightened somewhat, while demand for these loans

was moderately weaker. Meanwhile, credit standards for consumer loans ranged from

somewhat tightened to unchanged, while the change in demand for these loans ranged from

about the same to moderately weaker. Credit standards for prime residential mortgage loans

remained basically unchanged, while credit standards for nontraditional mortgage loans

tightened. The change in demand for both prime and nontraditional mortgage loans ranged

from about the same to moderately weaker.

Agriculture and Natural Resources

At least 95 percent of the corn, 89 percent of the soybean, 94 percent of the sorghum, 98

percent of the cotton, and all of the rice in the District states have been harvested. Yield

estimates for most crops in most District states stayed roughly the same between October and

November, but yield estimates for soybeans and cotton in Tennessee decreased by more than

10 percent. Winter wheat planting was ahead of its normal pace, and each District state has

planted at least three-fourths of its intended crop. Over 60 percent of the emerged winter

wheat in each District state was in good or excellent condition.

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Ninth District--Minneapolis

The Ninth District economy grew moderately since the last report. Growth was noted in

consumer spending, tourism, services, commercial construction and real estate,

manufacturing, energy, mining and agriculture. Residential construction and real estate

continued to weaken. Employment was mixed, with tight conditions in the western part of the

District and loosening in the east. Overall wage increases were moderate, while significant

price increases were noted for fuel, fertilizer, food, steel and copper products.

Consumer Spending and Tourism

Consumer spending increased modestly. A major Minneapolis-based retailer reported that

same-store sales increased about 4 percent in October compared with a year earlier. Traffic

was relatively slow in October at a Minneapolis-area mall, but grew in early November. Store

managers were optimistic for the holiday season, and some were running early promotions.

Retail sales at a mall in Fargo, N.D., were well above year-ago levels during the past two

months, according to the manager, who also noted increased Canadian traffic because of the

stronger Canadian dollar. However, according to preliminary results of the Minneapolis Fed's

annual business outlook poll (November), 48 percent of respondents expect consumer

spending to decrease in their communities during 2008, while 12 percent expect increases.

An auto dealer in Montana noted that recent demand for smaller cars is increasing and that

overall car sales are ahead of last year. Car sales softened during October and early

November, according to a representative of a Minnesota auto dealers association.

Fall tourism was up, and officials were optimistic for the winter season. Tourism and

convention business was strong during October in Duluth, Minn., according to an official;

inventory, occupancy and rates were up. According to a chamber of commerce representative

in northwestern Wisconsin, overall tourism-related traffic was good and businesses were

optimistic for the winter season.

Services

Contacts from professional business service firms were upbeat. Based on preliminary results

from the Minneapolis Fed's outlook poll, respondents from the service sector expect strong

growth in their company sales, employment and capital investment in 2008. Contacts at legal

firms reported robust billings in several sectors.

Construction and Real Estate

Commercial construction activity was up slightly. A bank director noted that Minnesota

builders were busy with industrial and large commercial projects, but that activity in smaller

commercial projects was slowing. Construction began on the replacement span for the I-35W

bridge in Minneapolis. A large medical provider announced plans to expand its headquarters

in the St. Paul suburbs by 175,000 square feet. Meanwhile, residential construction continued

at a slower pace. In Minneapolis-St. Paul, housing units authorized dropped 28 percent in

October from the previous year. Six planned condominium developments in downtown

Minneapolis have been stalled or cancelled in recent months. However, October new housing

permits in Sioux Falls, S.D., increased from the previous year.

Commercial real estate saw steady growth. A Minneapolis commercial real estate firm noted

that the industrial market saw positive absorption in the third quarter with an increase in lease

rates and that leasing was brisk for office space. However, retail real estate was soft. The

residential real estate market continued to decline. October home prices per square foot fell

4.4 percent from the previous year, with condominium space down almost 6 percent.

However, rents increased and the rental vacancy rate decreased during the third quarter in

Minneapolis-St. Paul. Realtors in Sioux Falls said the market there was robust. In western

Montana, demand for housing was still strong.

Manufacturing

The manufacturing sector grew since the last report. Based on preliminary results from the

Minneapolis Fed's outlook poll, respondents from the manufacturing sector expect growth in

company sales, employment and capital investment in 2008. In addition, preliminary results

from a survey of District manufacturers conducted in early November by the Minneapolis

Fed and the Minnesota Department of Employment and Economic Development show that

businesses expect production, productivity and investment to increase in 2008 from a solid

2007. Several respondents from the aforementioned surveys indicated that strong exports are

driving sales. Meanwhile, an October survey of purchasing managers by Creighton

University (Omaha, Neb.) indicated increased manufacturing activity in Minnesota and the

Dakotas.

Energy and Mining

Activity in the energy and mining sectors increased since the last report. Oil and gas

exploration and production in the District continued at a solid pace. Numerous wind energy

projects are under construction, while some proposed ethanol projects were put on hold.

Most mines continued to operate at near capacity. High metal prices induced permitting for

new mines and expansion of several existing operations.

Agriculture

Robust agricultural conditions were reported across the District. Preliminary results of the

Minneapolis Fed's third quarter (October) survey of agricultural credit conditions indicated

that lenders expect overall agricultural income and spending to be up in the fourth quarter of

2007 due to higher selling prices and decent yields, but are cautious about higher input costs

affecting next year's profits. The strong fall harvest is nearly complete for all major District

crops; winter wheat has started to emerge and is in good condition.

Employment, Wages, and Prices

Employment was mixed with tight conditions in the western part of the District and

loosening in the east. Based on preliminary results of the Minneapolis Fed's outlook poll, 34

percent of respondents plan to increase employment over the next year, while 21 percent

expect to decrease employment. Retailers in Sioux Falls were having difficulty hiring enough

seasonal workers because of the area's low rate of unemployment. One retailer noted a

decrease in retention as workers search for better pay or benefits at other locations. In

northwestern Montana, businesses are advertising and offering more benefits to attract

workers than in the past.

In contrast, Minnesota employment levels were down 6,600 jobs in October from September

and were only slightly above last year's levels. A residential real estate lender recently

announced plans to cut 460 jobs in Minnesota, while a producer of air conditioning and

heating equipment plans to lay off up to 145 workers in southwestern Wisconsin.

Overall wage increases were moderate. The preliminary results of the Minneapolis Fed's

outlook poll showed that 87 percent of respondents expect wages and salaries to increase no

more than 3 percent at businesses in their communities during 2008.

While overall price increases were moderate, significant increases were noted for fuel,

fertilizer, food, steel and copper products. Minnesota gasoline prices in early November were

about 85 cents a gallon higher than a year ago, while Midwest diesel prices were about 80

cents higher. A Montana bank director noted that fertilizer and a number of food prices have

increased over the past three months. Some steel and copper product prices recently rose.

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Tenth District--Kansas City

The Tenth District economy expanded modestly from mid-October to mid-November, but

with some mixed signals across industries. Consumer spending strengthened overall, and

energy and agricultural activity remained strong. The pace of growth of manufacturing

activity was somewhat sluggish, but plant managers were generally optimistic about the

future. Residential real estate activity weakened further, while commercial real estate activity

was solid. Bankers reported softer loan demand and tightened credit standards. Wage

pressures increased, although the pace of hiring moderated. Price pressures were generally

modest, with stable retail prices but slightly higher prices in manufacturing.

Consumer Spending

Consumer spending strengthened since the previous survey. After easing in the last survey

period, sales at retail stores recovered, with inventories remaining relatively stable. Sales of

apparel and electronics were relatively strong, while home furnishings were weak.

Automobile sales continued to decline, with especially weak demand for large vans, trucks

and SUVs, but relatively strong sales of fuel efficient and smaller cars. Following strong

travel activity in September, tourist visits moderated in line with normal seasonal patterns.

Still, most contacts in the hotel industry reported higher activity compared to expectations.

Average daily hotel room rates were up in October and hotel occupancy rates remained

strong. Restaurant sales were up slightly since the last survey period, and contacts anticipated

strong activity in the next three months.

Manufacturing

Manufacturing activity grew modestly since the last survey period, and firms remained

generally optimistic about the future. After easing slightly in September, production edged

higher in October. The volume of shipments also increased compared to the previous survey

period. On the other hand, new orders and orders for exports edged down, suggesting some

near-term sluggishness. Employment also edged down, and factories continued to reduce

inventories of both materials and finished goods. Capital spending remained relatively

strong, however, and plant managers reported positive expectations about activity six months

out, with production and employment expected to improve and the rate of pullback of

inventories expected to moderate.

Real Estate and Construction

Residential real estate activity declined further, while commercial real estate activity

remained solid. Home sales weakened in most areas and many residential contacts reported

negative expectations about near-term activity. Demand for higher-priced homes was

especially weak. Home prices fell slightly and inventories of unsold homes rose in most

major markets. However, home inventories eased a bit in the Denver metro area market, and

some energy-producing areas registered home price appreciation. Commercial real estate

sales activity remained solid, with little change in office vacancy rates and absorption rates.

The overall pace of commercial construction slowed, except in the District's energyproducing regions, where activity remained robust. Several District contacts reported

weakness in industries that supply materials and equipment to construction firms. Office

rents remained higher than year-ago levels and were expected to continue to increase.

Banking

Bankers reported weaker loan demand, tighter credit standards, and little change in deposits

since the last survey. Demand for residential real estate loans and commercial and industrial

loans again fell moderately. Demand also declined slightly for commercial real estate loans

and consumer installment loans. Overall loan quality was stable, and respondents expect little

or no change in loan quality over the next six months. Some banks reported a further

tightening of credit standards for commercial and residential real estate loans, although there

were fewer such reports than in the previous survey. Bank deposits held steady, as increases

in money market deposit accounts were offset by declines in CDs.

Energy

District energy activity remained robust. Drilling was particularly strong in the energyproducing regions of Colorado and in Oklahoma. Energy contacts reported the availability of

equipment and services as their top constraint. Many respondents reported labor shortages,

particularly for skilled and professional workers, but most indicated that availability of labor

was not a limiting factor in drilling activity. Most energy firms surveyed expected to see

robust drilling activity in the next three months. However, some companies recently reduced

their budgets for international operations due to higher drilling costs associated with

appreciation of foreign currencies, which have cut into their profits given the pricing of oil in

U.S. dollars.

Agriculture

Agricultural conditions remained favorable. The fall harvest was almost complete and winter

wheat emergence was progressing normally. Dry weather aided harvest progress, but reduced

soil moisture levels and eroded pasture conditions, especially in Oklahoma, where some

livestock were placed on supplemental feed. Strong foreign and domestic demand for

agricultural commodities helped support crop prices. Above-average corn and soybean yields

coupled with strong crop prices and rising exports were boosting farm income, despite rising

input costs. High feed costs were trimming livestock profits. Farm credit conditions

strengthened as loan repayment rates remained high and the number of requests for loan

renewals and extensions eased further.

Labor Markets and Wages

District labor markets remained tight since the previous survey, although the pace of new job

growth continued to slow. Hiring announcements outpaced planned layoffs, with significant

hiring reported by firms in manufacturing and health care industries. Reports of labor

shortages were most notable in energy-producing areas of the District, although District

energy firms seemed less concerned about finding workers than firms in other industries.

District contacts in the retail and hospitality industries experienced particular difficulty hiring

and retaining staff. In response to continuing labor shortages, wage pressures were higher

than in previous surveys.

Prices

Price pressures in the District generally remained modest. Retail prices were stable, with

most retailers expecting no change in prices in the next three months. Restaurants anticipated

raising menu prices, but said food costs had moderated since the previous survey. Builders

also reported some easing in the price of raw materials. The share of manufacturers reporting

higher raw material prices edged up slightly. After steadying in the last survey,

manufacturing selling prices also increased slightly. Nevertheless, a much smaller fraction of

manufacturers increased selling prices than reported higher raw materials costs. The share of

manufacturing respondents expecting future increases in the price for raw materials remained

high, but did not change from the previous month.

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Eleventh District--Dallas

The pace of economic activity in the Eleventh District decelerated further from mid-October

to mid-November. Manufacturing activity continued to weaken, and demand for business

services was softer. Retail sales were weaker than expected. Financial service firms reported

slower consumer and commercial lending. Home real estate markets and construction

continued to soften, but commercial and multi-family building and markets remained strong.

Energy activity picked up. Agricultural conditions remained generally positive.

The level of uncertainty remains quite high, and some firms say it has increased over the past

month. Most industries expect activity to pick up in 2008, but the expected timing of the

rebound varies from firm to firm.

Prices

Energy prices have risen steadily since early October. Escalating geopolitical tensions, tight

fundamentals and a weak dollar caused sharp increases in the price of crude oil that pushed

up heating oil, gasoline and diesel prices. Natural gas prices also rose but were restrained by

high inventories, which reached record levels.

Higher energy costs are putting upward pressure on selling prices for most industries, but

competitive pressures continue to restrain price increases for many firms. Shipping firms say

rising fuel costs have pushed up prices, and some expect further price increases in January.

Airline fares are also higher.

Manufacturers continued to report cost pressures from higher fuel, raw materials and import

price pressure from declines in the value of the dollar. Price pressures continue to be a

serious concern for the food industry. Costs are high or rising for many products, which

contacts attribute mostly to increased demand for corn to make ethanol. Prices have recently

risen sharply for wheat and flour, in part because production was displaced for corn.

Labor Market

The labor market remained tight, and difficulty in hiring continued to restrain some activity.

Still, the market has loosened a little, with some firms reporting slower hiring, and at least

one manufacturer scheduling workers for shorter shifts. Temporary service firms are having

less difficulty finding potential employees. While there continues to be some wage increases,

pressure appears to have ebbed, and a few firms said they are considering bonuses instead of

salary increases this year.

Manufacturing

Strong commercial, multifamily and industrial construction continued to fuel demand for

some construction-related products, but sales declined further for products used in residential

building. Manufacturers of construction-related products are cautious, expecting housing

markets to remain slow through 2008 and possible declines in commercial and road work.

Some high-tech manufacturers reported continued good sales, but other said sales were

slower, leading them to reduce their outlook for activity. Demand for food products is stable,

although producers say there has been some shifting of consumption to lower-priced foods.

Paper producers say demand for recycled paper is very high, but a noticeable drop in sales of

corrugated boxes to manufacturing and construction has caused inventories to rise.

Transportation manufacturers report stable demand. Auto producers say inventories are a

little high.

Domestic petrochemical demand was still weak, with slow sales to homebuilders and auto

producers. A weak dollar and favorable feedstock prices are still spurring strong export

demand, but higher feedstock costs have driven up prices for some chemicals, hurting sales.

Refiners were reluctant to build crude inventories with current prices well above futures.

Retail Sales

Retail sales have been weaker than expected and slower than in the last reporting period.

Contacts say consumers are being very cautious, with high food and fuel costs straining

lower-income customers. Warm weather dampened some apparel sales, but national retailers

said Texas continued to outperform the rest of the country. Many stores entered the holiday

season with discounts to reduce inventory. Some contacts report input cost pressure building

over the next several months, leading to a greater sense of urgency to streamline operations

and reduce costs. Auto sales remain sluggish.

Services

Demand for temporary staffing services was sluggish. Orders have declined from

manufacturing and warehousing industries, but demand is holding up for accountants,

financial services, information technology professionals and business support staff.

There has been little change in demand for accounting and legal firms. Accounting firms

reported steady demand and a very good outlook. Law firms report a pickup in bankruptcy

and litigation work that is sufficient to offset slower real estate and corporate transactions.

Contacts say the recent shift in legal activity usually signals a slowing economy.

Overall shipping activity has been weaker. Intermodal firms say imports have fallen and are

not being completely offset by export growth. Small parcel volume has been decelerating

over the past two months, but large freight volume appears to have increased. Railroad

volume is still strong but weaker than a year ago, with particularly weak shipments of motor

vehicles, lumber and wood.

Airlines reported strong demand and no sign of weakness in bookings. Capacity is flat to

shrinking. Contacts are very concerned about rising fuel costs and the possibility that a

slowing economy might affect business travel, but said they are hoping for a soft landing.

Construction and Real Estate

Home markets weakened, and construction continued to ebb. Sales have dropped

significantly for homes priced under $200,000. Existing home inventories edged up but are

low compared to historical and U.S. averages. Overall existing home prices remained steady,

but there is downward pressure on new home prices, and builders are increasing incentives to

reduce inventory. Contacts are uncertain about the outlook, but most don't expect a

turnaround until 2009. Apartment demand picked up, partially because some homebuyers are

unable to qualify for a mortgage. Multifamily construction is still robust, and contacts are

optimistic that employment and population growth will keep demand growing enough to

absorb new supply.

Office leasing continued to expand, although growth is still slowing from last year's pace.

Office rents have risen strongly in most metropolitan areas, but some contacts are uncertain

they will hold up because of new construction and the deceleration in demand for space.

Office fundamentals remain quite good, according to contacts, but investment activity is still

being hampered by difficulties obtaining credit. A few contacts say commercial credit

availability deteriorated in November after improving in September and October.

Financial Services

Demand for loans is slowing along with the economy. Financial service firms expect

continued softening, but remain optimistic. Potential borrowers are receiving added scrutiny,

and credit spreads have been increased for the more highly leveraged deals. Still, competition

for quality deals remains aggressive.

Consumer lending has softened, particularly for automobiles. There has been a slight shift

toward credit card lending and away from home equity lending. Real estate lending for the

most creditworthy borrowers has increased as mortgage rates have chased the 10-year

Treasury rate down. Commercial lenders say some of the recent slowing in lending may be

seasonal, but most of their clients have revised down their outlook and anticipate further

softening in the economy.

Energy

Energy activity remains robust. Rising energy prices stimulated an increase in land

drilling--with Texas drilling rising to the highest levels since the 1980s, and international

activity continuing to rise. Demand for oilfield services was strong. Lead times remain fairly

long for many manufactured items used in the oil patch. Competition from newly built and

imported rigs has put downward pressure on rates.

Agriculture

Warm, dry weather boosted cotton yields, but production is below average because producers

shifted acres to corn, and cotton prices have increased to well above the 10 year average.

Yields for corn, cotton and grain sorghum are good to excellent. Winter wheat and pasture

growth has slowed. Livestock producers have begun supplemental feeding of their herds.

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Twelfth District--San Francisco

The Twelfth District economy expanded during the survey period of October through

mid-November, but the pace of growth showed signs of further deceleration relative to recent

survey periods. Upward price pressures were modest in general with the exception of sharp

increases in the prices of food and energy, and increases in labor compensation were

moderate on net. Reports on retail sales were downbeat in general, and demand for services

grew at a slower pace than in recent survey periods. Manufacturing activity held up well

overall, and agricultural producers reported further growth in demand and sales. Home

demand and construction remained exceptionally weak, while demand for commercial real

estate remained strong but showed signs of softening in some areas. Banking contacts

reported little or no growth in overall lending activity and tighter credit standards for various

types of loans.

Wages and Prices

District contacts reported that price inflation was modest overall. Final prices were largely

stable or down slightly for a variety of retail products, selected construction materials, and

some categories of professional services to businesses. By contrast, increases in the costs of

energy and assorted raw materials created upward price pressures for transportation services

and selected manufactured goods; for some goods, rising import prices associated with

declines in the exchange value of the U.S. dollar added to upward price pressures. Prices for

various foods continued to rise rapidly, with some contacts reporting inflation rates as high as

8 to 10 percent.

Upward wage pressures were moderate on net, with contacts noting only small changes in

overall labor costs. Reports from several sectors, including banking and construction,

indicated that slight loosening in labor markets has relieved upward wage pressures of late,

although wage increases remained rapid for engineers and other skilled technical workers in

many areas.

Retail Trade and Services

Reports on retail sales generally were downbeat. Sales growth has slowed for major

department stores and smaller retail chains, causing increased inventories and order

cancellations in some cases. Contacts generally expect holiday season sales to show at best

weak growth relative to last year, and several contacts pointed to signs that price discounting

is occurring earlier than normal. The primary exception to this pessimistic outlook is

consumer electronics products, for which sales remained brisk. The ongoing downturn in

housing markets has caused sales of household items to fall, with further significant declines

reported for furniture and appliances. Sales of new automobiles remained sluggish, especially

for domestic makes, and the earlier strength in demand for used vehicles softened a bit.

Demand for services grew further but signs of slowing were widespread. Providers of

health-care services reported continued strong growth. However, sales by advertising

agencies and providers of media services were held down by weak advertising demand from

sellers of automobiles and home furnishings. Similarly, activity fell further for providers of

services related to home sales, such as real estate agencies and title companies. Travel and

tourism activity remained at high levels in major District markets, but conditions have

cooled, with contacts from Southern California and Hawaii reporting that indicators such as

visitor counts and spending are flat to down slightly relative to a year earlier.

Manufacturing

Demand for products manufactured in the District generally held steady or expanded

somewhat during the survey period of October through mid-November. Production activity

and sales remained very strong for makers of commercial aircraft and their suppliers. A

maker of industrial equipment reported "steady" production activity and orders. Sales of

information technology products remained on a moderate growth path, and contacts from that

industry reported continued high levels of capacity utilization and generally balanced

inventories. By contrast, demand for wood products fell further, and prices were reported to

be below costs in some cases. Food manufacturers saw further robust gains in output and

sales, while apparel makers reported slight weakness in orders and a desire to reduce

inventories.

Agriculture and Resource-related Industries

Demand for agricultural products continued to grow, with only limited supply constraints

evident. Contacts reported solid sales growth for dairy products and a variety of crops, with a

substantial expansion of export sales spurred in part by the reduced exchange value of the

U.S. dollar. A few reports pointed to improved labor availability and generally stable input

costs.

Real Estate and Construction

The slowdown in District housing markets deepened during the survey period, while demand

growth for commercial real estate generally remained strong. The glut of available homes

continued in most areas of the District, keeping construction activity at very low levels and

causing prices on homes sold to drop noticeably in some regions; contacts reported no signs

of improvement in existing weak conditions. Mortgage availability and terms improved

slightly during the survey period but reportedly remained a significant constraint on home

purchases in many areas. In contrast to housing markets, construction and leasing activity in

the commercial and industrial sectors has remained vibrant in most parts of the District.

However, scattered reports pointed to recent signs of softening, including a sharp reduction in

commercial real estate transactions since September in the San Francisco Bay Area and

rising vacancy rates in Las Vegas due to substantial availability of newly built space.

Financial Institutions

District banking contacts reported that overall loan demand was largely stable. Little or no

change was reported for commercial and industrial loan volumes relative to the previous

survey period, except in Hawaii, Idaho, and Utah, where robust economic conditions in

general supported further expansion in loan volumes. Residential mortgage lending was stuck

at low levels in most areas. Credit availability and standards remained relatively restrictive

for residential mortgages and construction loans, and a few reports pointed to tighter credit

conditions for consumer and business borrowers in general.

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Last update: November 28, 2007