Most Regional Fed Banks Saw Modest or Moderate Economic Growth - Beige Book Oct 15, 2014 02:02PM

(Updated - October 15, 2014 2:02 PM EDT)

Most regional Fed banks saw modest or moderate economic growth.

UPDATE -

Summary of Commentary on Current Economic Conditions by Federal Reserve District

Prepared at the Federal Reserve Bank of Minneapolis and based on information collected before October 6, 2014. This document summarizes comments received from business and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.

Reports from the twelve Federal Reserve Districts generally described modest to moderate economic growth at a pace similar to that noted in the previous Beige Book. Moderate growth was reported by the Cleveland, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco Districts, while modest growth was reported by the New York, Philadelphia, Richmond, Atlanta, and Kansas City Districts. In the Boston District, reports from business contacts painted a mixed picture of economic conditions. In addition, several Districts noted that contacts were generally optimistic about future activity.

Most Districts reported overall growth in consumer spending that ranged from slight to moderate, at a pace that was often similar to that reported in the previous Beige Book. However, general merchandise retailers in New York noted that sales were weaker on balance since the previous report. Several District reports indicated that retailers were relatively optimistic about the remainder of the year. Meanwhile, tourism activity remained upbeat in several areas, with some reports of higher occupancy rates and solid advance bookings for travel and lodging.

Several Districts reported that nonfinancial services grew at a moderate pace since the previous Beige Book. Districts reporting on transportation services generally noted growth in this sector, with a few pointing to capacity constraints in railroads, trucking, or both. Manufacturing activity increased in most Districts since the previous Beige Book; contacts in the Boston, Philadelphia, Atlanta, and Kansas City Districts reported positive near-term outlooks.

Residential construction and real estate activity were mixed since the previous report. Commercial construction and real estate activity grew in most Districts. Banking conditions continued to improve relative to the previous Beige Book. Commercial loan volumes increased in nearly all reporting Districts. However, consumer loan demand was mixed, and some Districts pointed to low or reduced levels of demand for refinancing. Credit standards generally remained unchanged, and there were no reports of deterioration in credit quality.

Agricultural conditions were mixed since the previous Beige Book. Prices for some crops declined, driven in part by very strong realized or anticipated production. These lower prices for some agricultural commodities were seen as weighing on producers' incomes, but as benefiting those using the commodities as inputs. In the energy sector, coal production was mixed and oil and natural gas production generally increased from already-high levels.

Employment continued to expand at about the same pace as that reported in the previous Beige Book. Most Districts reported that some employers had difficulty finding qualified workers for certain positions. A number of Districts characterized overall wage growth as modest, but reported upward wage pressures for particular industries and occupations, such as skilled labor in construction and manufacturing.

Consistent with the previous Beige Book, price pressures remained subdued, with Districts reporting little to no change in price levels or modest increases. Firms generally reported that input prices were unchanged or up slightly.

Consumer Spending and Tourism
Most Districts described growth in consumer spending as slight to moderate, and at a pace roughly similar to that reported in the previous Beige Book. In particular, the Boston, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, and Dallas Districts reported moderate growth; Philadelphia reported only slight growth in non-auto retail sales, and retailers in the Atlanta and San Francisco Districts also cited a slight improvement in sales. General merchandise sales in the New York District were weaker on balance since the previous report. Boston, New York, and Chicago reported that inventories were at desired levels. In Philadelphia, many retailers were avoiding the need for deeper discounting; however, New York and Cleveland reported that some contacts were running more promotions than usual. Boston, Philadelphia, Chicago, Kansas City, Dallas, and San Francisco indicated that retail contacts were relatively optimistic about the remainder of the year. In Chicago and Dallas, retailers were expecting that sales during the upcoming holiday shopping season would be up slightly from a year earlier.

Growth in auto sales varied across Districts, but was generally positive. In the New York District auto dealers reported that sales were steady to slightly stronger, while sales increased modestly in the Kansas City District. Auto dealers continued to report strong growth in the Philadelphia District. Lower gas prices spurred sales of larger vehicles in the Chicago District. Cleveland reported that new auto sales were down slightly in August from a year ago, but year-to-date sales were higher than the same period last year. Cleveland and Kansas City also reported solid sales of larger vehicles, such as light trucks and SUVs. In the Kansas City District, auto inventories fell; in Cleveland, inventory reports were mixed. Dallas reported that contacts were satisfied with their inventory levels. Philadelphia, Kansas City, and Dallas noted that dealers were optimistic about sales prospects for the rest of the year.

Tourism activity was relatively solid in several areas, with upbeat reports from the Boston, New York, Richmond, Atlanta, and Minneapolis Districts. In the Kansas City District, tourism fell from the previous month but was up strongly from a year ago. Growth was modest in Philadelphia. Boston, New York, Philadelphia, Atlanta, and San Francisco reported higher hotel occupancy rates in at least some parts of their Districts. Boston noted that restaurant revenues increased relative to a year ago. Advance bookings for travel and lodging were strong in the Philadelphia, Richmond, and Minneapolis Districts. In the Atlanta District, hospitality contacts maintained a positive outlook for the remainder of 2014 and the beginning of 2015.

Nonfinancial Services
A number of Districts reported that activity in the nonfinancial services sector advanced since the previous Beige Book. The Boston District reported generally higher demand for consulting and advertising services. Philadelphia noted that over three-fourths of all service-sector contacts reported expectations that growth trends will remain positive over the next six months. Richmond reported that technology firms and engineering companies noted stronger revenue growth; Dallas indicated that demand for accounting services rose further from an already-high level; and Dallas and San Francisco noted that demand for legal services picked up in some areas. Staffing services increased in many Districts, including New York, Philadelphia, Cleveland, Richmond, Chicago, and Dallas. Philadelphia indicated that staffing requests increased for both temporary and permanent positions. A contact from a staffing firm in the Chicago District reported strong orders but noted that improving labor market conditions were leading to increased difficulties in finding qualified workers.

Districts reporting on transportation services generally noted growth since the previous report, with a few pointing to capacity constraints in railroads, trucking, or both. Atlanta reported increased railroad shipments and strong trucking freight demand. Contacts at trucking firms and railroads in the Cleveland District noted that insufficient capacity is a major issue that is currently confronting the industry. In the Minneapolis District, capacity constraints in freight rail have increased demand for trucking services and led to increased stockpiles at some iron ore production facilities. A trucking firm in the Kansas City District cited supply chain disruptions and new regulations as having slowed freight traffic. Dallas noted that air cargo volumes continued their upward trend, and Richmond indicated that activity remains strong at District ports. St. Louis reported some expansion plans for freight firms.

Manufacturing
Manufacturing activity increased in most Districts since the previous Beige Book. However, New York noted that manufacturing growth had stalled, and Boston indicated that their contacts cited weaker results than in the past few reports. The outlook for manufacturing was positive in a number of Districts.

Within manufacturing, growth was reported across a broad range of products. Cleveland, Chicago, and San Francisco noted increased steel demand. The Chicago and St. Louis Districts noted strength in the aerospace sector; however, San Francisco reported that aerospace and defense capacity utilization declined. Demand for construction materials or equipment increased in Philadelphia, Cleveland, Chicago, and St. Louis. Manufacturers reported continued demand from the energy sector in the Philadelphia and Cleveland Districts. Richmond and San Francisco noted strong demand for medical equipment. San Francisco reported that worldwide semiconductor sales were up markedly over the previous year. In contrast, a food producer in the Richmond District said that demand was flat; St. Louis and Minneapolis reported layoffs or plant closures by food producers; and Kansas City noted slower activity at some food processing plants. Chicago reported weaker demand for agricultural and mining equipment.

Real Estate and Construction
Reports on residential construction and real estate activity were mixed. New York noted that single-family construction was sluggish in some areas, but that multifamily construction increased. Philadelphia reported only slight growth in home construction. In August, single-family construction starts in the Cleveland District reached their highest level so far this year, though the number of starts year-to-date remained slightly lower than last year. Richmond noted that residential construction across the District increased slightly for custom homes. Atlanta reported that multifamily construction continued to increase across much of the District, while Chicago indicated that both single- and multi-family construction continued to expand. Residential real estate contacts in the Atlanta District indicated that existing home sales and prices remained ahead of last year's levels and inventory levels were down from a year ago. Chicago noted that home sales were somewhat lower, and growth in home prices and residential rents slowed. San Francisco reported that sales of single-family homes were stable since the previous report.

Commercial construction and real estate activity grew in most Districts. Richmond, St. Louis, and San Francisco reported increased commercial construction, industrial construction, or both. Cleveland noted that a majority of commercial contractors saw increased construction activity relative to a year ago. Commercial contractors in the Atlanta District saw an increase in construction activity across many property types. In Minneapolis, however, commercial construction activity declined. Richmond reported that commercial real estate activity improved modestly over the past several weeks. The New York District noted that the New York City office market continued to strengthen. Atlanta noted that many commercial brokers saw growth in activity. Chicago noted that commercial real estate activity continued to expand. Kansas City indicated that commercial vacancy rates declined and absorption and sales increased. Boston noted that commercial real estate fundamentals are either holding steady or improving.

Banking and Finance
In most Districts, banking conditions continued to improve relative to the previous Beige Book, with net increases in loan volumes reported in a number of Districts.

Since the previous Beige Book, New York reported that consumer loan demand had leveled off, Cleveland reported that consumer lending was stable, and Atlanta, St. Louis, and Kansas City noted that consumer loan demand increased. Chicago reported strong growth in auto lending. New York reported decreased demand for loan refinancing, Philadelphia noted negligible demand for refinancing, and Richmond reported that refinancing demand was mostly unchanged, but down in some areas.

Demand for business credit expanded since the previous Beige Book. New York reported increased demand for commercial mortgages. Philadelphia noted increased loan volume for commercial and industrial loans. Cleveland, Atlanta, St. Louis, and San Francisco noted increased commercial loan demand. Chicago noted that business demand for equipment and commercial real estate financing rose. Financing for mergers and acquisitions as well as for capital expenditures rose in the Dallas District. Kansas City noted slight increases in commercial and agricultural lending.

There were no reports of deterioration in credit quality. New York reported that delinquency rates continued to decline, particularly for commercial loans and mortgages. Philadelphia banking contacts described steady improvement in credit quality, and San Francisco noted that asset quality has improved since the previous report. Most bankers in the Kansas City District reported that loan quality was unchanged compared with a year ago.

Credit standards generally remained unchanged since the previous Beige Book. Cleveland noted that no changes were made to loan-application standards during the past six weeks, but lenders slightly relaxed terms and conditions. Some contacts in the Philadelphia District said that heated competition for loans was resulting in a slight rise in credit risks.

Agriculture and Natural Resources
Prices for many crops continued to decline since the previous Beige Book, driven in part by very strong realized or anticipated crop yields. This higher production is expected to offset some of the effect of lower prices on farm incomes. Chicago, St. Louis, and Kansas City reported very good crop conditions at the beginning of the harvest; additionally, Chicago and Minneapolis expect large corn and soybean harvests. Drought conditions persisted in parts of the Atlanta, Dallas, and San Francisco Districts. Atlanta, Chicago, Minneapolis, and Dallas noted that livestock, poultry, and dairy producers had benefited from increased output prices and lower feed costs.

Since the previous Beige Book, oil exploration activity increased in the Minneapolis, Kansas City, and Dallas Districts. Richmond and Minneapolis noted increases in natural gas production, and San Francisco reported increased natural gas and electricity sales to manufacturers. Compared with a year earlier, coal production was flat in Cleveland, mixed in Richmond, and increased in St. Louis. Recent decreases in oil prices were reported by Atlanta and Kansas City; natural gas price decreases were reported by Cleveland, Richmond, and Kansas City. Iron ore production in the Minneapolis District held steady since the previous report.

Employment, Wages, and Prices
The pace of employment growth was about the same as that reported in the previous Beige Book. Most Districts reported that some employers had difficulty finding qualified workers for certain positions. In particular, manufacturers in the Boston District said that they continue to look for machinists; Chicago noted that difficulties in finding skilled labor have often delayed construction projects; and in the Dallas District a shortage of workers in heavy construction and engineering was causing some delays in projects for the petrochemical industry. Contacts in Richmond, Minneapolis, and Kansas City noted difficulty in filling openings for truck drivers.

A number of Districts characterized wage growth as modest, though several also reported upward wage pressures for particular industries and occupations, such as skilled labor in construction and manufacturing. Cleveland, Richmond, and Kansas City noted upward wage pressures for transportation workers; Richmond also reported upward wage pressures for skilled engineers, managers, information technology professionals, and bankers. San Francisco noted that software developers were receiving above-average wage increases. New York reported that workers were more frequently leaving jobs for higher pay, while a contact in the St. Louis District noted increased turnover of skilled employees who were switching to higher-paying jobs.

Consistent with the previous Beige Book, overall price pressures remained subdued, with Districts reporting little to no change in price levels or modest increases. Firms generally reported that input prices were unchanged or up slightly. Districts noted that several commodity prices fell since the previous report, although cattle, hog, and dairy prices remained at elevated levels. New York reported that cost pressures have largely subsided among manufacturers, but remained fairly widespread among service firms. Firms in the Atlanta District indicated that their pricing power remained relatively weak. However, in Chicago, a number of manufacturers expected to be able to raise prices, especially in the auto industry. St. Louis reported that some retail dealers of construction materials increased prices. Minneapolis noted that metals prices decreased somewhat since the previous report. Restaurant menu prices in Kansas City rose more slowly than in previous surveys; San Francisco reported that restaurant prices increased slightly in July and August.

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First District--Boston

Reports from business contacts paint a mixed picture of economic conditions in the First District. Manufacturers cite weaker results than in the last few reports and retailers are seeing flat to moderately increasing sales, while the tourist sector continues to be robust. Results from the consulting and advertising sector are generally quite positive. Commercial real estate markets are level or improving in the region, while residential real estate contacts mostly report declines in sales and prices, but ongoing cautious optimism. Firms are not generally hiring, on net, but those with substantial increases in business--one manufacturer and several in consulting and advertising--are raising their headcounts. Price pressures remain minimal according to contacts, with manufacturers and retailers noting only selective and modest price increases.

Retail and Tourism
Retail contacts for this round report comparable-store sales that are flat or increasing year-over-year; those with increases cite mid-to-high single digit growth from a year earlier. Spending is strong for furniture, household items, leisure and sporting goods, and apparel. Inventories are either "healthy," slightly up, or slightly down, depending on the contact. Respondents cite some modest price increases (2 percent to 3 percent) on certain items and anticipate this trend will continue. For the rest of the year, contacts continue to predict low-to-mid single-digit sales increases on an annual basis, with an outlook for the U.S. economy that ranges from "sideways growth" to "an optimistic outlook for steady growth."

The Boston-area economy continues to enjoy a strong boost from travel-related spending. In August 2014, hotel occupancy rates were up 12 percent year-over-year, while average nightly room rates were up almost 18 percent from August 2013. Through August, restaurant revenues were up 3.5 percent year-over-year, while attendance at museums and other attractions was up 2.2 percent. Though the results are not yet in for September, advance activity was strong for both September and October, traditionally the peak travel months. The hotel industry is predicting a 7 percent revenue increase for 2015 over 2014, with most of this growth reflecting rising room rates.

Manufacturing and Related Services
Of the 11 manufacturing firms contacted this cycle, five report some weakness in sales, a much higher number than in any recent cycle. The reasons cited for the weakness are varied. A manufacturer of industrial motors and brakes says that August was typically slow but that sales had not bounced back in September as much as they usually do, with orders down about 5 percent year-on-year. A furniture maker cites a 10 percent dropoff in sales during the winter which continued through the summer. A firm making advertising products says that sales have been declining 10 percent per year for a while.

One contact expresses caution about an "order bubble" in commercial aviation, an industry that has generally been a robust source of growth in the region. According to the contact, airlines order jet planes to make sure that if they need them, they have a slot in the queue; the worry is that at some point there could be a wave of cancellations.

None of our contacts reports excessive pricing pressure from suppliers or excessive pushback on price increases from customers. One contact says it is "always a battle," albeit successful, to convince customers to accept price increases. None of our contacts is laying off, but only one reports large hiring increases. A contact in the media business says they are "very careful with headcount." The one firm to report substantial hiring, a biotech firm, cites rising costs of hiring skilled workers in New England. As usual, several contacts say they are always looking for workers with particular manufacturing skills, such as machinists. Our contacts report no significant changes in inventories. Most firms cite increased capital spending more or less in line with their plans; only the biotech firm reports major increases.

In general, the manufacturing outlook is positive but very guarded. Two firms, the manufacturer of motors and brakes and a firm in the textile and chemical businesses, say that they are waiting to see how things play out in the fall.

Selected Business Services
Most contacts report that demand for consulting and advertising is up from a year ago, although the pace of growth varies across sectors and firms. Government and strategy consultants note a strong uptick in requests for proposals and eagerly await contract award decisions. A high-end economic consulting firm is still overwhelmed with work, mostly related to mortgage-backed securities (MBS) litigation, and at 12 percent growth year-over-year is now beyond capacity. An advertising merchandise firm is slightly outpacing the 5 percent growth they estimate the industry is experiencing on average; they are seeing less pushback on prices from their large clients and cite an increase in large orders. In healthcare consulting, contacted firms' revenues range from flat to up 10 percent from a year ago.

Prices are increasing in a bimodal fashion for contacts in consulting: Firms with relatively flat revenue are holding price structures constant for now, even as they bid on more jobs and anticipate winning their "usual" fraction; those whose business is booming are raising prices somewhat, taking on new personnel, raising wages, and experiencing increased compliance costs, and revenue growth is still outstripping costs. An advertising materials firm that has exhibited steady growth is keeping to its 5 percent increase in staff for this year, while the better-faring healthcare consulting firms are increasing employment in the 6 percent range. These firms are generally filling client-facing salesperson roles with some ease, and developer and e-commerce related roles with greater difficulty.

All contacts are hopeful about the future; they say that macroeconomic conditions are improving. Even the slower-growing firms see increases in demand and additional deals in the pipeline, and estimates for next year's growth range from 5 percent to 15 percent. The government and strategy consulting contacts' main concern is that they secure a normal percentage of the contracts for which they are contending. The business strategy contact notes strong business in the Northeast, but is concerned over a lack of new businesses being formed. The economic analysis firm continues to expect MBS-related work to dry up soon and is comfortable with the idea of throttling back growth when it happens. Healthcare consulting contacts feel somewhat at the mercy of government healthcare reforms, but generally feel that "the wind is at their backs" and growth will be sustained for the foreseeable future.

Commercial Real Estate
Commercial real estate fundamentals are either holding steady or improving across the First District. In Boston, contacts report that rents continue to rise in the popular Fort Point Channel area and have even started to increase in portions of the Financial District after several flat months. Healthy demand for office space and lack of new office construction are seen as the forces behind the latest rent increases in Boston, which are perceived as being in excess of increases in operating costs. Office leasing is also reportedly strong in Boston's inner suburbs, such as Waltham and Burlington. Construction activity in greater Boston is reportedly steady, but at a high level, with an emphasis on mixed use and "adaptive reuse" of existing structures. Labor shortages and associated high labor costs are seen as potential constraints on the growth of construction activity moving forward, in Boston and more broadly within Massachusetts. In Providence, leasing activity picked up modestly in both the office and industrial sectors since the previous report and industrial space remains in short supply in relation to demand. In greater Portland, the retail sector continues to grow, resulting in higher rental rates downtown and increased construction of small-scale retail outlets in surrounding areas. Maine's hospitality sector also remains strong, with better-than-expected occupancy rates at recently opened hotels in Portland and new hotels under construction around the state. In Hartford, leasing volume is unchanged in recent weeks and there is no significant construction activity reported. While that city's office vacancy rate has declined slightly in recent months, there has been no noticeable increase in asking rents. Also in greater Hartford, investment sales demand remains healthy and the number of properties being placed for sale is on the rise. A similar increase in supply of buildings for sale is reported for greater Boston, and contacts in both cities infer that a growing number of owners believe that prices are at or near their peak, borrowing costs are near their trough, or both. Contacts also report that demand for Boston's commercial real estate, especially from foreign buyers, remains strong and is expected to continue so for the foreseeable future.

Contacts are either cautiously optimistic (as in Hartford and Providence) or optimistic (Boston and Portland) that commercial real estate fundamentals will continue to improve. In both Providence and Hartford, contacts note that uncertainty over the outcomes of upcoming state and/or local elections is contributing to uncertainty in the local economic outlook.

Residential Real Estate
Closed sales of both single family homes and condominiums declined in August compared with a year earlier in at least four of the New England states. In Maine, by contrast, sales of single family homes increased as condominium sales decreased. Information for New Hampshire is not available. The median sales price also declined relative to August of last year for single family homes and condominiums in at least four states. The exception is Massachusetts, where prices for single family homes increased year-over-year for the twenty-third consecutive month and condominium prices rose for the fifteenth consecutive month. Massachusetts contacts say the sales decline and price increases are driven primarily by a shortage of inventory, as demand is steady; inventories have been falling on a year-over-year basis for more than two years. Contacts say affordability is a concern: "With prices on the rise, it's becoming more difficult to save the down payment, especially with rents as high as they are. We are hearing that buyers are approaching their threshold for what they are willing to pay." In contrast, Maine is seeing inventory increases and contacts expect to be busy in the fall market. In Connecticut and Maine, contacts report a need for higher paying jobs in their states to help sell the inventory of non-starter homes. As one contact in Maine stated, "We need the middle class to feel better. Right now they question what the next few years will be like." Notwithstanding declines in closed sales and median sales prices, residential real estate contacts say they are cautious but optimistic.

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Second District--New York

Growth in the Second District's economy has slowed to a somewhat more modest pace since the last report. Prices of finished goods and services continue to rise at a subdued pace; cost pressures remain fairly widespread among service firms but have largely subsided among manufacturers. Labor market conditions have shown further signs of strengthening, except in the manufacturing sector, where hiring activity has slowed. Contacts in most industry sectors report that business has been steady or improving, though manufacturers report that growth has stalled in recent weeks. General merchandise retailers report that sales were mixed but, on balance, weaker since the previous report; auto dealers report that sales were steady to slightly stronger. Tourism activity has continued to show strength since the last report. Housing markets have been steady or stronger, with inventories rising to more normal levels. New York City's commercial real estate market has continued to strengthen moderately, and there are scattered signs of a pickup in commercial construction. Finally, banks report that household loan demand has leveled off but that demand from commercial borrowers continues to grow; delinquency rates continue to decline, particularly for commercial loans and mortgages.

Consumer Spending
General merchandise retailers say that sales were reasonably robust in August but mixed to weaker in September. Two major retail chains reported that sales, which were on or ahead of plan in August, softened noticeably in September and were below plan. Retail contacts at upstate malls report that sales were generally flat in both August and September, with some strength noted in back-to-school sales. Reports on inventories were mixed in September, but on balance, stocks are reported to be at or near desired levels. Prices are mostly described as steady, though some contacts characterize the environment as increasingly promotional.

Auto dealers across upstate New York characterize sales as steady but fairly strong. Buffalo area dealers report that that new vehicle sales continued to increase moderately in August and September, while sales of used vehicles remained soft. Rochester area dealers report that new vehicle sales were flat in August and steady to up slightly in September; they note favorable market conditions for both new and used cars. Auto dealers in both areas continue to report that both wholesale and retail credit conditions remain in good shape.

Tourism activity has remained robust since the previous report. Business at Broadway theaters continued to show strength in August and September, with attendance up more than 10 percent from a year earlier and revenues up roughly 13 percent. Hotel occupancy rates in New York City have remained near record levels, while room rates have risen moderately. Hotel occupancy rates have also continued to climb in the Buffalo and Albany areas but edged back in metropolitan Rochester. Consumer confidence in the Middle Atlantic region (NY, NJ, PA) slipped in September, based on the Conference Board's latest survey.

Construction and Real Estate
The District's housing markets have been steady to stronger since the last report, while inventories have risen from unusually low levels in some areas. Rents have leveled off in Manhattan and Brooklyn--in part reflecting extensive luxury rental development coming on line--while rents in Queens have continued to increase briskly. New York City's co-op and condo market was generally steady in the third quarter. Resale prices for apartments were little changed in Manhattan but continued to rise moderately in Brooklyn and Queens; sales volume was down more than 10 percent from the extraordinarily high levels of a year earlier but little changed from the second quarter.

Northern New Jersey's housing market has continued to be mixed. Demand for single-family homes has remained sluggish, and so has new single-family construction, as builders remain reluctant to build for inventory. In contrast, a strong rental market has continued to spur multi-family construction, especially in areas easily accessible to New York City. Housing markets in western New York State flattened out in August and September, as both sales volume and prices leveled off. Multiple offers have become less common, as the inventory of available homes has increased from low levels.

New York City's office market continued to strengthen in the third quarter: Office availability rates declined moderately in the Midtown and Midtown South markets and fell more noticeably in Lower Manhattan. Asking rents continued to rise and were up 5 percent to 10 percent from a year earlier. There are a number of major commercial developments under construction in Manhattan, and an industry contact in northern New Jersey notes that there has been somewhat of a pickup in commercial construction there, albeit from low levels.

Other Business Activity
Manufacturing firms in the District report that growth, which had been fairly robust through the summer, has stalled since the last report. Contacts in other industry sectors, however, report that business has been steady or expanding. Businesses generally report steady to modest increases in their selling prices. Reports on input costs have been mixed: Although service firms continue to report widespread increases in input prices, manufacturers generally report more that costs have leveled off.

The labor market has shown further signs of strengthening since the previous report. One major New York City employment agency notes brisk hiring activity and characterizes labor demand as increasingly robust--particularly for temps, workers with people skills, and especially IT workers. A contact at another employment agency has not seen the normal seasonal slowdown in recent weeks and characterizes the labor market as fairly good, with particularly brisk demand for HR people. While one industry contact describes salaries as "pretty flat", another reports upward pressure on salaries, as people are more frequently leaving jobs for higher pay. More broadly, service-sector firms continue to add workers at a moderate pace, though more contacts than in the last report say they plan to expand staff in the months ahead. One major retailer expects to hire moderately more seasonal workers for the holidays than last year. In contrast, manufacturers say they have scaled back both hiring activity and hiring plans.

Financial Developments
Small-to-medium-sized banks in the District report increased demand for commercial mortgages but steady demand for other types of loans and decreased demand for refinancing since the previous report. Bankers report that credit standards were unchanged across all loan categories. Respondents report narrowing spreads on consumer loans and residential mortgages. Banks indicate that average deposit rates remain unchanged. Finally, bankers report ongoing declines in delinquency rates, particularly for commercial loans and mortgages.

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Third District--Philadelphia

Aggregate business activity in the Third District continued to grow at a modest pace during this current Beige Book period with very few shifts in the growth rates of specific sectors. The most notable change in growth was reported by staffing companies, which experienced further increases in staffing requests for temporary and permanent positions. Overall, service sectors maintained a moderate pace of growth. Nonauto retailers continued to report slight growth, auto dealers continued to report strong growth, and tourism activity continued at a reportedly modest pace. Manufacturers also reported an ongoing modest rate of increase in activity. The commercial and residential real estate sectors continued to report slight overall growth during the current Beige Book period for construction and for leasing of existing commercial properties; contacts reported little change for existing home sales, which continued to be down somewhat on a year-over-year basis.

Lending volumes continued to grow slowly, and credit quality continued to improve, while contacts continued to warn of a slight rise in credit risks because of heated competition for loans. Overall, contacts reported slight increases in wages, home prices, and general price levels that were similar to those reported for the previous Beige Book period. Contacts continued to anticipate moderate growth over the next six months.

Manufacturing
Third District manufacturers have continued to report modest growth overall since the previous Beige Book, but signals were somewhat mixed. A somewhat greater percentage of firms reported increases in new orders and shipments, even as a slightly greater percentage of firms reported decreases (the share reporting no change in activity declined). Gains in activity continued to reflect demand from a broad base of sectors. Except for paper products, all sectors reported overall increases in shipments and orders. Contacts specifically mentioned ongoing demand from the auto and energy sectors. Some firms reported growing demand for home construction products; however, demand remains at a low level. Some producers of construction-related materials worried that if housing starts do not soon rise further, industry shakeouts may result in plant closings to eliminate idle capacity. Other contacts mentioned that demand from defense contracts had stabilized or was growing again from lower levels.

Over half of Third District manufacturing contacts expected business conditions to improve during the next six months. While this is a slightly lower percentage than was reported during the previous Beige Book period, this is the second consecutive period in which no firms anticipated deterioration of business conditions. Moreover, a somewhat larger percentage of firms now expect to increase employment levels over the next six months, to increase their level of capital spending, or to do both.

Retail
Since the prior Beige Book period, Third District contacts have continued to report slight growth in nonauto retail sales. Although, sales growth of back-to-school shopping items was generally described as modest. An operator of area malls reported that cooler fall-like weather has helped move fall apparel inventory, which has allowed many retailers to avoid deeper discounting, thus improving their margins. After a midsummer lull, the restaurant business picked up in August and continued growing into September. Contacts reported very strong restaurant activity in Center City Philadelphia. Overall, contacts are increasingly optimistic. While hesitant to forecast the upcoming holiday season, one contact suggested that a lot of ongoing new tenant openings may attract more shoppers. Another contact was optimistic about three significant Center City retail openings this fall.

Auto dealers continued to report strong sales growth. A Pennsylvania contact described August as one of the best months ever for auto sales at dealers throughout the state; reported sales for September were also strong but were beginning to show signs of their normal seasonal slowdown. New Jersey contacts also reported strong August sales followed by lower volumes for September, as they approach the model-year changeover and typical year-end selloff in October. Dealers remain very optimistic for continued strong sales levels through 2015.

Finance
Third District financial firms have continued to report slight increases in total loan volume since the previous Beige Book. Volumes increased most for commercial and industrial loans and for some consumer credit lines (though not for credit cards). Reports on demand for home mortgages varied across the region from modest growth to little change; all contacts described low levels of demand for new mortgages, and negligible demand for refinancing loans. Most contacts reported little change in the commercial real estate market. Overall, banking contacts continued to report steady improvement in credit quality; several mentioned that the financials of most small business customers had improved. However, competition remains intense for creditworthy loan prospects. Some contacts also cited risky loan terms that they would not match; one described the market as "frothy."

Real Estate and Construction
Third District homebuilders have continued to report slight growth in new home construction since the previous Beige Book period. Contacts credited lower gas prices for improving sales traffic and lower interest rates for improving contract signings. Construction activity is expected to continue at modest levels, as builders are starting some homes on spec to boost their inventory of move-in-ready homes before the end of the year. Residential real estate brokers reported little change in sales this period from the prior Beige Book period. On a year-over-year basis, sales have fallen in most major markets. Brokers noted that more deals are falling through now than prior to the recession, and bankers noted that fewer people are qualifying for mortgages. These observations have been borne out by recent monthly reports from Third District multilists that have seen positive year-over-year growth of pending contracts evolve into negative growth of contracts closed one month later. Brokers also reported that the months' supply of inventory has begun to increase again. Still, brokers remain optimistic for some improvement in 2015.

Overall, nonresidential real estate contacts have reported little change since the previous Beige Book period in the pace of growth of construction and leasing activity, which remains slight. Construction activity continues to be greatest for industrial/warehouse building projects; however, some major office and residential projects have broken ground in Center City Philadelphia, and construction activity will accelerate next spring when the buildings begin to go vertical. An architecture and engineering firm reported that its business continued to exceed its plan, and it will be hiring again. Demand for the firm's services has been especially strong from energy-related sectors. Contacts also reported improved leasing activity in downtown Philadelphia and suburban Philadelphia, especially for Class A office space. Strong demand continued in Center City Philadelphia for office, residential, and retail space. In the suburban Philadelphia market, a developer noted that a "flight to quality" from older properties has driven rents higher for Class A office space and prompted ongoing renovations to upgrade older offices into Class A space.

Services
Third District service-sector firms have continued to report moderate growth in activity since the previous Beige Book. Nearly half of all firms reported increases in new orders and sales. Several contacts from banking and health-related manufacturing reported that some health-care providers had reduced personnel and expenses. These cost-cutting measures were attributed to narrower margins due to smaller reimbursements from insurance plans. The cuts occurred even though these providers have been experiencing modest demand increases as a result of previously uninsured individuals gaining access to healthcare. Staffing contacts in eastern and central Pennsylvania reported moderate increases in hiring for temporary and permanent positions. Staffing requests have come from a variety of sectors and for business expansions as well as replacements. Staffing firms remained very upbeat about prospects for this year and next. Once again, over three-fourths of all service-sector contacts reported expectations that growth trends will remain positive over the next six months; none anticipated declines.

Third District tourist areas continued to benefit from great weather conditions as the summer blended into fall. Accordingly, contacts reported modest gains overall. One retail contact reported dramatic sales increases throughout the shore areas, attributing double-digit year-over-year gains to more day-tripping even as occupancy rates of shore rentals continued to rise. (These gains, which were still strong in September, were viewed as resulting from lower gasoline prices as well as from favorable weather.) Several contacts continued to report that rebuilding from Hurricane Sandy was not complete in the hardest-hit areas, where new flood insurance and building standards have slowed reconstruction plans. In the Poconos, contacts reported favorable weather, higher occupancies, and strong bookings for the upcoming fall weekends. Contacts reported that recent casino closings in Atlantic City are expected to have a large effect on the city that should be relatively localized. Reported employment losses in Atlantic City are high; however, many of the lost jobs were part time (and many of these would have ended after the summer tourist season was over). Contacts expect that the remaining casinos may pick up some of the lost business from the recent closures; however, existing staff levels should be sufficient to service any added activity. More broadly, District tourism contacts remain generally positive regarding prospects for the fall.

Prices and Wages
Overall, Third District contacts reported little change to the steady, slight pace of price level increases that is similar to that seen in other recent Beige Book periods. Less than one-third of manufacturing contacts reported an increase in their input costs; just over 10 percent reported charging higher prices for their own products. About one-fifth of service-sector contacts reported an increase in prices paid and received--a somewhat smaller share than in the prior period. Auto dealers reported little change in pricing. Several contacts continued to report tight margins. Generally, contacts reported that hiring remains cautious--occurring when necessary for replacement or for incremental growth; however, staffing firms continued to note some increased hiring for expansion. Staffing contacts also reported a few leading signs of wage pressure: A few job prospects have turned down offers, some companies are making counteroffers to retain employees, and clients are generally less rigid about salary levels.

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Fourth District--Cleveland

The economy in the Fourth District expanded at a moderate pace during the past six weeks. Manufacturers reported moderate to strong business activity. Demand for nonresidential construction strengthened, while the residential market slowed. Consumer spending at retail outlets grew, and year-to-date auto sales were above 2013 levels. Since the previous report, coal production and shale gas activity were little changed. Freight volume grew at a moderate to robust rate. The demand for business credit moved higher, and consumer lending was stable.

Payrolls showed a mild increase, primarily in manufacturing, construction, and freight transportation. Staffing firms reported that the number of job openings has picked up, while placements have fallen. Several recruiters reported on a trend to replace permanent, lower-skilled employees with temporary workers. Due to perceived shortages in selected labor skill areas, upward pressure on wages is beginning to be felt by general building contractors and freight haulers. Overall, input and finished goods prices were stable. Prices for energy and agricultural commodities declined, while transportation equipment prices rose.

Manufacturing
Most District factories reported little change in the pace of growth of new orders and production since the previous report and that year-over-year revenues were higher. Firms seeing lower production attributed it to seasonal factors or declining exports. Our contacts remain optimistic and expect moderate to strong demand for the remainder of the year. Steel shipments improved slightly since the last report. Fourth-quarter shipments are expected to increase on a seasonally adjusted basis relative to the third quarter, and a few steel producers project volume in 2014 will be about 5 percent higher compared to 2013. One steel executive noted that his capacity utilization rate has risen to 80 percent, a rise of 10 percentage points since the recession ended. Manufacturers and steel producers reported that the strongest demand came from the construction, motor vehicle, and oil and gas industries. Auto production at District assembly plants for the first eight months of this year was more than 7 percent higher compared to the same period in 2013.

Many of our contacts anticipate that their capital budgets for fiscal year 2015 will be higher than current-year spending. In general, input and finished goods prices were stable since the previous report, apart from declines in agricultural commodities and steel. A food producer remarked that prices for the major commodities that he purchases are at their lowest level in five years and he does not believe food inflation will be a major issue for the next 12 months. We continue to hear numerous reports about new hiring, mainly for production jobs. The boost in hiring has put little upward pressure on manufacturing wages.

Real Estate and Construction
Sales of new and existing single-family homes showed a modest decline in many parts of the District since the last report. Year-to-date sales through August were lower compared to a year ago. Most builders expect that activity will stabilize at current levels, though some expressed concern about the impact of a potential rise in interest rates combined with continued strict lending standards. Multifamily development (market rate, affordable, and senior) was characterized as very strong, with occupancy rates greater than 95 percent. In August, single-family construction starts across the District were at their highest level so far this year. However, the number of starts year-to-date remains slightly lower compared to the same time period in 2013. New-home contracts were mainly in the move-up price-point categories, though activity in the first-time buyer category continues to slowly improve. Some builders anticipate a modest rise in new-home prices before year's end, which they attribute to rising material and labor costs. The upward trend seen in sale prices of existing homes has leveled off, but the average price remains higher than the average level for 2013 as a whole.

Nonresidential builders reported continued strong pipeline activity since our last report, and a majority indicated that the level of activity has picked up compared to a year ago. A few builders noted that they are more selective about the inquiries that they respond to because they are at or near capacity. One builder commented that because his customers are not expecting prices for nonresidential construction to rise much, there is no sense of urgency to push forward with some projects. In general, backlogs were described as good or solid. Market demand is broad based, though demand for industrial space (manufacturing and distribution) and healthcare facilities is strongest. There has also been a pickup in requests for retail and office space. Leasing of vacant industrial space has increased. Most builders remain optimistic, but they are concerned about labor availability, tight margins, and capacity constraints, should a demand spike occur.

General contractors are not overly concerned with rising prices for building materials; the largest price increases are anticipated for steel components, drywall, and wood products. The pace of hiring has slowed since our last report, with some of the decline in hiring activity being seasonal. Nonetheless, a majority of general contractors reported that they expect to increase their payrolls across a broad range of occupations--craft workers, laborers, management, and back office. Little wage pressure was reported, except for craft workers. Subcontractors are pushing through rate increases to cover rising costs (including labor) and to widen their margins. Subcontractors are still encountering capacity and cash-flow issues. As a result, some general contractors are turning to prefabrication to circumvent subcontractors.

Consumer Spending
Spending at retail outlets during August and into early September was generally higher compared to earlier in the third quarter. Many retailers cited an extended back-to-school buying period as a contributing factor to the increase. Revenues were higher relative to the same time period in 2013 for most retailers, which they attributed to a stronger product mix and growing investment in e-commerce. In addition to back-to-school items, sales of home furnishings, athletic footwear, and food products were doing well. Fourth-quarter revenues are projected to be higher, with expected year-over-year percent gains in the low single digits. Vendor and shelf prices held steady. Several retailers noted that they are running more promotions than usual, mainly to clear inventory and boost revenues. Excluding new store openings and temporary seasonal hiring, retail payrolls were stable.

New motor vehicle sales showed a moderate decline in August on a month-over-month basis and were down slightly from a year ago. However, year-to-date sales through August were 5 percent higher compared to the same time period in 2013. Strong sales of SUVs and trucks continued. Inventory reports were mixed, which is attributable to the model-year changeover. Dealers believe that the level of sales will follow seasonal trends for the remainder of the year and that unit volume for 2014 as a whole will be about 6 percent higher compared to 2013. Used-car purchases showed a modest decline in August on a month-over-month basis, while year-to-date unit volume was slightly higher. We heard several reports about automakers becoming increasingly dependent on the use of incentives to boost sales. Demand for service technicians is growing, but dealers are having difficulty finding qualified applicants.

Banking
Bankers reported that demand for business credit was stable to showing moderate growth during the past six weeks. While demand was described as broad based, it was strongest for commercial real estate and construction loans and C&I lending to manufacturers. Interest rates held steady. On net, consumer credit demand was roughly stable. The number of applications for auto loans remains very high, while households are making marginally greater use of home equity lines of credit. Residential mortgage activity was flat to down slightly; some of the decline is seasonal. Purchase transactions dominate mortgage applications. Delinquency rates are stable to improving across categories. No changes were made to loan-application standards during the past six weeks. However, to gain a competitive advantage, there has been some slight relaxing of terms and conditions. Banks saw growth in core deposits from businesses and consumers. On balance, banking payrolls held steady. New hires were mainly in the areas of compliance, risk management, and commercial lending; however, in response to reduced traffic at branches, payrolls there are being reduced.

Energy
Year-to-date coal production across the District is consistent with prior-year levels, with no material change in output anticipated in the near term. A production decline in eastern Kentucky is being offset by a significant increase in northern West Virginia. Spot prices for thermal and metallurgical coal remain on a downward trend. Activity in the Marcellus and Utica Shales remains at a high level. During the first half of 2014, production in Ohio's Utica Shale was more than six times greater relative to the same time period in 2013, while the number of producing wells increased by 61 percent. Wellhead prices for natural gas and oil have declined since late in the second quarter. Since the last report, equipment and materials prices were largely unchanged and energy payrolls held steady.

Freight Transportation
Freight volume expanded since the last report, with contacts describing year-over-year growth as moderate to robust. Although demand is fairly broad based, it is strongest from the agriculture, motor vehicle, and oil and gas industries. The near-term outlook is favorable. Contacts from trucking and railroads observed that insufficient capacity is a major issue that is currently confronting the industry and that there is concern about stress on the freight-transport system from this year's grain harvest, which is expected to be at a historic high. We heard a report about rail carriers being reluctant to contract for shipments of less than five carloads, which is hurting small manufacturers. The cost of new equipment (truck tractors and rail cars) is rising, and in some cases delivery times are lengthening. Some of the higher cost was attributed to meeting regulatory requirements. Hiring is both for replacement and for adding capacity. Projected capital spending in fiscal year 2015 is mainly for equipment replacement. Although most fleets would like to add capacity, they are having difficulty finding drivers.

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Fifth District--Richmond

District economic conditions improved modestly since the previous report. Manufacturing advanced as shipments and new orders grew modestly, and inventories of finished goods and raw materials rose at a faster pace. Retail sales rose on pace with our last report, and the non-retail service sector expanded moderately. Tourism remained robust, and executives anticipate a strong holiday season. Business lending was unchanged on balance, and competition among bankers remained intense. Residential real estate activity increased in recent weeks, albeit at a somewhat slower pace, and reports on housing inventory were mixed. In agriculture, crop harvesting was on schedule, with price declines for some crops. In the energy sector, coal production and prices declined. More natural gas wells were brought online. On balance, District labor market reports indicated greater demand for workers. According to our latest surveys, manufacturing employment grew modestly and average wages rose slightly. Service-sector employment and wages increased at a moderate pace.

Manufacturing
Manufacturing activity increased in recent weeks, and expectations for the months ahead remained positive. Shipments and new orders grew modestly, and inventories of finished goods and raw materials rose at a faster pace relative to the previous report. A medical equipment manufacturer in North Carolina reported continued robust growth in new orders during the past six weeks and noted optimistic customer expectations for the months ahead. Additionally, a North Carolina electrical equipment manufacturer indicated that orders were up, and that his firm's increased capital spending had improved its shipment capability. A source said that in West Virginia, large manufacturing firms were hiring and investing, but that smaller manufacturers were not making capital investments. A Virginia food manufacturer reported that order volume was flat during the past month, but that he expected improvement during the holidays. However, an executive at a North Carolina textile manufacturer stated that revenues had slowed and retailers were holding back on new orders. Prices of raw materials and finished goods rose at a slightly faster pace since the last report.

Ports
District port officials reported that activity remained strong, suggesting that the peak import season, which had begun earlier than usual, was extended rather than just shifted forward. Loaded container traffic rose further for the major ports, primarily for imports; for other traffic as well, imports continued to outpace exports. Some of the softness in exports was attributed to rail and trucking issues, such as slowdowns from bottlenecks in rail service and truck driver shortages, which have delayed movement of inland cargo to the ports. Port contacts reported strong exports of autos, as well as of containerized grain and soybeans. Imports were led by commodities related to housing and retail, such as appliances, flooring, apparel, and footwear. According to one official, shipping lines have been consolidating and upgrading to larger ships.

Retail
Retail sales rose on pace with our last report. Big-ticket sales grew solidly, but somewhat more slowly relative to the previous report. Sales picked up for suppliers of retail and wholesale building materials. Wholesalers of heavy equipment also reported stronger sales. A car dealer near Washington, D.C. said he expects this year's sales to be about the same as the record sales of a year ago, with dealer incentives helping to move current-year models. According to a central Virginia retail representative, current strong sales of furniture, appliances, and electronics may signal that consumers have more cash, but early big-ticket sales may leave less for discretionary spending during the later weeks of the holiday season. In contrast, the manager at a discount store in the Hampton Roads area of Virginia said that there was almost no change in sales revenues during the past six weeks, but customers were already making holiday purchases using the store's lay-away program. A grocery store manager in southwestern Virginia commented that diminishing incomes for coal mining families, together with rising meat prices, have resulted in lower sales per purchase. Retail price increases slowed since the previous report.

Services
Firms in the non-retail service sector reported moderate growth in recent weeks. Technology firms, engineering companies, and a few smaller healthcare facilities reported stronger revenue growth. According to a North Carolina hospital source, it has been a good year for revenues, and that the hospital was able to make small price increases. In contrast, an executive at a large healthcare system said that cost reductions, including hiring restrictions, were continuing and that their projections were for reduced inpatient volumes. While executives at a couple of accounting firms in North Carolina reported a pick-up in business, a CPA at a Maryland accounting firm saw little change in requests for proposals. According to our most recent survey, non-retail price growth increased slightly.

The summer tourism season finished on a high note, meeting resort managers' expectations. Moreover, hoteliers in Baltimore and western North Carolina said that conventions and autumn leaf viewing were expected to support strong bookings throughout October. A source on North Carolina's Outer Banks reported a number of scheduled autumn events to draw tourists for several more weeks. In addition, many rentals were already booked for Thanksgiving, Christmas, and New Year's. Few rate changes were reported.

Finance
Reports on lending activity were mixed in recent weeks. Residential mortgage demand declined in West Virginia and southeastern Virginia but rose slightly in Maryland, North Carolina, and South Carolina. Refinance loan demand was mostly unchanged except in West Virginia and South Carolina, where demand declined. Business lending was unchanged on balance. A contact in Maryland remarked that small businesses were having difficulty getting credit while larger businesses had no problems. The level of lending in commercial and industrial real estate, which had been trending up, has flattened in the Carolinas and West Virginia. Bankers in several locations characterized competition as "fierce." A lender from South Carolina reported some easing of standards; however, a contact from Maryland cited a tightening of underwriting standards. There were no reports of changes to credit quality. Lastly, slight upward pressure on loan interest rates was reported in West Virginia.

Real Estate
District housing market activity grew at a somewhat slower pace since the previous report. Most brokers indicated that buyer traffic was steady, on a seasonally adjusted basis. Most Realtors reported a slight increase in home prices, although one South Carolina broker reported a small decrease in both single-family and condominium sale prices. A contact in the Hampton Roads region of Virginia stated that the number of condominium sales was only slightly higher; apartment rental activity remained steady. Inventory reports were mixed. Realtors in South Carolina, North Carolina, and Virginia saw seasonal declines in inventories, while District of Columbia and northern Virginia brokers reported steady or rising inventories. Days on the market varied by location. Average market times decreased for Realtors in Richmond, Charlotte, and Myrtle Beach, but contacts in the nation's capital and Greensboro reported no change; a northern Virginia Realtor noted a slight increase. Construction across the District increased slightly for custom homes. A South Carolina Realtor saw no new multifamily construction and a Virginia Beach broker stated that multifamily growth is slowing down because of overbuilding. In contrast, an agent in Asheville stated that multifamily construction has "ramped up."

Commercial real estate activity improved modestly over the past several weeks. A broker in Charlotte reported a gradual improvement in sales and leasing, with a moderately strong office market and modest activity in industrial and retail real estate. The office market in the Hampton Roads area of Virginia was mixed. A South Carolina source reported robust leasing in both office and retail, with a slower industrial market since the last report. Retail vacancy rates were lower in Baltimore and Virginia Beach, and unchanged in Charlotte and Richmond. Office vacancy rates varied across the District. A Charlotte broker reported increased industrial construction, along with a few speculative office projects. Multiple contacts noted rising commercial sales prices. Rental rates varied across regions and submarkets.

Agriculture and Natural Resources
Corn prices declined further over the past six weeks. Soybean prices also fell, while cotton prices were unchanged. A West Virginia farmer stated that grain prices declined after seven years of above-average prices. Farmers' input prices were unchanged in South Carolina and Virginia. A grower in South Carolina reported completion of corn harvesting and the start of peanut harvesting since the previous report. In West Virginia a farmer said that crop planting, reseeding, and harvesting were on schedule, and that his compost business had increased in the past six weeks.

Since the previous report, coal production and prices decreased in southern West Virginia and rose in the northern part of the state, according to a source. Natural gas production increased moderately; more West Virginia wells were brought online, and natural gas prices decreased slightly.

Labor Markets
On balance, demand for workers increased since the previous report. A textile and chemical manufacturer from Virginia reported new hiring, while a food producer transitioned several temporary employees into full-time positions. New hiring in tourism, manufacturing, and IT was noted in West Virginia; however, there were reports that WARN Act notices, indicating a planned mass layoff, had been issued in the coal industry. A central Virginia staffing agent noticed significantly stronger demand in recent weeks, especially for customer service, healthcare, and legal workers. A Maryland employment service provider said there were no notable changes in hiring, but suggested that the skills most in demand were for managers, supervisors, engineers, and IT professionals. Some transportation, banking and finance, hospitality, and retail industries continued to have difficulty finding workers. A few contacts reported wage pressures for drivers, construction workers, skilled engineers, managers, IT professionals, and bankers. According to our most recent surveys, manufacturing employment grew at a modest pace, the average workweek lengthened, and wages rose slightly; in the service sector, employment and wages increased at a moderate pace.

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Sixth District--Atlanta

Sixth District business contacts described economic conditions as improving at a modest pace in September. The outlook among firms remains largely optimistic with the majority of contacts expecting near-term growth to be sustained at or slightly above current levels.

Retailers cited a slight improvement in sales activity since the previous report. Auto dealers continued to note increasing sales. Hospitality contacts continued to report strong activity, with increasing demand from both leisure and business travel. Residential real estate contacts indicated that existing and new home sales and prices remained ahead of last year's levels, and inventory levels were down from a year ago. Commercial real estate brokers continued to note improved demand and modest levels of construction for most property types. Multifamily construction, in particular, continued to increase across much of the District. Manufacturers indicated that overall activity expanded with new orders and production increasing since the previous report. Banking conditions improved for both businesses and consumers as loan volume increased slightly, on balance. Payrolls across the region expanded slowly and businesses continued to report difficulties finding qualified workers. Contacts indicated wages grew at a steady pace. Some contacts expressed concerns about the rising costs of specific inputs.

Consumer Spending and Tourism
District retailers reported a slight improvement in sales since the previous report. Young shoppers were described as being confident and willing to spend, while older consumers were reportedly being more cautious. The battle between online sales versus brick-and-mortar store sales continued as merchants indicated that competition from rival stores' online sales was having an adverse effect on in-store traffic. However, the outlook among retailers for the remainder of the year remains optimistic. District auto dealers not only continued to see increased consumer sales, but saw strong demand from commercial businesses as well.

Reports on tourism and business travel remained upbeat. Tourism activity across the region was strong with high occupancy numbers at hotels and resorts. The development of various new entertainment venues has increased demand for leisure travel and business travel has been solid year to date. Overall, hospitality contacts maintain a positive outlook for the remainder of 2014 and the beginning of 2015.

Real Estate and Construction
Many District brokers reported growth in activity since the previous report. Most brokers indicated that home sales met or exceeded their plan for the reporting period, but a growing share of contacts reported that sales fell short of their plan. The majority of brokers indicated that inventory levels remained flat or continued to decline on a year-over-year basis and home prices were ahead of their year-earlier level. Regarding the outlook, optimism about future sales activity waned from earlier reports with most brokers expecting home sales to remain flat or decline slightly over the next three months with some of the expected decline being attributed to seasonal factors.

Reports from District builders remained fairly positive. The majority reported that recent construction activity either met or exceeded their plan for the period. Many builders noted that construction activity and new home sales were ahead of their year-ago levels. Half of contacted builders indicated that their inventory of unsold homes was down from a year ago. Builders also continued to report modest home price appreciation. The outlook among builders for new home sales and construction activity remains positive.

Commercial real estate brokers across the District continued to report improving demand since the previous report, though they cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. Commercial contractors reported that apartment construction remained robust. Contacts also noted that the level of construction activity across other property types continued to increase modestly. The outlook among District commercial real estate contacts remains fairly optimistic.

Manufacturing and Transportation
District manufacturers reported that activity expanded compared with the previous reporting period. Contacts noted growth in new orders and production; in addition, they indicated that finished inventory levels rose and commodity prices continued to increase. Respondents noted that supplier delivery times for inputs were slightly shorter. Relative to the previous report, a larger share of purchasing agents polled during the reporting period expect production to increase over the next three to six months.

Overall, transportation contacts reported an improvement in demand since the previous report. District railroads cited increases in total carloads, led by significant strengthening in shipments of petroleum products; grain; and military, machinery, and transportation equipment. Intermodal traffic continued to increase on a year-over-year basis. Ports in the District reported a notable increase in container traffic and substantial growth in overall cargo tonnage in September. Trucking companies continued to experience strong freight demand through the end of September.

Banking and Finance
Contacts described the financing environment as improving for both businesses and consumers, with a growing number of projects being financed. Competition for high-quality borrowers remained very keen and credit demand was mixed. Line-of-credit utilization at banks remained relatively flat with few requests for increased limits on short-term credit. Demand for some other loan types was up from year-ago levels.

Employment and Prices
With a few exceptions, contacts reported that their staffing levels were increasing slowly. The District added 51,100 jobs on net in August and the unemployment rate rose 0.2 percentage point to 6.9 percent. Nearly all states in the District added to payrolls in August, with the exception of Mississippi, which lost 4,600 jobs on net. Businesses across the region continued to report difficulty finding qualified workers. Similar to the previous report, hiring challenges appeared to be both intensifying and broadening across the skill and occupation spectrums.

In general, firms indicated that their pricing power remained relatively weak, although a growing number of contacts expect improved margins over the coming year. Contacts in some sectors, including transportation and construction, continued to report concerns about rising input costs, though a slower pace of commodity price increases is anticipated to offer some respite going forward. Respondents to the latest business inflation expectations survey indicated that, on average, businesses anticipate unit costs to rise 2.1 percent over the coming 12 months. There were some reports of upward pressure on starting salaries; however, average compensation increases for most contacts remained anchored between two and three percent per year.

Natural Resources and Agriculture
Contacts in the oil industry reported that there was an excess supply of crude oil, with recent prices well below year-ago levels. Gulf Coast refinery utilization increased over the last year. Imports of crude oil fell; exports were slightly above year-ago levels, though some contacts expressed concern that the strength of the dollar has made U.S. oil exports more expensive for the rest of the world.

Parts of Alabama, Florida, and Georgia experienced abnormally dry to severe drought conditions. Lower corn prices continued to benefit poultry and livestock producers that rely on corn for feed. The USDA announced a new financial assistance program for eligible Florida citrus growers to help with the removal and replacement of stock affected by citrus greening.

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Seventh District--Chicago

Growth in economic activity in the Seventh District remained moderate in September, and contacts maintained their optimistic outlook for the rest of the year. Consumer and business spending, manufacturing production, and construction and real estate activity all increased moderately. Credit conditions and cost pressures changed little on balance. Corn and soybean prices fell as a big harvest got underway, but milk, hog, and cattle prices increased.

Consumer Spending
Growth in consumer spending remained moderate in September, led by continued strength in auto sales. Lower gas prices spurred sales of larger vehicles, especially light trucks, and consumers continued to take advantage of low lending rates and easing loan standards. Several auto dealers also noted that leasing activity had finally returned to pre-recession levels. Non-auto retail spending increased slightly, as growth picked up for discretionary spending categories in recent weeks. Retail contacts generally expected that sales in the upcoming holiday season would be up slightly relative to a year ago.

Business Spending
Business spending also continued to grow at a moderate pace in September. Inventories remained at comfortable levels for most retailers and manufacturers. Non-auto retailers reported adding more to their holiday season inventories than they did last year. Capital expenditures and capital spending plans steadily increased, with expenditures primarily going toward replacing IT and industrial equipment. A number of manufacturing contacts, especially auto suppliers, reported that demand was strong enough to justify expansion in the near future. Both actual hiring and hiring plans increased at a moderate pace, and many contacts reported slightly higher turnover. Many manufacturing contacts added hours to meet increased demand. Holiday hiring began, and retailers plan to hire slightly more holiday workers than last year. Demand remained strong for skilled workers, particularly for those in professional and technical occupations and skilled manufacturing and building trades. Contacts again mentioned expanding internal training programs to address worker shortages and an increased willingness to pay higher wages. A staffing firm reported strong order books, but noted that improving labor market conditions in the District were leading to increased difficulties finding qualified workers.

Construction and Real Estate
Construction and real estate activity also increased moderately over the reporting period. Residential construction continued to expand in both the single- and multi-family markets. An industry contact noted that with homebuilders beginning to exhaust their existing inventories of vacant in-fill lots, single-family construction might slow in some areas of the District until planned projects start to come online. Builders also noted improved availability of financing for new projects, but indicated that difficulties in finding skilled labor have often delayed construction. Home sales were somewhat lower, and growth in home prices and residential rents slowed. Real estate contacts expected sales to return to normal levels in the coming months, pointing to recent increases in online and open-house traffic. Nonresidential construction increased, driven in large part by demand for industrial and office buildings. Automotive parts manufacturers, in particular, remained a source of demand for industrial buildings. Commercial real estate activity continued to expand, with contacts noting strong demand for medical office buildings. Vacancies ticked down, rents rose, and leasing of industrial buildings, office space, and retail space all increased.

Manufacturing
Manufacturing continued to grow at a moderate pace in September. The auto, aerospace, and energy industries remained a source of strength for the District. Light vehicle production increased as manufacturers built up inventories in anticipation of continued growth in sales. Demand for steel steadily increased and most specialty metal manufacturers’ order books continued to fill. Led by the U.S. market, demand for heavy machinery picked up some on net, as higher demand for construction machinery overshadowed weaker demand for agricultural and mining equipment. Slowing demand has led some agricultural machinery manufacturers to start offering incentives such as extended warranties, low interest rate loans, and special financing to help dealers sell used equipment. Manufacturers of construction materials reported a modest increase in demand, but still were disappointed in the slow pace of improvement in the housing market. Utility contacts reported that weather-adjusted load growth was flat over the reporting period.

Banking and Finance
Credit conditions were mixed in September. Financial market participants noted slightly tighter financial conditions, pointing to an increase in equity market volatility and widening corporate bond spreads. In contrast, banking contacts cited looser conditions, with business and consumer lending both increasing. Business loan demand for equipment and commercial real estate financing rose, as did utilization of credit lines for working capital. Banking contacts also noted that despite elevated acquisition multiples, their clients continue to seek opportunities for mergers and acquisitions; this was especially the case for large corporations with ample cash balances. Consumer loan demand increased, with contacts citing some additional growth in credit card lending, continued strong growth in auto lending, and an uptick in mortgage lending.

Prices and Costs
Cost pressures changed little on balance over the reporting period. Energy costs declined. Steel and aluminum prices increased. A contact noted that supply constraints in the Midwest pushed up the local price for aluminum to a new high relative to benchmark spot prices. A number of manufacturers expected to be able to raise prices, especially those in the auto industry, where capacity is increasingly constrained. Retail prices were down slightly as contacts reported more generous sales promotions. Meat and dairy prices remained elevated, though contacts did not report price pressures for other grocery items. Overall, wage pressures were modest, but a number of contacts again reported moderate wage pressures for skilled workers. Non-wage labor costs changed little from the previous reporting period. Many contacts reported passing some of their higher health care costs on to employees in the form of higher co-pays or deductibles.

Agriculture
Overall crop conditions were very good at the start of the harvest. The District should see record corn and soybean harvests. Early results indicated yields for corn and soybeans would range from above-average to record-high levels. The huge anticipated harvests pushed down corn and soybean prices. Crop income was lower than a year ago as higher yields were insufficient to offset lower prices. Crop insurance will cover some of the lost income, but farmers already are planning to trim costs for next year, particularly spending on farm equipment and other capital purchases. Corn farmers helped bid up cattle prices, with the intention of using the abundant harvest as feed for their own cattle production rather than selling it. Hog and milk prices were higher as well, contributing to expansions in output of these commodities.

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Eighth District--St. Louis

Economic activity in the Eighth District has increased at a moderate pace since the previous report. Recent reports of planned activity in manufacturing and services have been largely positive. Reports from retail contacts have also been positive. Overall residential real estate market conditions have remained weak. Commercial and industrial real estate market conditions have been mixed, but commercial and industrial construction has increased. Lending activity at a sample of small and midsized District banks increased from mid-June to mid-September.

Manufacturing and Other Business Activity
Reports of plans for manufacturing activity have been largely positive since the previous report. Several manufacturing firms reported plans to add workers, expand operations, or open new facilities in the Eighth District, while a smaller number of contacts reported plans to reduce employment. Producers of construction materials, tools, consumer goods, and aviation equipment announced plans to hire new employees and expand operations in the Eighth District. In contrast, a metal products manufacturer and a food manufacturer reported plans to lay off workers and close facilities. Reports from automobile and auto parts manufacturers were positive, with District contacts reporting plans to expand operations and hire new workers.

Reports of plans in the District’s service sector have also been positive since the previous report. Firms in freight, insurance and financial, and communications services reported new hiring and expansion plans in the District. In contrast, firms in animal health services and firms in news media services announced plans to lay off employees. Reports from healthcare services firms were mixed. Anecdotal reports from retailers were mostly positive. Contacts in Memphis noted new openings or expanding operations in retail and grocery establishments. In contrast, a major nationwide retailer announced two store closures in the District.

Real Estate and Construction
Home sales decreased in the Eighth District on a year-over-year basis. Compared with the same period in 2013, August 2014 year-to-date home sales were down 3 percent in Little Rock, 2 percent in Louisville, 8 percent in Memphis, and 5 percent in St. Louis. Residential construction declined in the majority of the District’s metro areas. August 2014 year-to-date single-family housing permits decreased in the majority of the District’s metro areas compared with the same period in 2013. In particular, permits decreased 29 percent in Little Rock, 8 percent in Louisville, and 3 percent in St. Louis. In contrast, permits increased 2 percent in Memphis.

Commercial and industrial real estate market conditions were mixed throughout the District. A contact in Louisville reported an increase in prospective commercial tenants in the downtown area. A contact in Memphis noted that the Germantown commercial real estate market remains strong. A contact in Little Rock reported robust demand for commercial real estate space. Commercial and industrial construction activity improved throughout most of the District since the previous report. A contact in Memphis reported plans for a large-scale mixed-use development in the downtown area. A contact in Louisville reported the construction of a building in an industrial park in southern Indiana, with tentative plans for the construction of additional buildings. A Little Rock contact reported the redevelopment of vacant commercial real estate space in Fayetteville. Contacts in St. Louis reported the expansion of a commercial real estate development in Chesterfield and multiple plans for speculative industrial development projects across the area.

Banking and Finance
Total loans outstanding at a sample of small and midsized District banks increased 1.9 percent from mid-June to mid-September. Real estate lending, which accounts for 72 percent of total loans, increased 1.1 percent over this period. Commercial and industrial loans, which account for 16 percent of total loans, increased 2.0 percent over the period. Loans to individuals, which account for 5.3 percent of total loans, increased 4.6 percent over the period. All other loans, which account for 7.2 percent of total loans, increased 7.7 percent over the period. During this period, total deposits at these banks decreased 0.2 percent.

Agriculture and Natural Resources
As of late September, about 75 percent of the District’s corn, rice, and soybean crops was rated in good or excellent condition. Similarly, about 60 percent of the District’s pastureland was rated in good or excellent condition; Kentucky’s pastureland, in particular, has improved significantly since the previous report. Harvest completion rates across the District have lagged behind their five-year averages. District coal production for August was about 1.5 percent higher than a year ago.

Employment, Wages, and Prices
Anecdotal information suggests that employment in the Eighth District grew moderately since the previous report, while wages and prices grew modestly. A contact in Louisville noted increased turnover of skilled employees who are switching to higher-paying jobs. Contacts also noted increases in the cost of lumber and other building materials, and indicated that increased demand has allowed some retail dealers of construction materials to increase prices to consumers.

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Ninth District--Minneapolis

The Ninth District economy grew at a moderate pace since the previous report. Increased activity was noted in consumer spending, tourism, commercial real estate, professional services, manufacturing, and energy. Agricultural conditions were mixed and mining was flat, while construction and residential real estate activity decreased. Labor markets continued to show signs of tightening. Overall wage increases were modest, while price increases generally remained subdued.

Consumer Spending and Tourism
Consumer spending increased moderately overall since the previous report. August and early-September same-store sales at a mall in North Dakota were up about 2 percent compared with the same period a year earlier. Recent sales and traffic at a South Dakota mall were relatively flat compared with last year, while August sales were flat relative to a year ago at a Minnesota mall. An apparel retailer noted that recent sales were up slightly from a year earlier. Recent vehicle sales at Montana dealerships were doing well with particularly strong sales in the northeastern part of the state, according to a representative of an auto dealers association.

Tourism activity was up from last year. This year's record attendance at the Minnesota State Fair was 5 percent higher than a year ago. A travel agency in Minnesota noted that recent leisure travel bookings were about 10 percent higher than last year, while another travel agency reported that leisure bookings in August and September were strong. Compared with last year, August visits to Glacier National Park were up 8 percent and visits to Yellowstone National Park were up 7 percent. According to a survey of lodging and camping properties in Minnesota, 48 percent of respondents reported that summer occupancy was up from a year ago, while 25 percent reported that it was down.

Construction and Real Estate
Commercial construction activity decreased since the previous report. Commercial permits in Billings, Mont., were down significantly in value in September from a year earlier. In Sioux Falls, S.D., the value of August commercial permits decreased from a year ago. Residential construction decreased from last year. In the Minneapolis-St. Paul area, the value of September residential permits decreased 16 percent compared with September 2013. The value of August residential permits in Sioux Falls decreased 40 percent from the same period last year. The value of August housing permits decreased significantly in Bismarck from a year ago. However, September residential building permits in Billings increased in value from last year.

Activity in commercial real estate markets increased since the previous report. Several commercial real estate transactions were announced around the District, including both purchase and lease transactions in retail, hotel, office, and industrial real estate. However, a retailer announced that it would vacate three of its stores in Minnesota this year. Residential real estate market activity decreased since the previous report. In the Sioux Falls area, August home sales were down 8 percent, inventory increased 11 percent, and the median sales price increased 5 percent relative to a year earlier. August home sales were down 5 percent from the same period a year ago in Minnesota; the inventory of homes for sale increased 13 percent, and the median sales price rose 4 percent. Several Minnesota real estate professionals and investors recently noted that out-of-state investor groups are paying above-market prices for single-family rental properties in Minneapolis. Meanwhile, August home sales in western Wisconsin were up 8 percent from a year ago; the median sales price was flat.

Services
Activity at professional business services firms increased at a modest pace since the previous report. Contacts from architectural firms noted some increases from a year ago in bidding activity for government and industrial projects. Contacts from accounting and legal firms noted steady activity since the previous report. Several contacts noted that capacity constraints in freight rail have increased demand for trucking services.

Manufacturing
Manufacturing activity grew moderately since the previous report. A manufacturing index released by Creighton University (Omaha, Neb.) increased in September from the previous month in North Dakota; the index fell slightly in Minnesota and South Dakota, but remained at levels consistent with expansion in activity in all three states. An agribusiness firm announced that it will move ahead in building a $3 billion fertilizer plant in North Dakota.

Energy and Mining
Activity in the energy sector increased, while mining was steady since the previous report. Late-September oil and gas exploration activity increased in North Dakota and was level in Montana from a month earlier; production remained at record levels. A partnership announced plans to build a 450-mile pipeline from the Bakken oil fields to a hub in Wyoming. A crude oil storage facility in North Dakota announced a $5.5 million expansion. Production at District iron ore mines appeared steady in August compared with a month earlier. It was announced that construction will resume on a $1.8 billion ore production facility that was delayed due to financing. Freight rail congestion was leading to increased stockpiles at some ore production facilities, as locomotives and crews that move ore to port were in short supply.

Agriculture
Agricultural conditions were mixed since the previous report. The most recent USDA forecast calls for substantially increased production of corn and soybeans this year in District states compared with 2013. Livestock and dairy producers continued to benefit from lower feed costs and high output prices. Most of the district's crops were in good or excellent condition despite late planting; however, an early frost damaged soybeans in some parts of Minnesota and South Dakota. Relative to a year earlier, prices received by farmers in September were lower for corn, soybeans, and wheat; prices increased for hay, cattle, hogs, poultry, and milk.

Employment, Wages, and Prices
Labor markets continued to show signs of tightening since the previous report. In Minnesota, a firm is hiring 1,000 seasonal workers to fill a variety of positions, a medical device manufacturer announced plans to add over 200 jobs, a window manufacturer will add 100 jobs, and a heating and air conditioning plant announced plans to add 95 jobs over the next three years. According to a survey of Minnesota businesses by an employment services firm, 19 percent of respondents expect to hire more employees during the fourth quarter, while 6 percent expect decreases in staffing. In last year's survey, 17 percent expected staffing increases, while 7 percent expected decreases. According to surveys conducted by four technical schools in South Dakota, almost all graduates were employed or continuing their education six months after graduation. Some contacts noted continued difficulty finding truck drivers to fill open positions. In contrast, a food manufacturer recently announced plans to eliminate up to 800 positions companywide.

Overall, wage increases were modest since the previous report. However, according to a recent survey of central Minnesota businesses by St. Cloud State University, 54 percent of respondents expect to increase compensation over the next six months, up from 43 percent in last year's survey.

Price increases generally remained subdued. End-of-September Minnesota gasoline prices were down about 10 cents per gallon both from mid-August and from a year earlier. Metals prices decreased somewhat since the previous report.

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Tenth District--Kansas City

The Tenth District economy grew modestly in late August and September, and most contacts were optimistic about future activity. Consumer spending was up moderately despite some sluggishness at restaurants and hotels, and expectations for future sales were mostly positive. District manufacturing activity grew modestly, and wholesale trade firms reported improved sales. District real estate activity increased slightly, and activity in the energy sector continued to expand. Transportation, professional, and high-tech firms reported slower growth relative to the previous survey. Bankers reported steady loan demand, better loan quality, and stable deposits. In agriculture, crop conditions remained solid in the District, but lower crop prices weighed on the outlook for farm incomes. Prices grew more slowly in most industries, while some firms reported increased wage pressures as well as labor shortages for specific positions.

Consumer Spending
Consumer spending grew at a solid rate, and contacts were more optimistic about future sales growth than in previous reports. Retail sales grew moderately, at a similar pace of growth as in the previous survey. Several retailers noted stronger sales of home improvement and building materials, though sales for some higher-priced items were characterized as weak. Expectations for future sales remained strong, and inventory levels were expected to rise somewhat. Auto sales were up modestly from the previous survey. Dealer contacts anticipated some increases in sales in the months ahead and noted solid sales for mid-sized vehicles and small SUVs. Auto inventories fell further, with one contact noting a considerable rise in the cost of inventory. Restaurant sales weakened in late August and September but remained well above year-ago levels, and contacts expected sales to improve in coming months. Many restaurants reported a reduction in employment, and one restaurant owner said they would be adding a health care surcharge of 3 percent to each check. District tourism activity fell from the previous month, but was up strongly from a year ago. Expectations for future tourism edged down somewhat but remained solid.

Manufacturing and Other Business Activity
District manufacturing and other business activity rose modestly in late August and September. Factory production increased, primarily at durable goods producers, though several nondurable-goods producers also reported modest gains. However, activity at some food processing plants continued to decline in the face of higher beef prices. Contacts reported solid gains in factory shipments and employment, with new orders up slightly. Expectations for future factory activity held steady at overall favorable levels. Manufacturers' capital spending plans increased slightly and remained well above year-ago levels. Growth in wholesale trade sales increased, with contacts expecting continued solid growth in the next few months. Transportation, professional, and high-tech firms reported smaller gains than the previous survey, although sales remained considerably higher than year-ago levels and many contacts expected solid improvement heading forward. One trucking firm cited supply chain disruptions and new regulations as having slowed freight traffic for both shippers and distributors.

Real Estate and Construction
On balance, District real estate activity increased slightly in late August and September with residential real estate activity flat and commercial real estate activity increasing moderately. Residential home sales were unchanged compared to the previous survey period and were similar to year-ago levels. Sales of low- and medium-priced homes continued to run ahead of sales for higher-priced homes. Home prices increased modestly, and inventories continued to rise slightly. Most residential real estate contacts expected home sales to decrease in the coming months primarily reflecting typical seasonal declines. Housing starts and construction supply sales edged down since the previous survey period. Residential construction activity was expected to pick up slightly as builders anticipated a slight increase in traffic of potential buyers. Commercial real estate activity increased moderately relative to the previous survey period as contacts continued to report a decline in vacancy rates, an increase in absorption, higher sales, and increased construction activity. The commercial real estate market was expected to strengthen at a moderate pace over the coming months.

Banking
Bankers reported steady overall loan demand, a modest improvement in loan quality, and mostly steady deposit levels in late August and September. Loan demand was slightly improved for agricultural loans, consumer installment loans and commercial and industrial loans. Demand for residential real estate loans was slightly weaker compared to the last survey. Even with the recent modest improvement in loan quality, most bankers indicated loan quality was unchanged compared to a year ago, and many expected it to remain the same over the next six months. Credit standards remained largely unchanged for all major loan categories, and deposit levels were stable for most banks.

Energy
Energy activity continued to expand in late August and September. District contacts reported steady growth in drilling activity, primarily for oil, and expectations for future drilling were solid, though somewhat lower than the previous survey. Oil prices declined in late August and September, as global demand failed to keep up with supply. Most respondents expected oil prices to decline marginally in the coming months, yet most producers anticipated that drilling would remain profitable across the areas where they are active. Natural gas prices continued to decline but remained slightly above year-ago levels; most contacts expected these prices to start to rise modestly as the winter heating season approaches. Energy firms' overall capital expenditure plans remained solid.

Agriculture
Despite expectations of above-average yields, further declines in crop prices weighed on farm income prospects in the District. However, crop insurance and some pre-selling of this year's crop at higher prices earlier in the year may help mitigate the effect on overall farm incomes of recent spot price declines. The corn and soybean crops were mostly rated in good to excellent condition as harvest began. Cattle prices rose since the last survey period while hog prices fell with increased production resulting from higher dressed weights. The demand for farm operating loans has risen substantially from last year as more crop producers borrowed to pay for operating costs. Bankers also reported a rise in requests for agricultural loan renewals and extensions and noted that loan repayment rates have edged down from the high levels seen the past few years. Despite the sharp drop in crop prices, farmland values were typically holding at high levels.

Wages and Prices
Relative to the previous report, prices rose at a slightly slower pace in most industries, and while most firms reported only modest wage pressures, in some cases wage pressures were more pronounced. Retail price growth was minimal, likely because retailers' input costs rose more slowly than in previous surveys. Restaurant menu prices also rose less than in previous surveys despite persistent growth in input costs. Manufacturing selling prices rose slightly, while raw materials prices continued to increase at modest rates. Transportation input prices fell and fewer transportation firms raised their selling prices. Construction materials prices were up in late August and September, and many builders expected further increases. Contacts in most industries expected prices to rise moderately going forward. Increased wage pressures were noted in a few industries, particularly manufacturing, restaurants, transportation, and energy. Some contacts continued to report a short supply of workers, particularly for drivers, construction, and skilled manufacturing positions.

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Eleventh District--Dallas

The Eleventh District economy grew at a moderate pace over the past six weeks. Manufacturers mostly reported increases in demand, and retail and automobile sales expanded at a pace in line with the prior report. Demand for nonfinancial services generally improved and real estate activity remained solid. The energy sector continued to grow, and agricultural conditions improved. Upward price pressures eased slightly and employment held steady or increased. Outlooks remained optimistic across the board.

Prices
Most responding firms said prices held steady over the last six weeks, with fewer reports of firms raising prices than in the previous report. Professional business services firms said rates were unchanged over the reporting period (though higher than a year ago), and retailers and auto dealers also noted steady prices. Changes in selling prices in the manufacturing sector were mixed. Prices for construction materials such as fabricated metals, concrete, brick, and glass rose, while prices for primary metals, transportation equipment, and high-tech products held steady and lumber prices fell slightly. Food producers continued to note selling price increases due to rising input costs. These contacts said selling prices will likely level out before raw materials prices do, and companies will try to cut costs elsewhere.

The price of West Texas Intermediate crude oil fell over the course of the reporting period, as global supply growth met softer international demand. The price of natural gas stabilized at just under $4 per MMbtu over the past six weeks after falling during the prior reporting period. Retail gasoline and diesel prices continued to fall.

Labor Market
Employment at responding firms held steady or increased, and labor market tightness continued to be mentioned by numerous contacts. Reports of hiring came from staffing and transportation services firms and construction-related manufacturers (such as fabricated metal, cement, and brick producers). Legal firms noted a seasonal increase in headcounts from adding new fall associates. A retailer noted difficulty in hiring in the areas of the state where the energy sector was booming, and an auto dealer said they were losing mechanics and technicians to energy companies in the Eagle Ford region to repair oilfield trucks. A shortage of specialized heavy construction workers and chemical engineers was causing some delays in announced construction projects in the petrochemicals industry. Residential construction contacts also noted persistent labor shortages; one contact saw some easing while another said that in Houston, a few builders were placing cameras and armed guards at their construction sites to prevent poaching of workers. Energy contacts saw no relief from the tight labor market, especially in West Texas.

Several contacts continued to report upward wage pressures. Staffing services firms said candidates were often receiving multiple offers, which caused some firms to increase wages to stay competitive. Some primary and fabricated metals manufacturers noted higher wages; increases as high as 30 percent over the last six months were seen in some trades, according to contacts. High-tech manufacturers said wage pressures remained elevated for some higher-skilled workers.

Manufacturing
Most manufacturers noted an increase in demand since the previous report and outlooks were largely positive. Primary metals producers said demand grew but at a slower pace, possibly due to seasonal factors. Demand for fabricated metals strengthened and was up notably from last year, with contacts pointing to increased demand from a number of segments of the construction industry. Demand was mostly flat for lumber, cement, glass, and brick manufacturers, although a couple of contacts noted a pickup in demand for these products in the Dallas area.

Contacts in high-tech manufacturing reported demand was stable or higher over the past six weeks. Respondents expect strong demand growth for the next three to six months, primarily due to expansion in capacity by cloud and mobile computing providers. Food producers said demand increased somewhat over the reporting period, mostly due to seasonal factors, but was largely unchanged from a year ago.

Petrochemical producers reported slightly lower production as various repairs and upgrades to existing facilities had fallen behind schedule. Firms in this sector noted some delays in announced construction projects because of worker and materials shortages as well as delays in securing permits. Refinery utilization rates along the Gulf Coast were strong, and outlooks through year-end remained positive among refiners and chemical producers.

Retail Sales
Retail sales increased at about the same pace as during the prior reporting period. A continued boost from back-to-school shopping was the most-noted driver of recent sales growth, and demand was also up year-over-year. Contacts' outlooks for the remainder of the year were optimistic, and they expect demand during the holiday shopping season to be slightly stronger this year than in 2013.

Automobile sales continued to increase, at a pace similar to the prior reporting period. Demand was up year-over-year. Contacts were satisfied with inventory levels and said they had plenty of vehicles. Outlooks for the rest of the year were positive, although one contact noted that an increase in interest rates could drastically change the landscape of their industry.

Nonfinancial Services
Most nonfinancial services firms reported demand was up from six weeks ago, and outlooks were optimistic. Staffing firms generally noted demand increases, with one contact saying the past two weeks were the company's strongest all year. Contacts said all skill levels were in high demand, and that demand for low-skilled workers had increased. Direct hiring led demand growth, although one contact said contract and temporary worker demand will likely increase as the Affordable Care Act's effects continue to be felt. The accounting sector continued to operate at high levels of activity and demand for these services increased further over the reporting period. Demand for legal services increased as well, with particular strength coming from corporate work.

Transportation services firms said overall cargo volumes increased slightly since the previous report. Small-parcel cargo volumes increased, with retail trade (led by e-commerce) remaining the strongest source of growth. Railroad contacts noted a rise in petroleum and motor vehicle shipments. Air cargo volumes continued to trend upward as increased international air cargo demand outpaced a decline in domestic demand. Outlooks were cautiously optimistic.

Airlines reported passenger demand fell over the reporting period due to seasonal factors, but was up from a year ago. Domestic demand remained stronger than international demand.

Construction and Real Estate
The District's housing sector remained solid overall. Single-family home sales were flat to down over the reporting period. Land prices continued to trend upward at the same pace; however, the pace of home price appreciation slowed, with one respondent noting a slight pushback in pricing from buyers. Contacts said a few homebuilders were expanding production of more-affordable high-density housing. Robust apartment demand kept occupancy high and rent growth solid despite elevated levels of multifamily construction activity. Single- and multifamily housing contacts were optimistic in their near-term outlooks.

Office leasing activity increased in Dallas and Austin and held steady at high levels in Houston. Contacts noted moderate growth in rents. Demand for industrial space remained strong and vacancy rates remained tight in most major metro areas. Construction activity stayed elevated, and outlooks were mostly optimistic.

Financial Services
Demand for loans accelerated slightly since the last report. Financing for mergers and acquisitions as well as capital expenditures rose in recent weeks. Lending to medium-sized businesses continued to grow, and financing activity for commercial real estate development remained robust. Mortgage lending grew slightly, but contacts noted that a low supply of housing was constraining growth. Contacts noted increased optimism among clients.

Energy
Demand for oilfield services in the District continued to grow, although activity in the Permian Basin in September was muted temporarily by flooding. Growth in Texas drilling activity was again concentrated outside of the major basins. Outlooks for the rest of the year remained optimistic and were largely unchanged from the prior reporting period.

Agriculture
District drought conditions eased slightly over the past six weeks, although more than half of Texas remained in a drought that has plagued the state since the end of 2010. Harvesting of row crops like cotton and corn continued, and crop conditions were slightly better than last year. Cattle prices continued to be at a record high while feed prices fell, boosting profitability for cattle producers. Domestic and export beef demand remained strong despite retail beef prices reaching a record high in August. Improved moisture conditions overall have increased optimism for winter crops and expanded prospects for cattle herd rebuilding.

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Twelfth District--San Francisco

Economic activity in the Twelfth District continued to improve moderately during the reporting period of mid-August through late September. Overall price and wage inflation remained modest. Retail sales grew slightly, and demand for business and consumer services increased moderately. Overall manufacturing activity picked up, while agricultural conditions were mixed. Real estate activity advanced, but growth in the residential sector varied across the District. Loan demand increased moderately.

Prices and Wages
Overall price inflation remained modest during the reporting period. Contacts reported that consumers are very price conscious. A shortage of cattle drove up beef prices, and the California drought boosted nut prices. Although operating costs, commodity costs, and packaging costs in the wholesale food industry increased slightly, contacts reported that competition prevented these cost increases from being passed on to retail prices for most food items. Electric utility input prices increased modestly during the reporting period. Prices in the technology sector decreased for both businesses and consumers, driven by competitive pressures and technological advances. Prices of certain building supplies, including wallboard, wood, cement, and insulation increased a bit. Contacts reported that restaurant prices increased slightly in July and August in some states in response to minimum-wage increases. Las Vegas hotel room rates for August were higher than in any August since 2007.

In general, wages continued to increase at a modest pace. Most contacts reported that wages and salaries were up about 2-1/2 percent to 3 percent compared with last year. Wages for software developers, for workers in skilled trades, and, in some areas, for experienced construction workers increased faster. Declines in defense spending led some aerospace manufacturers to institute greater employee cost-sharing on benefits.

Retail Trade and Services
Overall retail sales grew slightly during the reporting period. Sales of higher-end clothing picked up, but somewhat less than respondents expected. Food sales increased a bit, and contacts reported that grocery inventories were stable. However, the droughts in California and other parts of the West resulted in lower-quality produce. Revenue at hobby game stores showed strong growth. Contacts characterized consumers as still cautious in their spending habits but expect retail demand to strengthen further soon.

Demand for business and consumer services increased moderately. Demand for legal services picked up in some areas, in connection with rising real estate activity. Demand for advertising services declined, but businesses increased spending on cloud computing services. Contacts reported that industry leaders expect information technology spending to accelerate in 2015, driven by spending on big data and security services, as well as on cloud computing. Casual dining picked up in August, the first monthly increase in sales in that segment this year. Contacts expect continued slow growth of casual dining in the coming months. Las Vegas year-to-date visitor volume increased moderately over 2013. Total occupied room nights and occupancy percentage at Las Vegas hotels climbed.

Manufacturing
Overall District manufacturing activity picked up during the reporting period. Worldwide semiconductor sales were up markedly over the previous year. Recent sales of manufactured steel and recycled metals also were up over the same period a year earlier. Revenue for biotech and pharmaceutical manufacturers grew notably since the previous reporting period. Industry contacts detected stronger demand for pharmaceuticals stemming from the increase in the number of insured people, and they expect healthy earnings growth to continue. Demand for medical equipment was also very strong. Aerospace and defense capacity utilization declined since the prior reporting period. In contrast, contacts reported that capacity utilization among commercial aircraft producers increased to record levels.

Agriculture and Resource-related Industries
Agricultural conditions in the District were mixed during the reporting period. Continuing droughts in California and parts of Washington and Idaho elevated water costs and depressed harvests of cotton and various grains, vegetables, nuts, and legumes. Farmers increased the number of acres lying fallow and reduced herd sizes. However, low corn prices and stable fertilizer and machinery prices benefited dairy and feedlot operations. Milk prices increased, and export demand for hay from the West Coast reached an historical peak. Sales of electricity and natural gas to the manufacturing sector have increased markedly since the beginning of the year. Agricultural land prices remained relatively high.

Real Estate and Construction
Real estate activity in the District advanced, but growth trends in the residential sector were uneven across the District. Contacts reported that in a few areas, prices of single-family homes accelerated, while in other areas the pace of price increases declined. In a few areas, year-to-date single-family housing starts were down compared with the same period in 2013. Sales of single-family homes were stable during the reporting period. Overall, multifamily construction and development activity remained strong. Commercial office demand was robust in San Francisco and Silicon Valley, and rents increased compared with the previous reporting period. In Los Angeles, commercial real estate construction picked up.

Financial Institutions
Overall loan demand increased moderately since the previous reporting period. In some areas where lending activity had been stagnant for a long time, demand for commercial and industrial and commercial real estate loans picked up. Other areas that had already been experiencing growth in loans showed continued expansion. Asset quality improved since the previous reporting period, and contacts reported that current overall loan performance was comparable to that seen before the recession. Competition among lenders for customers with high-quality credit remained intense. Contacts reported that this competition had depressed interest rates on loans, reducing net interest margins and profitability.


Most Regional Fed Banks Saw Modest or Moderate Economic Growth - Beige Book Oct 15, 2014 02:02PM

(Updated - October 15, 2014 2:02 PM EDT)

Most regional Fed banks saw modest or moderate economic growth.

UPDATE -

Summary of Commentary on Current Economic Conditions by Federal Reserve District

Prepared at the Federal Reserve Bank of Minneapolis and based on information collected before October 6, 2014. This document summarizes comments received from business and other contacts outside the Federal Reserve System and is not a commentary on the views of Federal Reserve officials.

Reports from the twelve Federal Reserve Districts generally described modest to moderate economic growth at a pace similar to that noted in the previous Beige Book. Moderate growth was reported by the Cleveland, Chicago, St. Louis, Minneapolis, Dallas, and San Francisco Districts, while modest growth was reported by the New York, Philadelphia, Richmond, Atlanta, and Kansas City Districts. In the Boston District, reports from business contacts painted a mixed picture of economic conditions. In addition, several Districts noted that contacts were generally optimistic about future activity.

Most Districts reported overall growth in consumer spending that ranged from slight to moderate, at a pace that was often similar to that reported in the previous Beige Book. However, general merchandise retailers in New York noted that sales were weaker on balance since the previous report. Several District reports indicated that retailers were relatively optimistic about the remainder of the year. Meanwhile, tourism activity remained upbeat in several areas, with some reports of higher occupancy rates and solid advance bookings for travel and lodging.

Several Districts reported that nonfinancial services grew at a moderate pace since the previous Beige Book. Districts reporting on transportation services generally noted growth in this sector, with a few pointing to capacity constraints in railroads, trucking, or both. Manufacturing activity increased in most Districts since the previous Beige Book; contacts in the Boston, Philadelphia, Atlanta, and Kansas City Districts reported positive near-term outlooks.

Residential construction and real estate activity were mixed since the previous report. Commercial construction and real estate activity grew in most Districts. Banking conditions continued to improve relative to the previous Beige Book. Commercial loan volumes increased in nearly all reporting Districts. However, consumer loan demand was mixed, and some Districts pointed to low or reduced levels of demand for refinancing. Credit standards generally remained unchanged, and there were no reports of deterioration in credit quality.

Agricultural conditions were mixed since the previous Beige Book. Prices for some crops declined, driven in part by very strong realized or anticipated production. These lower prices for some agricultural commodities were seen as weighing on producers' incomes, but as benefiting those using the commodities as inputs. In the energy sector, coal production was mixed and oil and natural gas production generally increased from already-high levels.

Employment continued to expand at about the same pace as that reported in the previous Beige Book. Most Districts reported that some employers had difficulty finding qualified workers for certain positions. A number of Districts characterized overall wage growth as modest, but reported upward wage pressures for particular industries and occupations, such as skilled labor in construction and manufacturing.

Consistent with the previous Beige Book, price pressures remained subdued, with Districts reporting little to no change in price levels or modest increases. Firms generally reported that input prices were unchanged or up slightly.

Consumer Spending and Tourism
Most Districts described growth in consumer spending as slight to moderate, and at a pace roughly similar to that reported in the previous Beige Book. In particular, the Boston, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, and Dallas Districts reported moderate growth; Philadelphia reported only slight growth in non-auto retail sales, and retailers in the Atlanta and San Francisco Districts also cited a slight improvement in sales. General merchandise sales in the New York District were weaker on balance since the previous report. Boston, New York, and Chicago reported that inventories were at desired levels. In Philadelphia, many retailers were avoiding the need for deeper discounting; however, New York and Cleveland reported that some contacts were running more promotions than usual. Boston, Philadelphia, Chicago, Kansas City, Dallas, and San Francisco indicated that retail contacts were relatively optimistic about the remainder of the year. In Chicago and Dallas, retailers were expecting that sales during the upcoming holiday shopping season would be up slightly from a year earlier.

Growth in auto sales varied across Districts, but was generally positive. In the New York District auto dealers reported that sales were steady to slightly stronger, while sales increased modestly in the Kansas City District. Auto dealers continued to report strong growth in the Philadelphia District. Lower gas prices spurred sales of larger vehicles in the Chicago District. Cleveland reported that new auto sales were down slightly in August from a year ago, but year-to-date sales were higher than the same period last year. Cleveland and Kansas City also reported solid sales of larger vehicles, such as light trucks and SUVs. In the Kansas City District, auto inventories fell; in Cleveland, inventory reports were mixed. Dallas reported that contacts were satisfied with their inventory levels. Philadelphia, Kansas City, and Dallas noted that dealers were optimistic about sales prospects for the rest of the year.

Tourism activity was relatively solid in several areas, with upbeat reports from the Boston, New York, Richmond, Atlanta, and Minneapolis Districts. In the Kansas City District, tourism fell from the previous month but was up strongly from a year ago. Growth was modest in Philadelphia. Boston, New York, Philadelphia, Atlanta, and San Francisco reported higher hotel occupancy rates in at least some parts of their Districts. Boston noted that restaurant revenues increased relative to a year ago. Advance bookings for travel and lodging were strong in the Philadelphia, Richmond, and Minneapolis Districts. In the Atlanta District, hospitality contacts maintained a positive outlook for the remainder of 2014 and the beginning of 2015.

Nonfinancial Services
A number of Districts reported that activity in the nonfinancial services sector advanced since the previous Beige Book. The Boston District reported generally higher demand for consulting and advertising services. Philadelphia noted that over three-fourths of all service-sector contacts reported expectations that growth trends will remain positive over the next six months. Richmond reported that technology firms and engineering companies noted stronger revenue growth; Dallas indicated that demand for accounting services rose further from an already-high level; and Dallas and San Francisco noted that demand for legal services picked up in some areas. Staffing services increased in many Districts, including New York, Philadelphia, Cleveland, Richmond, Chicago, and Dallas. Philadelphia indicated that staffing requests increased for both temporary and permanent positions. A contact from a staffing firm in the Chicago District reported strong orders but noted that improving labor market conditions were leading to increased difficulties in finding qualified workers.

Districts reporting on transportation services generally noted growth since the previous report, with a few pointing to capacity constraints in railroads, trucking, or both. Atlanta reported increased railroad shipments and strong trucking freight demand. Contacts at trucking firms and railroads in the Cleveland District noted that insufficient capacity is a major issue that is currently confronting the industry. In the Minneapolis District, capacity constraints in freight rail have increased demand for trucking services and led to increased stockpiles at some iron ore production facilities. A trucking firm in the Kansas City District cited supply chain disruptions and new regulations as having slowed freight traffic. Dallas noted that air cargo volumes continued their upward trend, and Richmond indicated that activity remains strong at District ports. St. Louis reported some expansion plans for freight firms.

Manufacturing
Manufacturing activity increased in most Districts since the previous Beige Book. However, New York noted that manufacturing growth had stalled, and Boston indicated that their contacts cited weaker results than in the past few reports. The outlook for manufacturing was positive in a number of Districts.

Within manufacturing, growth was reported across a broad range of products. Cleveland, Chicago, and San Francisco noted increased steel demand. The Chicago and St. Louis Districts noted strength in the aerospace sector; however, San Francisco reported that aerospace and defense capacity utilization declined. Demand for construction materials or equipment increased in Philadelphia, Cleveland, Chicago, and St. Louis. Manufacturers reported continued demand from the energy sector in the Philadelphia and Cleveland Districts. Richmond and San Francisco noted strong demand for medical equipment. San Francisco reported that worldwide semiconductor sales were up markedly over the previous year. In contrast, a food producer in the Richmond District said that demand was flat; St. Louis and Minneapolis reported layoffs or plant closures by food producers; and Kansas City noted slower activity at some food processing plants. Chicago reported weaker demand for agricultural and mining equipment.

Real Estate and Construction
Reports on residential construction and real estate activity were mixed. New York noted that single-family construction was sluggish in some areas, but that multifamily construction increased. Philadelphia reported only slight growth in home construction. In August, single-family construction starts in the Cleveland District reached their highest level so far this year, though the number of starts year-to-date remained slightly lower than last year. Richmond noted that residential construction across the District increased slightly for custom homes. Atlanta reported that multifamily construction continued to increase across much of the District, while Chicago indicated that both single- and multi-family construction continued to expand. Residential real estate contacts in the Atlanta District indicated that existing home sales and prices remained ahead of last year's levels and inventory levels were down from a year ago. Chicago noted that home sales were somewhat lower, and growth in home prices and residential rents slowed. San Francisco reported that sales of single-family homes were stable since the previous report.

Commercial construction and real estate activity grew in most Districts. Richmond, St. Louis, and San Francisco reported increased commercial construction, industrial construction, or both. Cleveland noted that a majority of commercial contractors saw increased construction activity relative to a year ago. Commercial contractors in the Atlanta District saw an increase in construction activity across many property types. In Minneapolis, however, commercial construction activity declined. Richmond reported that commercial real estate activity improved modestly over the past several weeks. The New York District noted that the New York City office market continued to strengthen. Atlanta noted that many commercial brokers saw growth in activity. Chicago noted that commercial real estate activity continued to expand. Kansas City indicated that commercial vacancy rates declined and absorption and sales increased. Boston noted that commercial real estate fundamentals are either holding steady or improving.

Banking and Finance
In most Districts, banking conditions continued to improve relative to the previous Beige Book, with net increases in loan volumes reported in a number of Districts.

Since the previous Beige Book, New York reported that consumer loan demand had leveled off, Cleveland reported that consumer lending was stable, and Atlanta, St. Louis, and Kansas City noted that consumer loan demand increased. Chicago reported strong growth in auto lending. New York reported decreased demand for loan refinancing, Philadelphia noted negligible demand for refinancing, and Richmond reported that refinancing demand was mostly unchanged, but down in some areas.

Demand for business credit expanded since the previous Beige Book. New York reported increased demand for commercial mortgages. Philadelphia noted increased loan volume for commercial and industrial loans. Cleveland, Atlanta, St. Louis, and San Francisco noted increased commercial loan demand. Chicago noted that business demand for equipment and commercial real estate financing rose. Financing for mergers and acquisitions as well as for capital expenditures rose in the Dallas District. Kansas City noted slight increases in commercial and agricultural lending.

There were no reports of deterioration in credit quality. New York reported that delinquency rates continued to decline, particularly for commercial loans and mortgages. Philadelphia banking contacts described steady improvement in credit quality, and San Francisco noted that asset quality has improved since the previous report. Most bankers in the Kansas City District reported that loan quality was unchanged compared with a year ago.

Credit standards generally remained unchanged since the previous Beige Book. Cleveland noted that no changes were made to loan-application standards during the past six weeks, but lenders slightly relaxed terms and conditions. Some contacts in the Philadelphia District said that heated competition for loans was resulting in a slight rise in credit risks.

Agriculture and Natural Resources
Prices for many crops continued to decline since the previous Beige Book, driven in part by very strong realized or anticipated crop yields. This higher production is expected to offset some of the effect of lower prices on farm incomes. Chicago, St. Louis, and Kansas City reported very good crop conditions at the beginning of the harvest; additionally, Chicago and Minneapolis expect large corn and soybean harvests. Drought conditions persisted in parts of the Atlanta, Dallas, and San Francisco Districts. Atlanta, Chicago, Minneapolis, and Dallas noted that livestock, poultry, and dairy producers had benefited from increased output prices and lower feed costs.

Since the previous Beige Book, oil exploration activity increased in the Minneapolis, Kansas City, and Dallas Districts. Richmond and Minneapolis noted increases in natural gas production, and San Francisco reported increased natural gas and electricity sales to manufacturers. Compared with a year earlier, coal production was flat in Cleveland, mixed in Richmond, and increased in St. Louis. Recent decreases in oil prices were reported by Atlanta and Kansas City; natural gas price decreases were reported by Cleveland, Richmond, and Kansas City. Iron ore production in the Minneapolis District held steady since the previous report.

Employment, Wages, and Prices
The pace of employment growth was about the same as that reported in the previous Beige Book. Most Districts reported that some employers had difficulty finding qualified workers for certain positions. In particular, manufacturers in the Boston District said that they continue to look for machinists; Chicago noted that difficulties in finding skilled labor have often delayed construction projects; and in the Dallas District a shortage of workers in heavy construction and engineering was causing some delays in projects for the petrochemical industry. Contacts in Richmond, Minneapolis, and Kansas City noted difficulty in filling openings for truck drivers.

A number of Districts characterized wage growth as modest, though several also reported upward wage pressures for particular industries and occupations, such as skilled labor in construction and manufacturing. Cleveland, Richmond, and Kansas City noted upward wage pressures for transportation workers; Richmond also reported upward wage pressures for skilled engineers, managers, information technology professionals, and bankers. San Francisco noted that software developers were receiving above-average wage increases. New York reported that workers were more frequently leaving jobs for higher pay, while a contact in the St. Louis District noted increased turnover of skilled employees who were switching to higher-paying jobs.

Consistent with the previous Beige Book, overall price pressures remained subdued, with Districts reporting little to no change in price levels or modest increases. Firms generally reported that input prices were unchanged or up slightly. Districts noted that several commodity prices fell since the previous report, although cattle, hog, and dairy prices remained at elevated levels. New York reported that cost pressures have largely subsided among manufacturers, but remained fairly widespread among service firms. Firms in the Atlanta District indicated that their pricing power remained relatively weak. However, in Chicago, a number of manufacturers expected to be able to raise prices, especially in the auto industry. St. Louis reported that some retail dealers of construction materials increased prices. Minneapolis noted that metals prices decreased somewhat since the previous report. Restaurant menu prices in Kansas City rose more slowly than in previous surveys; San Francisco reported that restaurant prices increased slightly in July and August.

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First District--Boston

Reports from business contacts paint a mixed picture of economic conditions in the First District. Manufacturers cite weaker results than in the last few reports and retailers are seeing flat to moderately increasing sales, while the tourist sector continues to be robust. Results from the consulting and advertising sector are generally quite positive. Commercial real estate markets are level or improving in the region, while residential real estate contacts mostly report declines in sales and prices, but ongoing cautious optimism. Firms are not generally hiring, on net, but those with substantial increases in business--one manufacturer and several in consulting and advertising--are raising their headcounts. Price pressures remain minimal according to contacts, with manufacturers and retailers noting only selective and modest price increases.

Retail and Tourism
Retail contacts for this round report comparable-store sales that are flat or increasing year-over-year; those with increases cite mid-to-high single digit growth from a year earlier. Spending is strong for furniture, household items, leisure and sporting goods, and apparel. Inventories are either "healthy," slightly up, or slightly down, depending on the contact. Respondents cite some modest price increases (2 percent to 3 percent) on certain items and anticipate this trend will continue. For the rest of the year, contacts continue to predict low-to-mid single-digit sales increases on an annual basis, with an outlook for the U.S. economy that ranges from "sideways growth" to "an optimistic outlook for steady growth."

The Boston-area economy continues to enjoy a strong boost from travel-related spending. In August 2014, hotel occupancy rates were up 12 percent year-over-year, while average nightly room rates were up almost 18 percent from August 2013. Through August, restaurant revenues were up 3.5 percent year-over-year, while attendance at museums and other attractions was up 2.2 percent. Though the results are not yet in for September, advance activity was strong for both September and October, traditionally the peak travel months. The hotel industry is predicting a 7 percent revenue increase for 2015 over 2014, with most of this growth reflecting rising room rates.

Manufacturing and Related Services
Of the 11 manufacturing firms contacted this cycle, five report some weakness in sales, a much higher number than in any recent cycle. The reasons cited for the weakness are varied. A manufacturer of industrial motors and brakes says that August was typically slow but that sales had not bounced back in September as much as they usually do, with orders down about 5 percent year-on-year. A furniture maker cites a 10 percent dropoff in sales during the winter which continued through the summer. A firm making advertising products says that sales have been declining 10 percent per year for a while.

One contact expresses caution about an "order bubble" in commercial aviation, an industry that has generally been a robust source of growth in the region. According to the contact, airlines order jet planes to make sure that if they need them, they have a slot in the queue; the worry is that at some point there could be a wave of cancellations.

None of our contacts reports excessive pricing pressure from suppliers or excessive pushback on price increases from customers. One contact says it is "always a battle," albeit successful, to convince customers to accept price increases. None of our contacts is laying off, but only one reports large hiring increases. A contact in the media business says they are "very careful with headcount." The one firm to report substantial hiring, a biotech firm, cites rising costs of hiring skilled workers in New England. As usual, several contacts say they are always looking for workers with particular manufacturing skills, such as machinists. Our contacts report no significant changes in inventories. Most firms cite increased capital spending more or less in line with their plans; only the biotech firm reports major increases.

In general, the manufacturing outlook is positive but very guarded. Two firms, the manufacturer of motors and brakes and a firm in the textile and chemical businesses, say that they are waiting to see how things play out in the fall.

Selected Business Services
Most contacts report that demand for consulting and advertising is up from a year ago, although the pace of growth varies across sectors and firms. Government and strategy consultants note a strong uptick in requests for proposals and eagerly await contract award decisions. A high-end economic consulting firm is still overwhelmed with work, mostly related to mortgage-backed securities (MBS) litigation, and at 12 percent growth year-over-year is now beyond capacity. An advertising merchandise firm is slightly outpacing the 5 percent growth they estimate the industry is experiencing on average; they are seeing less pushback on prices from their large clients and cite an increase in large orders. In healthcare consulting, contacted firms' revenues range from flat to up 10 percent from a year ago.

Prices are increasing in a bimodal fashion for contacts in consulting: Firms with relatively flat revenue are holding price structures constant for now, even as they bid on more jobs and anticipate winning their "usual" fraction; those whose business is booming are raising prices somewhat, taking on new personnel, raising wages, and experiencing increased compliance costs, and revenue growth is still outstripping costs. An advertising materials firm that has exhibited steady growth is keeping to its 5 percent increase in staff for this year, while the better-faring healthcare consulting firms are increasing employment in the 6 percent range. These firms are generally filling client-facing salesperson roles with some ease, and developer and e-commerce related roles with greater difficulty.

All contacts are hopeful about the future; they say that macroeconomic conditions are improving. Even the slower-growing firms see increases in demand and additional deals in the pipeline, and estimates for next year's growth range from 5 percent to 15 percent. The government and strategy consulting contacts' main concern is that they secure a normal percentage of the contracts for which they are contending. The business strategy contact notes strong business in the Northeast, but is concerned over a lack of new businesses being formed. The economic analysis firm continues to expect MBS-related work to dry up soon and is comfortable with the idea of throttling back growth when it happens. Healthcare consulting contacts feel somewhat at the mercy of government healthcare reforms, but generally feel that "the wind is at their backs" and growth will be sustained for the foreseeable future.

Commercial Real Estate
Commercial real estate fundamentals are either holding steady or improving across the First District. In Boston, contacts report that rents continue to rise in the popular Fort Point Channel area and have even started to increase in portions of the Financial District after several flat months. Healthy demand for office space and lack of new office construction are seen as the forces behind the latest rent increases in Boston, which are perceived as being in excess of increases in operating costs. Office leasing is also reportedly strong in Boston's inner suburbs, such as Waltham and Burlington. Construction activity in greater Boston is reportedly steady, but at a high level, with an emphasis on mixed use and "adaptive reuse" of existing structures. Labor shortages and associated high labor costs are seen as potential constraints on the growth of construction activity moving forward, in Boston and more broadly within Massachusetts. In Providence, leasing activity picked up modestly in both the office and industrial sectors since the previous report and industrial space remains in short supply in relation to demand. In greater Portland, the retail sector continues to grow, resulting in higher rental rates downtown and increased construction of small-scale retail outlets in surrounding areas. Maine's hospitality sector also remains strong, with better-than-expected occupancy rates at recently opened hotels in Portland and new hotels under construction around the state. In Hartford, leasing volume is unchanged in recent weeks and there is no significant construction activity reported. While that city's office vacancy rate has declined slightly in recent months, there has been no noticeable increase in asking rents. Also in greater Hartford, investment sales demand remains healthy and the number of properties being placed for sale is on the rise. A similar increase in supply of buildings for sale is reported for greater Boston, and contacts in both cities infer that a growing number of owners believe that prices are at or near their peak, borrowing costs are near their trough, or both. Contacts also report that demand for Boston's commercial real estate, especially from foreign buyers, remains strong and is expected to continue so for the foreseeable future.

Contacts are either cautiously optimistic (as in Hartford and Providence) or optimistic (Boston and Portland) that commercial real estate fundamentals will continue to improve. In both Providence and Hartford, contacts note that uncertainty over the outcomes of upcoming state and/or local elections is contributing to uncertainty in the local economic outlook.

Residential Real Estate
Closed sales of both single family homes and condominiums declined in August compared with a year earlier in at least four of the New England states. In Maine, by contrast, sales of single family homes increased as condominium sales decreased. Information for New Hampshire is not available. The median sales price also declined relative to August of last year for single family homes and condominiums in at least four states. The exception is Massachusetts, where prices for single family homes increased year-over-year for the twenty-third consecutive month and condominium prices rose for the fifteenth consecutive month. Massachusetts contacts say the sales decline and price increases are driven primarily by a shortage of inventory, as demand is steady; inventories have been falling on a year-over-year basis for more than two years. Contacts say affordability is a concern: "With prices on the rise, it's becoming more difficult to save the down payment, especially with rents as high as they are. We are hearing that buyers are approaching their threshold for what they are willing to pay." In contrast, Maine is seeing inventory increases and contacts expect to be busy in the fall market. In Connecticut and Maine, contacts report a need for higher paying jobs in their states to help sell the inventory of non-starter homes. As one contact in Maine stated, "We need the middle class to feel better. Right now they question what the next few years will be like." Notwithstanding declines in closed sales and median sales prices, residential real estate contacts say they are cautious but optimistic.

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Second District--New York

Growth in the Second District's economy has slowed to a somewhat more modest pace since the last report. Prices of finished goods and services continue to rise at a subdued pace; cost pressures remain fairly widespread among service firms but have largely subsided among manufacturers. Labor market conditions have shown further signs of strengthening, except in the manufacturing sector, where hiring activity has slowed. Contacts in most industry sectors report that business has been steady or improving, though manufacturers report that growth has stalled in recent weeks. General merchandise retailers report that sales were mixed but, on balance, weaker since the previous report; auto dealers report that sales were steady to slightly stronger. Tourism activity has continued to show strength since the last report. Housing markets have been steady or stronger, with inventories rising to more normal levels. New York City's commercial real estate market has continued to strengthen moderately, and there are scattered signs of a pickup in commercial construction. Finally, banks report that household loan demand has leveled off but that demand from commercial borrowers continues to grow; delinquency rates continue to decline, particularly for commercial loans and mortgages.

Consumer Spending
General merchandise retailers say that sales were reasonably robust in August but mixed to weaker in September. Two major retail chains reported that sales, which were on or ahead of plan in August, softened noticeably in September and were below plan. Retail contacts at upstate malls report that sales were generally flat in both August and September, with some strength noted in back-to-school sales. Reports on inventories were mixed in September, but on balance, stocks are reported to be at or near desired levels. Prices are mostly described as steady, though some contacts characterize the environment as increasingly promotional.

Auto dealers across upstate New York characterize sales as steady but fairly strong. Buffalo area dealers report that that new vehicle sales continued to increase moderately in August and September, while sales of used vehicles remained soft. Rochester area dealers report that new vehicle sales were flat in August and steady to up slightly in September; they note favorable market conditions for both new and used cars. Auto dealers in both areas continue to report that both wholesale and retail credit conditions remain in good shape.

Tourism activity has remained robust since the previous report. Business at Broadway theaters continued to show strength in August and September, with attendance up more than 10 percent from a year earlier and revenues up roughly 13 percent. Hotel occupancy rates in New York City have remained near record levels, while room rates have risen moderately. Hotel occupancy rates have also continued to climb in the Buffalo and Albany areas but edged back in metropolitan Rochester. Consumer confidence in the Middle Atlantic region (NY, NJ, PA) slipped in September, based on the Conference Board's latest survey.

Construction and Real Estate
The District's housing markets have been steady to stronger since the last report, while inventories have risen from unusually low levels in some areas. Rents have leveled off in Manhattan and Brooklyn--in part reflecting extensive luxury rental development coming on line--while rents in Queens have continued to increase briskly. New York City's co-op and condo market was generally steady in the third quarter. Resale prices for apartments were little changed in Manhattan but continued to rise moderately in Brooklyn and Queens; sales volume was down more than 10 percent from the extraordinarily high levels of a year earlier but little changed from the second quarter.

Northern New Jersey's housing market has continued to be mixed. Demand for single-family homes has remained sluggish, and so has new single-family construction, as builders remain reluctant to build for inventory. In contrast, a strong rental market has continued to spur multi-family construction, especially in areas easily accessible to New York City. Housing markets in western New York State flattened out in August and September, as both sales volume and prices leveled off. Multiple offers have become less common, as the inventory of available homes has increased from low levels.

New York City's office market continued to strengthen in the third quarter: Office availability rates declined moderately in the Midtown and Midtown South markets and fell more noticeably in Lower Manhattan. Asking rents continued to rise and were up 5 percent to 10 percent from a year earlier. There are a number of major commercial developments under construction in Manhattan, and an industry contact in northern New Jersey notes that there has been somewhat of a pickup in commercial construction there, albeit from low levels.

Other Business Activity
Manufacturing firms in the District report that growth, which had been fairly robust through the summer, has stalled since the last report. Contacts in other industry sectors, however, report that business has been steady or expanding. Businesses generally report steady to modest increases in their selling prices. Reports on input costs have been mixed: Although service firms continue to report widespread increases in input prices, manufacturers generally report more that costs have leveled off.

The labor market has shown further signs of strengthening since the previous report. One major New York City employment agency notes brisk hiring activity and characterizes labor demand as increasingly robust--particularly for temps, workers with people skills, and especially IT workers. A contact at another employment agency has not seen the normal seasonal slowdown in recent weeks and characterizes the labor market as fairly good, with particularly brisk demand for HR people. While one industry contact describes salaries as "pretty flat", another reports upward pressure on salaries, as people are more frequently leaving jobs for higher pay. More broadly, service-sector firms continue to add workers at a moderate pace, though more contacts than in the last report say they plan to expand staff in the months ahead. One major retailer expects to hire moderately more seasonal workers for the holidays than last year. In contrast, manufacturers say they have scaled back both hiring activity and hiring plans.

Financial Developments
Small-to-medium-sized banks in the District report increased demand for commercial mortgages but steady demand for other types of loans and decreased demand for refinancing since the previous report. Bankers report that credit standards were unchanged across all loan categories. Respondents report narrowing spreads on consumer loans and residential mortgages. Banks indicate that average deposit rates remain unchanged. Finally, bankers report ongoing declines in delinquency rates, particularly for commercial loans and mortgages.

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Third District--Philadelphia

Aggregate business activity in the Third District continued to grow at a modest pace during this current Beige Book period with very few shifts in the growth rates of specific sectors. The most notable change in growth was reported by staffing companies, which experienced further increases in staffing requests for temporary and permanent positions. Overall, service sectors maintained a moderate pace of growth. Nonauto retailers continued to report slight growth, auto dealers continued to report strong growth, and tourism activity continued at a reportedly modest pace. Manufacturers also reported an ongoing modest rate of increase in activity. The commercial and residential real estate sectors continued to report slight overall growth during the current Beige Book period for construction and for leasing of existing commercial properties; contacts reported little change for existing home sales, which continued to be down somewhat on a year-over-year basis.

Lending volumes continued to grow slowly, and credit quality continued to improve, while contacts continued to warn of a slight rise in credit risks because of heated competition for loans. Overall, contacts reported slight increases in wages, home prices, and general price levels that were similar to those reported for the previous Beige Book period. Contacts continued to anticipate moderate growth over the next six months.

Manufacturing
Third District manufacturers have continued to report modest growth overall since the previous Beige Book, but signals were somewhat mixed. A somewhat greater percentage of firms reported increases in new orders and shipments, even as a slightly greater percentage of firms reported decreases (the share reporting no change in activity declined). Gains in activity continued to reflect demand from a broad base of sectors. Except for paper products, all sectors reported overall increases in shipments and orders. Contacts specifically mentioned ongoing demand from the auto and energy sectors. Some firms reported growing demand for home construction products; however, demand remains at a low level. Some producers of construction-related materials worried that if housing starts do not soon rise further, industry shakeouts may result in plant closings to eliminate idle capacity. Other contacts mentioned that demand from defense contracts had stabilized or was growing again from lower levels.

Over half of Third District manufacturing contacts expected business conditions to improve during the next six months. While this is a slightly lower percentage than was reported during the previous Beige Book period, this is the second consecutive period in which no firms anticipated deterioration of business conditions. Moreover, a somewhat larger percentage of firms now expect to increase employment levels over the next six months, to increase their level of capital spending, or to do both.

Retail
Since the prior Beige Book period, Third District contacts have continued to report slight growth in nonauto retail sales. Although, sales growth of back-to-school shopping items was generally described as modest. An operator of area malls reported that cooler fall-like weather has helped move fall apparel inventory, which has allowed many retailers to avoid deeper discounting, thus improving their margins. After a midsummer lull, the restaurant business picked up in August and continued growing into September. Contacts reported very strong restaurant activity in Center City Philadelphia. Overall, contacts are increasingly optimistic. While hesitant to forecast the upcoming holiday season, one contact suggested that a lot of ongoing new tenant openings may attract more shoppers. Another contact was optimistic about three significant Center City retail openings this fall.

Auto dealers continued to report strong sales growth. A Pennsylvania contact described August as one of the best months ever for auto sales at dealers throughout the state; reported sales for September were also strong but were beginning to show signs of their normal seasonal slowdown. New Jersey contacts also reported strong August sales followed by lower volumes for September, as they approach the model-year changeover and typical year-end selloff in October. Dealers remain very optimistic for continued strong sales levels through 2015.

Finance
Third District financial firms have continued to report slight increases in total loan volume since the previous Beige Book. Volumes increased most for commercial and industrial loans and for some consumer credit lines (though not for credit cards). Reports on demand for home mortgages varied across the region from modest growth to little change; all contacts described low levels of demand for new mortgages, and negligible demand for refinancing loans. Most contacts reported little change in the commercial real estate market. Overall, banking contacts continued to report steady improvement in credit quality; several mentioned that the financials of most small business customers had improved. However, competition remains intense for creditworthy loan prospects. Some contacts also cited risky loan terms that they would not match; one described the market as "frothy."

Real Estate and Construction
Third District homebuilders have continued to report slight growth in new home construction since the previous Beige Book period. Contacts credited lower gas prices for improving sales traffic and lower interest rates for improving contract signings. Construction activity is expected to continue at modest levels, as builders are starting some homes on spec to boost their inventory of move-in-ready homes before the end of the year. Residential real estate brokers reported little change in sales this period from the prior Beige Book period. On a year-over-year basis, sales have fallen in most major markets. Brokers noted that more deals are falling through now than prior to the recession, and bankers noted that fewer people are qualifying for mortgages. These observations have been borne out by recent monthly reports from Third District multilists that have seen positive year-over-year growth of pending contracts evolve into negative growth of contracts closed one month later. Brokers also reported that the months' supply of inventory has begun to increase again. Still, brokers remain optimistic for some improvement in 2015.

Overall, nonresidential real estate contacts have reported little change since the previous Beige Book period in the pace of growth of construction and leasing activity, which remains slight. Construction activity continues to be greatest for industrial/warehouse building projects; however, some major office and residential projects have broken ground in Center City Philadelphia, and construction activity will accelerate next spring when the buildings begin to go vertical. An architecture and engineering firm reported that its business continued to exceed its plan, and it will be hiring again. Demand for the firm's services has been especially strong from energy-related sectors. Contacts also reported improved leasing activity in downtown Philadelphia and suburban Philadelphia, especially for Class A office space. Strong demand continued in Center City Philadelphia for office, residential, and retail space. In the suburban Philadelphia market, a developer noted that a "flight to quality" from older properties has driven rents higher for Class A office space and prompted ongoing renovations to upgrade older offices into Class A space.

Services
Third District service-sector firms have continued to report moderate growth in activity since the previous Beige Book. Nearly half of all firms reported increases in new orders and sales. Several contacts from banking and health-related manufacturing reported that some health-care providers had reduced personnel and expenses. These cost-cutting measures were attributed to narrower margins due to smaller reimbursements from insurance plans. The cuts occurred even though these providers have been experiencing modest demand increases as a result of previously uninsured individuals gaining access to healthcare. Staffing contacts in eastern and central Pennsylvania reported moderate increases in hiring for temporary and permanent positions. Staffing requests have come from a variety of sectors and for business expansions as well as replacements. Staffing firms remained very upbeat about prospects for this year and next. Once again, over three-fourths of all service-sector contacts reported expectations that growth trends will remain positive over the next six months; none anticipated declines.

Third District tourist areas continued to benefit from great weather conditions as the summer blended into fall. Accordingly, contacts reported modest gains overall. One retail contact reported dramatic sales increases throughout the shore areas, attributing double-digit year-over-year gains to more day-tripping even as occupancy rates of shore rentals continued to rise. (These gains, which were still strong in September, were viewed as resulting from lower gasoline prices as well as from favorable weather.) Several contacts continued to report that rebuilding from Hurricane Sandy was not complete in the hardest-hit areas, where new flood insurance and building standards have slowed reconstruction plans. In the Poconos, contacts reported favorable weather, higher occupancies, and strong bookings for the upcoming fall weekends. Contacts reported that recent casino closings in Atlantic City are expected to have a large effect on the city that should be relatively localized. Reported employment losses in Atlantic City are high; however, many of the lost jobs were part time (and many of these would have ended after the summer tourist season was over). Contacts expect that the remaining casinos may pick up some of the lost business from the recent closures; however, existing staff levels should be sufficient to service any added activity. More broadly, District tourism contacts remain generally positive regarding prospects for the fall.

Prices and Wages
Overall, Third District contacts reported little change to the steady, slight pace of price level increases that is similar to that seen in other recent Beige Book periods. Less than one-third of manufacturing contacts reported an increase in their input costs; just over 10 percent reported charging higher prices for their own products. About one-fifth of service-sector contacts reported an increase in prices paid and received--a somewhat smaller share than in the prior period. Auto dealers reported little change in pricing. Several contacts continued to report tight margins. Generally, contacts reported that hiring remains cautious--occurring when necessary for replacement or for incremental growth; however, staffing firms continued to note some increased hiring for expansion. Staffing contacts also reported a few leading signs of wage pressure: A few job prospects have turned down offers, some companies are making counteroffers to retain employees, and clients are generally less rigid about salary levels.

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Fourth District--Cleveland

The economy in the Fourth District expanded at a moderate pace during the past six weeks. Manufacturers reported moderate to strong business activity. Demand for nonresidential construction strengthened, while the residential market slowed. Consumer spending at retail outlets grew, and year-to-date auto sales were above 2013 levels. Since the previous report, coal production and shale gas activity were little changed. Freight volume grew at a moderate to robust rate. The demand for business credit moved higher, and consumer lending was stable.

Payrolls showed a mild increase, primarily in manufacturing, construction, and freight transportation. Staffing firms reported that the number of job openings has picked up, while placements have fallen. Several recruiters reported on a trend to replace permanent, lower-skilled employees with temporary workers. Due to perceived shortages in selected labor skill areas, upward pressure on wages is beginning to be felt by general building contractors and freight haulers. Overall, input and finished goods prices were stable. Prices for energy and agricultural commodities declined, while transportation equipment prices rose.

Manufacturing
Most District factories reported little change in the pace of growth of new orders and production since the previous report and that year-over-year revenues were higher. Firms seeing lower production attributed it to seasonal factors or declining exports. Our contacts remain optimistic and expect moderate to strong demand for the remainder of the year. Steel shipments improved slightly since the last report. Fourth-quarter shipments are expected to increase on a seasonally adjusted basis relative to the third quarter, and a few steel producers project volume in 2014 will be about 5 percent higher compared to 2013. One steel executive noted that his capacity utilization rate has risen to 80 percent, a rise of 10 percentage points since the recession ended. Manufacturers and steel producers reported that the strongest demand came from the construction, motor vehicle, and oil and gas industries. Auto production at District assembly plants for the first eight months of this year was more than 7 percent higher compared to the same period in 2013.

Many of our contacts anticipate that their capital budgets for fiscal year 2015 will be higher than current-year spending. In general, input and finished goods prices were stable since the previous report, apart from declines in agricultural commodities and steel. A food producer remarked that prices for the major commodities that he purchases are at their lowest level in five years and he does not believe food inflation will be a major issue for the next 12 months. We continue to hear numerous reports about new hiring, mainly for production jobs. The boost in hiring has put little upward pressure on manufacturing wages.

Real Estate and Construction
Sales of new and existing single-family homes showed a modest decline in many parts of the District since the last report. Year-to-date sales through August were lower compared to a year ago. Most builders expect that activity will stabilize at current levels, though some expressed concern about the impact of a potential rise in interest rates combined with continued strict lending standards. Multifamily development (market rate, affordable, and senior) was characterized as very strong, with occupancy rates greater than 95 percent. In August, single-family construction starts across the District were at their highest level so far this year. However, the number of starts year-to-date remains slightly lower compared to the same time period in 2013. New-home contracts were mainly in the move-up price-point categories, though activity in the first-time buyer category continues to slowly improve. Some builders anticipate a modest rise in new-home prices before year's end, which they attribute to rising material and labor costs. The upward trend seen in sale prices of existing homes has leveled off, but the average price remains higher than the average level for 2013 as a whole.

Nonresidential builders reported continued strong pipeline activity since our last report, and a majority indicated that the level of activity has picked up compared to a year ago. A few builders noted that they are more selective about the inquiries that they respond to because they are at or near capacity. One builder commented that because his customers are not expecting prices for nonresidential construction to rise much, there is no sense of urgency to push forward with some projects. In general, backlogs were described as good or solid. Market demand is broad based, though demand for industrial space (manufacturing and distribution) and healthcare facilities is strongest. There has also been a pickup in requests for retail and office space. Leasing of vacant industrial space has increased. Most builders remain optimistic, but they are concerned about labor availability, tight margins, and capacity constraints, should a demand spike occur.

General contractors are not overly concerned with rising prices for building materials; the largest price increases are anticipated for steel components, drywall, and wood products. The pace of hiring has slowed since our last report, with some of the decline in hiring activity being seasonal. Nonetheless, a majority of general contractors reported that they expect to increase their payrolls across a broad range of occupations--craft workers, laborers, management, and back office. Little wage pressure was reported, except for craft workers. Subcontractors are pushing through rate increases to cover rising costs (including labor) and to widen their margins. Subcontractors are still encountering capacity and cash-flow issues. As a result, some general contractors are turning to prefabrication to circumvent subcontractors.

Consumer Spending
Spending at retail outlets during August and into early September was generally higher compared to earlier in the third quarter. Many retailers cited an extended back-to-school buying period as a contributing factor to the increase. Revenues were higher relative to the same time period in 2013 for most retailers, which they attributed to a stronger product mix and growing investment in e-commerce. In addition to back-to-school items, sales of home furnishings, athletic footwear, and food products were doing well. Fourth-quarter revenues are projected to be higher, with expected year-over-year percent gains in the low single digits. Vendor and shelf prices held steady. Several retailers noted that they are running more promotions than usual, mainly to clear inventory and boost revenues. Excluding new store openings and temporary seasonal hiring, retail payrolls were stable.

New motor vehicle sales showed a moderate decline in August on a month-over-month basis and were down slightly from a year ago. However, year-to-date sales through August were 5 percent higher compared to the same time period in 2013. Strong sales of SUVs and trucks continued. Inventory reports were mixed, which is attributable to the model-year changeover. Dealers believe that the level of sales will follow seasonal trends for the remainder of the year and that unit volume for 2014 as a whole will be about 6 percent higher compared to 2013. Used-car purchases showed a modest decline in August on a month-over-month basis, while year-to-date unit volume was slightly higher. We heard several reports about automakers becoming increasingly dependent on the use of incentives to boost sales. Demand for service technicians is growing, but dealers are having difficulty finding qualified applicants.

Banking
Bankers reported that demand for business credit was stable to showing moderate growth during the past six weeks. While demand was described as broad based, it was strongest for commercial real estate and construction loans and C&I lending to manufacturers. Interest rates held steady. On net, consumer credit demand was roughly stable. The number of applications for auto loans remains very high, while households are making marginally greater use of home equity lines of credit. Residential mortgage activity was flat to down slightly; some of the decline is seasonal. Purchase transactions dominate mortgage applications. Delinquency rates are stable to improving across categories. No changes were made to loan-application standards during the past six weeks. However, to gain a competitive advantage, there has been some slight relaxing of terms and conditions. Banks saw growth in core deposits from businesses and consumers. On balance, banking payrolls held steady. New hires were mainly in the areas of compliance, risk management, and commercial lending; however, in response to reduced traffic at branches, payrolls there are being reduced.

Energy
Year-to-date coal production across the District is consistent with prior-year levels, with no material change in output anticipated in the near term. A production decline in eastern Kentucky is being offset by a significant increase in northern West Virginia. Spot prices for thermal and metallurgical coal remain on a downward trend. Activity in the Marcellus and Utica Shales remains at a high level. During the first half of 2014, production in Ohio's Utica Shale was more than six times greater relative to the same time period in 2013, while the number of producing wells increased by 61 percent. Wellhead prices for natural gas and oil have declined since late in the second quarter. Since the last report, equipment and materials prices were largely unchanged and energy payrolls held steady.

Freight Transportation
Freight volume expanded since the last report, with contacts describing year-over-year growth as moderate to robust. Although demand is fairly broad based, it is strongest from the agriculture, motor vehicle, and oil and gas industries. The near-term outlook is favorable. Contacts from trucking and railroads observed that insufficient capacity is a major issue that is currently confronting the industry and that there is concern about stress on the freight-transport system from this year's grain harvest, which is expected to be at a historic high. We heard a report about rail carriers being reluctant to contract for shipments of less than five carloads, which is hurting small manufacturers. The cost of new equipment (truck tractors and rail cars) is rising, and in some cases delivery times are lengthening. Some of the higher cost was attributed to meeting regulatory requirements. Hiring is both for replacement and for adding capacity. Projected capital spending in fiscal year 2015 is mainly for equipment replacement. Although most fleets would like to add capacity, they are having difficulty finding drivers.

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Fifth District--Richmond

District economic conditions improved modestly since the previous report. Manufacturing advanced as shipments and new orders grew modestly, and inventories of finished goods and raw materials rose at a faster pace. Retail sales rose on pace with our last report, and the non-retail service sector expanded moderately. Tourism remained robust, and executives anticipate a strong holiday season. Business lending was unchanged on balance, and competition among bankers remained intense. Residential real estate activity increased in recent weeks, albeit at a somewhat slower pace, and reports on housing inventory were mixed. In agriculture, crop harvesting was on schedule, with price declines for some crops. In the energy sector, coal production and prices declined. More natural gas wells were brought online. On balance, District labor market reports indicated greater demand for workers. According to our latest surveys, manufacturing employment grew modestly and average wages rose slightly. Service-sector employment and wages increased at a moderate pace.

Manufacturing
Manufacturing activity increased in recent weeks, and expectations for the months ahead remained positive. Shipments and new orders grew modestly, and inventories of finished goods and raw materials rose at a faster pace relative to the previous report. A medical equipment manufacturer in North Carolina reported continued robust growth in new orders during the past six weeks and noted optimistic customer expectations for the months ahead. Additionally, a North Carolina electrical equipment manufacturer indicated that orders were up, and that his firm's increased capital spending had improved its shipment capability. A source said that in West Virginia, large manufacturing firms were hiring and investing, but that smaller manufacturers were not making capital investments. A Virginia food manufacturer reported that order volume was flat during the past month, but that he expected improvement during the holidays. However, an executive at a North Carolina textile manufacturer stated that revenues had slowed and retailers were holding back on new orders. Prices of raw materials and finished goods rose at a slightly faster pace since the last report.

Ports
District port officials reported that activity remained strong, suggesting that the peak import season, which had begun earlier than usual, was extended rather than just shifted forward. Loaded container traffic rose further for the major ports, primarily for imports; for other traffic as well, imports continued to outpace exports. Some of the softness in exports was attributed to rail and trucking issues, such as slowdowns from bottlenecks in rail service and truck driver shortages, which have delayed movement of inland cargo to the ports. Port contacts reported strong exports of autos, as well as of containerized grain and soybeans. Imports were led by commodities related to housing and retail, such as appliances, flooring, apparel, and footwear. According to one official, shipping lines have been consolidating and upgrading to larger ships.

Retail
Retail sales rose on pace with our last report. Big-ticket sales grew solidly, but somewhat more slowly relative to the previous report. Sales picked up for suppliers of retail and wholesale building materials. Wholesalers of heavy equipment also reported stronger sales. A car dealer near Washington, D.C. said he expects this year's sales to be about the same as the record sales of a year ago, with dealer incentives helping to move current-year models. According to a central Virginia retail representative, current strong sales of furniture, appliances, and electronics may signal that consumers have more cash, but early big-ticket sales may leave less for discretionary spending during the later weeks of the holiday season. In contrast, the manager at a discount store in the Hampton Roads area of Virginia said that there was almost no change in sales revenues during the past six weeks, but customers were already making holiday purchases using the store's lay-away program. A grocery store manager in southwestern Virginia commented that diminishing incomes for coal mining families, together with rising meat prices, have resulted in lower sales per purchase. Retail price increases slowed since the previous report.

Services
Firms in the non-retail service sector reported moderate growth in recent weeks. Technology firms, engineering companies, and a few smaller healthcare facilities reported stronger revenue growth. According to a North Carolina hospital source, it has been a good year for revenues, and that the hospital was able to make small price increases. In contrast, an executive at a large healthcare system said that cost reductions, including hiring restrictions, were continuing and that their projections were for reduced inpatient volumes. While executives at a couple of accounting firms in North Carolina reported a pick-up in business, a CPA at a Maryland accounting firm saw little change in requests for proposals. According to our most recent survey, non-retail price growth increased slightly.

The summer tourism season finished on a high note, meeting resort managers' expectations. Moreover, hoteliers in Baltimore and western North Carolina said that conventions and autumn leaf viewing were expected to support strong bookings throughout October. A source on North Carolina's Outer Banks reported a number of scheduled autumn events to draw tourists for several more weeks. In addition, many rentals were already booked for Thanksgiving, Christmas, and New Year's. Few rate changes were reported.

Finance
Reports on lending activity were mixed in recent weeks. Residential mortgage demand declined in West Virginia and southeastern Virginia but rose slightly in Maryland, North Carolina, and South Carolina. Refinance loan demand was mostly unchanged except in West Virginia and South Carolina, where demand declined. Business lending was unchanged on balance. A contact in Maryland remarked that small businesses were having difficulty getting credit while larger businesses had no problems. The level of lending in commercial and industrial real estate, which had been trending up, has flattened in the Carolinas and West Virginia. Bankers in several locations characterized competition as "fierce." A lender from South Carolina reported some easing of standards; however, a contact from Maryland cited a tightening of underwriting standards. There were no reports of changes to credit quality. Lastly, slight upward pressure on loan interest rates was reported in West Virginia.

Real Estate
District housing market activity grew at a somewhat slower pace since the previous report. Most brokers indicated that buyer traffic was steady, on a seasonally adjusted basis. Most Realtors reported a slight increase in home prices, although one South Carolina broker reported a small decrease in both single-family and condominium sale prices. A contact in the Hampton Roads region of Virginia stated that the number of condominium sales was only slightly higher; apartment rental activity remained steady. Inventory reports were mixed. Realtors in South Carolina, North Carolina, and Virginia saw seasonal declines in inventories, while District of Columbia and northern Virginia brokers reported steady or rising inventories. Days on the market varied by location. Average market times decreased for Realtors in Richmond, Charlotte, and Myrtle Beach, but contacts in the nation's capital and Greensboro reported no change; a northern Virginia Realtor noted a slight increase. Construction across the District increased slightly for custom homes. A South Carolina Realtor saw no new multifamily construction and a Virginia Beach broker stated that multifamily growth is slowing down because of overbuilding. In contrast, an agent in Asheville stated that multifamily construction has "ramped up."

Commercial real estate activity improved modestly over the past several weeks. A broker in Charlotte reported a gradual improvement in sales and leasing, with a moderately strong office market and modest activity in industrial and retail real estate. The office market in the Hampton Roads area of Virginia was mixed. A South Carolina source reported robust leasing in both office and retail, with a slower industrial market since the last report. Retail vacancy rates were lower in Baltimore and Virginia Beach, and unchanged in Charlotte and Richmond. Office vacancy rates varied across the District. A Charlotte broker reported increased industrial construction, along with a few speculative office projects. Multiple contacts noted rising commercial sales prices. Rental rates varied across regions and submarkets.

Agriculture and Natural Resources
Corn prices declined further over the past six weeks. Soybean prices also fell, while cotton prices were unchanged. A West Virginia farmer stated that grain prices declined after seven years of above-average prices. Farmers' input prices were unchanged in South Carolina and Virginia. A grower in South Carolina reported completion of corn harvesting and the start of peanut harvesting since the previous report. In West Virginia a farmer said that crop planting, reseeding, and harvesting were on schedule, and that his compost business had increased in the past six weeks.

Since the previous report, coal production and prices decreased in southern West Virginia and rose in the northern part of the state, according to a source. Natural gas production increased moderately; more West Virginia wells were brought online, and natural gas prices decreased slightly.

Labor Markets
On balance, demand for workers increased since the previous report. A textile and chemical manufacturer from Virginia reported new hiring, while a food producer transitioned several temporary employees into full-time positions. New hiring in tourism, manufacturing, and IT was noted in West Virginia; however, there were reports that WARN Act notices, indicating a planned mass layoff, had been issued in the coal industry. A central Virginia staffing agent noticed significantly stronger demand in recent weeks, especially for customer service, healthcare, and legal workers. A Maryland employment service provider said there were no notable changes in hiring, but suggested that the skills most in demand were for managers, supervisors, engineers, and IT professionals. Some transportation, banking and finance, hospitality, and retail industries continued to have difficulty finding workers. A few contacts reported wage pressures for drivers, construction workers, skilled engineers, managers, IT professionals, and bankers. According to our most recent surveys, manufacturing employment grew at a modest pace, the average workweek lengthened, and wages rose slightly; in the service sector, employment and wages increased at a moderate pace.

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Sixth District--Atlanta

Sixth District business contacts described economic conditions as improving at a modest pace in September. The outlook among firms remains largely optimistic with the majority of contacts expecting near-term growth to be sustained at or slightly above current levels.

Retailers cited a slight improvement in sales activity since the previous report. Auto dealers continued to note increasing sales. Hospitality contacts continued to report strong activity, with increasing demand from both leisure and business travel. Residential real estate contacts indicated that existing and new home sales and prices remained ahead of last year's levels, and inventory levels were down from a year ago. Commercial real estate brokers continued to note improved demand and modest levels of construction for most property types. Multifamily construction, in particular, continued to increase across much of the District. Manufacturers indicated that overall activity expanded with new orders and production increasing since the previous report. Banking conditions improved for both businesses and consumers as loan volume increased slightly, on balance. Payrolls across the region expanded slowly and businesses continued to report difficulties finding qualified workers. Contacts indicated wages grew at a steady pace. Some contacts expressed concerns about the rising costs of specific inputs.

Consumer Spending and Tourism
District retailers reported a slight improvement in sales since the previous report. Young shoppers were described as being confident and willing to spend, while older consumers were reportedly being more cautious. The battle between online sales versus brick-and-mortar store sales continued as merchants indicated that competition from rival stores' online sales was having an adverse effect on in-store traffic. However, the outlook among retailers for the remainder of the year remains optimistic. District auto dealers not only continued to see increased consumer sales, but saw strong demand from commercial businesses as well.

Reports on tourism and business travel remained upbeat. Tourism activity across the region was strong with high occupancy numbers at hotels and resorts. The development of various new entertainment venues has increased demand for leisure travel and business travel has been solid year to date. Overall, hospitality contacts maintain a positive outlook for the remainder of 2014 and the beginning of 2015.

Real Estate and Construction
Many District brokers reported growth in activity since the previous report. Most brokers indicated that home sales met or exceeded their plan for the reporting period, but a growing share of contacts reported that sales fell short of their plan. The majority of brokers indicated that inventory levels remained flat or continued to decline on a year-over-year basis and home prices were ahead of their year-earlier level. Regarding the outlook, optimism about future sales activity waned from earlier reports with most brokers expecting home sales to remain flat or decline slightly over the next three months with some of the expected decline being attributed to seasonal factors.

Reports from District builders remained fairly positive. The majority reported that recent construction activity either met or exceeded their plan for the period. Many builders noted that construction activity and new home sales were ahead of their year-ago levels. Half of contacted builders indicated that their inventory of unsold homes was down from a year ago. Builders also continued to report modest home price appreciation. The outlook among builders for new home sales and construction activity remains positive.

Commercial real estate brokers across the District continued to report improving demand since the previous report, though they cautioned that the rate of improvement varied by metropolitan area, submarket, and property type. Commercial contractors reported that apartment construction remained robust. Contacts also noted that the level of construction activity across other property types continued to increase modestly. The outlook among District commercial real estate contacts remains fairly optimistic.

Manufacturing and Transportation
District manufacturers reported that activity expanded compared with the previous reporting period. Contacts noted growth in new orders and production; in addition, they indicated that finished inventory levels rose and commodity prices continued to increase. Respondents noted that supplier delivery times for inputs were slightly shorter. Relative to the previous report, a larger share of purchasing agents polled during the reporting period expect production to increase over the next three to six months.

Overall, transportation contacts reported an improvement in demand since the previous report. District railroads cited increases in total carloads, led by significant strengthening in shipments of petroleum products; grain; and military, machinery, and transportation equipment. Intermodal traffic continued to increase on a year-over-year basis. Ports in the District reported a notable increase in container traffic and substantial growth in overall cargo tonnage in September. Trucking companies continued to experience strong freight demand through the end of September.

Banking and Finance
Contacts described the financing environment as improving for both businesses and consumers, with a growing number of projects being financed. Competition for high-quality borrowers remained very keen and credit demand was mixed. Line-of-credit utilization at banks remained relatively flat with few requests for increased limits on short-term credit. Demand for some other loan types was up from year-ago levels.

Employment and Prices
With a few exceptions, contacts reported that their staffing levels were increasing slowly. The District added 51,100 jobs on net in August and the unemployment rate rose 0.2 percentage point to 6.9 percent. Nearly all states in the District added to payrolls in August, with the exception of Mississippi, which lost 4,600 jobs on net. Businesses across the region continued to report difficulty finding qualified workers. Similar to the previous report, hiring challenges appeared to be both intensifying and broadening across the skill and occupation spectrums.

In general, firms indicated that their pricing power remained relatively weak, although a growing number of contacts expect improved margins over the coming year. Contacts in some sectors, including transportation and construction, continued to report concerns about rising input costs, though a slower pace of commodity price increases is anticipated to offer some respite going forward. Respondents to the latest business inflation expectations survey indicated that, on average, businesses anticipate unit costs to rise 2.1 percent over the coming 12 months. There were some reports of upward pressure on starting salaries; however, average compensation increases for most contacts remained anchored between two and three percent per year.

Natural Resources and Agriculture
Contacts in the oil industry reported that there was an excess supply of crude oil, with recent prices well below year-ago levels. Gulf Coast refinery utilization increased over the last year. Imports of crude oil fell; exports were slightly above year-ago levels, though some contacts expressed concern that the strength of the dollar has made U.S. oil exports more expensive for the rest of the world.

Parts of Alabama, Florida, and Georgia experienced abnormally dry to severe drought conditions. Lower corn prices continued to benefit poultry and livestock producers that rely on corn for feed. The USDA announced a new financial assistance program for eligible Florida citrus growers to help with the removal and replacement of stock affected by citrus greening.

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Seventh District--Chicago

Growth in economic activity in the Seventh District remained moderate in September, and contacts maintained their optimistic outlook for the rest of the year. Consumer and business spending, manufacturing production, and construction and real estate activity all increased moderately. Credit conditions and cost pressures changed little on balance. Corn and soybean prices fell as a big harvest got underway, but milk, hog, and cattle prices increased.

Consumer Spending
Growth in consumer spending remained moderate in September, led by continued strength in auto sales. Lower gas prices spurred sales of larger vehicles, especially light trucks, and consumers continued to take advantage of low lending rates and easing loan standards. Several auto dealers also noted that leasing activity had finally returned to pre-recession levels. Non-auto retail spending increased slightly, as growth picked up for discretionary spending categories in recent weeks. Retail contacts generally expected that sales in the upcoming holiday season would be up slightly relative to a year ago.

Business Spending
Business spending also continued to grow at a moderate pace in September. Inventories remained at comfortable levels for most retailers and manufacturers. Non-auto retailers reported adding more to their holiday season inventories than they did last year. Capital expenditures and capital spending plans steadily increased, with expenditures primarily going toward replacing IT and industrial equipment. A number of manufacturing contacts, especially auto suppliers, reported that demand was strong enough to justify expansion in the near future. Both actual hiring and hiring plans increased at a moderate pace, and many contacts reported slightly higher turnover. Many manufacturing contacts added hours to meet increased demand. Holiday hiring began, and retailers plan to hire slightly more holiday workers than last year. Demand remained strong for skilled workers, particularly for those in professional and technical occupations and skilled manufacturing and building trades. Contacts again mentioned expanding internal training programs to address worker shortages and an increased willingness to pay higher wages. A staffing firm reported strong order books, but noted that improving labor market conditions in the District were leading to increased difficulties finding qualified workers.

Construction and Real Estate
Construction and real estate activity also increased moderately over the reporting period. Residential construction continued to expand in both the single- and multi-family markets. An industry contact noted that with homebuilders beginning to exhaust their existing inventories of vacant in-fill lots, single-family construction might slow in some areas of the District until planned projects start to come online. Builders also noted improved availability of financing for new projects, but indicated that difficulties in finding skilled labor have often delayed construction. Home sales were somewhat lower, and growth in home prices and residential rents slowed. Real estate contacts expected sales to return to normal levels in the coming months, pointing to recent increases in online and open-house traffic. Nonresidential construction increased, driven in large part by demand for industrial and office buildings. Automotive parts manufacturers, in particular, remained a source of demand for industrial buildings. Commercial real estate activity continued to expand, with contacts noting strong demand for medical office buildings. Vacancies ticked down, rents rose, and leasing of industrial buildings, office space, and retail space all increased.

Manufacturing
Manufacturing continued to grow at a moderate pace in September. The auto, aerospace, and energy industries remained a source of strength for the District. Light vehicle production increased as manufacturers built up inventories in anticipation of continued growth in sales. Demand for steel steadily increased and most specialty metal manufacturers’ order books continued to fill. Led by the U.S. market, demand for heavy machinery picked up some on net, as higher demand for construction machinery overshadowed weaker demand for agricultural and mining equipment. Slowing demand has led some agricultural machinery manufacturers to start offering incentives such as extended warranties, low interest rate loans, and special financing to help dealers sell used equipment. Manufacturers of construction materials reported a modest increase in demand, but still were disappointed in the slow pace of improvement in the housing market. Utility contacts reported that weather-adjusted load growth was flat over the reporting period.

Banking and Finance
Credit conditions were mixed in September. Financial market participants noted slightly tighter financial conditions, pointing to an increase in equity market volatility and widening corporate bond spreads. In contrast, banking contacts cited looser conditions, with business and consumer lending both increasing. Business loan demand for equipment and commercial real estate financing rose, as did utilization of credit lines for working capital. Banking contacts also noted that despite elevated acquisition multiples, their clients continue to seek opportunities for mergers and acquisitions; this was especially the case for large corporations with ample cash balances. Consumer loan demand increased, with contacts citing some additional growth in credit card lending, continued strong growth in auto lending, and an uptick in mortgage lending.

Prices and Costs
Cost pressures changed little on balance over the reporting period. Energy costs declined. Steel and aluminum prices increased. A contact noted that supply constraints in the Midwest pushed up the local price for aluminum to a new high relative to benchmark spot prices. A number of manufacturers expected to be able to raise prices, especially those in the auto industry, where capacity is increasingly constrained. Retail prices were down slightly as contacts reported more generous sales promotions. Meat and dairy prices remained elevated, though contacts did not report price pressures for other grocery items. Overall, wage pressures were modest, but a number of contacts again reported moderate wage pressures for skilled workers. Non-wage labor costs changed little from the previous reporting period. Many contacts reported passing some of their higher health care costs on to employees in the form of higher co-pays or deductibles.

Agriculture
Overall crop conditions were very good at the start of the harvest. The District should see record corn and soybean harvests. Early results indicated yields for corn and soybeans would range from above-average to record-high levels. The huge anticipated harvests pushed down corn and soybean prices. Crop income was lower than a year ago as higher yields were insufficient to offset lower prices. Crop insurance will cover some of the lost income, but farmers already are planning to trim costs for next year, particularly spending on farm equipment and other capital purchases. Corn farmers helped bid up cattle prices, with the intention of using the abundant harvest as feed for their own cattle production rather than selling it. Hog and milk prices were higher as well, contributing to expansions in output of these commodities.

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Eighth District--St. Louis

Economic activity in the Eighth District has increased at a moderate pace since the previous report. Recent reports of planned activity in manufacturing and services have been largely positive. Reports from retail contacts have also been positive. Overall residential real estate market conditions have remained weak. Commercial and industrial real estate market conditions have been mixed, but commercial and industrial construction has increased. Lending activity at a sample of small and midsized District banks increased from mid-June to mid-September.

Manufacturing and Other Business Activity
Reports of plans for manufacturing activity have been largely positive since the previous report. Several manufacturing firms reported plans to add workers, expand operations, or open new facilities in the Eighth District, while a smaller number of contacts reported plans to reduce employment. Producers of construction materials, tools, consumer goods, and aviation equipment announced plans to hire new employees and expand operations in the Eighth District. In contrast, a metal products manufacturer and a food manufacturer reported plans to lay off workers and close facilities. Reports from automobile and auto parts manufacturers were positive, with District contacts reporting plans to expand operations and hire new workers.

Reports of plans in the District’s service sector have also been positive since the previous report. Firms in freight, insurance and financial, and communications services reported new hiring and expansion plans in the District. In contrast, firms in animal health services and firms in news media services announced plans to lay off employees. Reports from healthcare services firms were mixed. Anecdotal reports from retailers were mostly positive. Contacts in Memphis noted new openings or expanding operations in retail and grocery establishments. In contrast, a major nationwide retailer announced two store closures in the District.

Real Estate and Construction
Home sales decreased in the Eighth District on a year-over-year basis. Compared with the same period in 2013, August 2014 year-to-date home sales were down 3 percent in Little Rock, 2 percent in Louisville, 8 percent in Memphis, and 5 percent in St. Louis. Residential construction declined in the majority of the District’s metro areas. August 2014 year-to-date single-family housing permits decreased in the majority of the District’s metro areas compared with the same period in 2013. In particular, permits decreased 29 percent in Little Rock, 8 percent in Louisville, and 3 percent in St. Louis. In contrast, permits increased 2 percent in Memphis.

Commercial and industrial real estate market conditions were mixed throughout the District. A contact in Louisville reported an increase in prospective commercial tenants in the downtown area. A contact in Memphis noted that the Germantown commercial real estate market remains strong. A contact in Little Rock reported robust demand for commercial real estate space. Commercial and industrial construction activity improved throughout most of the District since the previous report. A contact in Memphis reported plans for a large-scale mixed-use development in the downtown area. A contact in Louisville reported the construction of a building in an industrial park in southern Indiana, with tentative plans for the construction of additional buildings. A Little Rock contact reported the redevelopment of vacant commercial real estate space in Fayetteville. Contacts in St. Louis reported the expansion of a commercial real estate development in Chesterfield and multiple plans for speculative industrial development projects across the area.

Banking and Finance
Total loans outstanding at a sample of small and midsized District banks increased 1.9 percent from mid-June to mid-September. Real estate lending, which accounts for 72 percent of total loans, increased 1.1 percent over this period. Commercial and industrial loans, which account for 16 percent of total loans, increased 2.0 percent over the period. Loans to individuals, which account for 5.3 percent of total loans, increased 4.6 percent over the period. All other loans, which account for 7.2 percent of total loans, increased 7.7 percent over the period. During this period, total deposits at these banks decreased 0.2 percent.

Agriculture and Natural Resources
As of late September, about 75 percent of the District’s corn, rice, and soybean crops was rated in good or excellent condition. Similarly, about 60 percent of the District’s pastureland was rated in good or excellent condition; Kentucky’s pastureland, in particular, has improved significantly since the previous report. Harvest completion rates across the District have lagged behind their five-year averages. District coal production for August was about 1.5 percent higher than a year ago.

Employment, Wages, and Prices
Anecdotal information suggests that employment in the Eighth District grew moderately since the previous report, while wages and prices grew modestly. A contact in Louisville noted increased turnover of skilled employees who are switching to higher-paying jobs. Contacts also noted increases in the cost of lumber and other building materials, and indicated that increased demand has allowed some retail dealers of construction materials to increase prices to consumers.

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Ninth District--Minneapolis

The Ninth District economy grew at a moderate pace since the previous report. Increased activity was noted in consumer spending, tourism, commercial real estate, professional services, manufacturing, and energy. Agricultural conditions were mixed and mining was flat, while construction and residential real estate activity decreased. Labor markets continued to show signs of tightening. Overall wage increases were modest, while price increases generally remained subdued.

Consumer Spending and Tourism
Consumer spending increased moderately overall since the previous report. August and early-September same-store sales at a mall in North Dakota were up about 2 percent compared with the same period a year earlier. Recent sales and traffic at a South Dakota mall were relatively flat compared with last year, while August sales were flat relative to a year ago at a Minnesota mall. An apparel retailer noted that recent sales were up slightly from a year earlier. Recent vehicle sales at Montana dealerships were doing well with particularly strong sales in the northeastern part of the state, according to a representative of an auto dealers association.

Tourism activity was up from last year. This year's record attendance at the Minnesota State Fair was 5 percent higher than a year ago. A travel agency in Minnesota noted that recent leisure travel bookings were about 10 percent higher than last year, while another travel agency reported that leisure bookings in August and September were strong. Compared with last year, August visits to Glacier National Park were up 8 percent and visits to Yellowstone National Park were up 7 percent. According to a survey of lodging and camping properties in Minnesota, 48 percent of respondents reported that summer occupancy was up from a year ago, while 25 percent reported that it was down.

Construction and Real Estate
Commercial construction activity decreased since the previous report. Commercial permits in Billings, Mont., were down significantly in value in September from a year earlier. In Sioux Falls, S.D., the value of August commercial permits decreased from a year ago. Residential construction decreased from last year. In the Minneapolis-St. Paul area, the value of September residential permits decreased 16 percent compared with September 2013. The value of August residential permits in Sioux Falls decreased 40 percent from the same period last year. The value of August housing permits decreased significantly in Bismarck from a year ago. However, September residential building permits in Billings increased in value from last year.

Activity in commercial real estate markets increased since the previous report. Several commercial real estate transactions were announced around the District, including both purchase and lease transactions in retail, hotel, office, and industrial real estate. However, a retailer announced that it would vacate three of its stores in Minnesota this year. Residential real estate market activity decreased since the previous report. In the Sioux Falls area, August home sales were down 8 percent, inventory increased 11 percent, and the median sales price increased 5 percent relative to a year earlier. August home sales were down 5 percent from the same period a year ago in Minnesota; the inventory of homes for sale increased 13 percent, and the median sales price rose 4 percent. Several Minnesota real estate professionals and investors recently noted that out-of-state investor groups are paying above-market prices for single-family rental properties in Minneapolis. Meanwhile, August home sales in western Wisconsin were up 8 percent from a year ago; the median sales price was flat.

Services
Activity at professional business services firms increased at a modest pace since the previous report. Contacts from architectural firms noted some increases from a year ago in bidding activity for government and industrial projects. Contacts from accounting and legal firms noted steady activity since the previous report. Several contacts noted that capacity constraints in freight rail have increased demand for trucking services.

Manufacturing
Manufacturing activity grew moderately since the previous report. A manufacturing index released by Creighton University (Omaha, Neb.) increased in September from the previous month in North Dakota; the index fell slightly in Minnesota and South Dakota, but remained at levels consistent with expansion in activity in all three states. An agribusiness firm announced that it will move ahead in building a $3 billion fertilizer plant in North Dakota.

Energy and Mining
Activity in the energy sector increased, while mining was steady since the previous report. Late-September oil and gas exploration activity increased in North Dakota and was level in Montana from a month earlier; production remained at record levels. A partnership announced plans to build a 450-mile pipeline from the Bakken oil fields to a hub in Wyoming. A crude oil storage facility in North Dakota announced a $5.5 million expansion. Production at District iron ore mines appeared steady in August compared with a month earlier. It was announced that construction will resume on a $1.8 billion ore production facility that was delayed due to financing. Freight rail congestion was leading to increased stockpiles at some ore production facilities, as locomotives and crews that move ore to port were in short supply.

Agriculture
Agricultural conditions were mixed since the previous report. The most recent USDA forecast calls for substantially increased production of corn and soybeans this year in District states compared with 2013. Livestock and dairy producers continued to benefit from lower feed costs and high output prices. Most of the district's crops were in good or excellent condition despite late planting; however, an early frost damaged soybeans in some parts of Minnesota and South Dakota. Relative to a year earlier, prices received by farmers in September were lower for corn, soybeans, and wheat; prices increased for hay, cattle, hogs, poultry, and milk.

Employment, Wages, and Prices
Labor markets continued to show signs of tightening since the previous report. In Minnesota, a firm is hiring 1,000 seasonal workers to fill a variety of positions, a medical device manufacturer announced plans to add over 200 jobs, a window manufacturer will add 100 jobs, and a heating and air conditioning plant announced plans to add 95 jobs over the next three years. According to a survey of Minnesota businesses by an employment services firm, 19 percent of respondents expect to hire more employees during the fourth quarter, while 6 percent expect decreases in staffing. In last year's survey, 17 percent expected staffing increases, while 7 percent expected decreases. According to surveys conducted by four technical schools in South Dakota, almost all graduates were employed or continuing their education six months after graduation. Some contacts noted continued difficulty finding truck drivers to fill open positions. In contrast, a food manufacturer recently announced plans to eliminate up to 800 positions companywide.

Overall, wage increases were modest since the previous report. However, according to a recent survey of central Minnesota businesses by St. Cloud State University, 54 percent of respondents expect to increase compensation over the next six months, up from 43 percent in last year's survey.

Price increases generally remained subdued. End-of-September Minnesota gasoline prices were down about 10 cents per gallon both from mid-August and from a year earlier. Metals prices decreased somewhat since the previous report.

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Tenth District--Kansas City

The Tenth District economy grew modestly in late August and September, and most contacts were optimistic about future activity. Consumer spending was up moderately despite some sluggishness at restaurants and hotels, and expectations for future sales were mostly positive. District manufacturing activity grew modestly, and wholesale trade firms reported improved sales. District real estate activity increased slightly, and activity in the energy sector continued to expand. Transportation, professional, and high-tech firms reported slower growth relative to the previous survey. Bankers reported steady loan demand, better loan quality, and stable deposits. In agriculture, crop conditions remained solid in the District, but lower crop prices weighed on the outlook for farm incomes. Prices grew more slowly in most industries, while some firms reported increased wage pressures as well as labor shortages for specific positions.

Consumer Spending
Consumer spending grew at a solid rate, and contacts were more optimistic about future sales growth than in previous reports. Retail sales grew moderately, at a similar pace of growth as in the previous survey. Several retailers noted stronger sales of home improvement and building materials, though sales for some higher-priced items were characterized as weak. Expectations for future sales remained strong, and inventory levels were expected to rise somewhat. Auto sales were up modestly from the previous survey. Dealer contacts anticipated some increases in sales in the months ahead and noted solid sales for mid-sized vehicles and small SUVs. Auto inventories fell further, with one contact noting a considerable rise in the cost of inventory. Restaurant sales weakened in late August and September but remained well above year-ago levels, and contacts expected sales to improve in coming months. Many restaurants reported a reduction in employment, and one restaurant owner said they would be adding a health care surcharge of 3 percent to each check. District tourism activity fell from the previous month, but was up strongly from a year ago. Expectations for future tourism edged down somewhat but remained solid.

Manufacturing and Other Business Activity
District manufacturing and other business activity rose modestly in late August and September. Factory production increased, primarily at durable goods producers, though several nondurable-goods producers also reported modest gains. However, activity at some food processing plants continued to decline in the face of higher beef prices. Contacts reported solid gains in factory shipments and employment, with new orders up slightly. Expectations for future factory activity held steady at overall favorable levels. Manufacturers' capital spending plans increased slightly and remained well above year-ago levels. Growth in wholesale trade sales increased, with contacts expecting continued solid growth in the next few months. Transportation, professional, and high-tech firms reported smaller gains than the previous survey, although sales remained considerably higher than year-ago levels and many contacts expected solid improvement heading forward. One trucking firm cited supply chain disruptions and new regulations as having slowed freight traffic for both shippers and distributors.

Real Estate and Construction
On balance, District real estate activity increased slightly in late August and September with residential real estate activity flat and commercial real estate activity increasing moderately. Residential home sales were unchanged compared to the previous survey period and were similar to year-ago levels. Sales of low- and medium-priced homes continued to run ahead of sales for higher-priced homes. Home prices increased modestly, and inventories continued to rise slightly. Most residential real estate contacts expected home sales to decrease in the coming months primarily reflecting typical seasonal declines. Housing starts and construction supply sales edged down since the previous survey period. Residential construction activity was expected to pick up slightly as builders anticipated a slight increase in traffic of potential buyers. Commercial real estate activity increased moderately relative to the previous survey period as contacts continued to report a decline in vacancy rates, an increase in absorption, higher sales, and increased construction activity. The commercial real estate market was expected to strengthen at a moderate pace over the coming months.

Banking
Bankers reported steady overall loan demand, a modest improvement in loan quality, and mostly steady deposit levels in late August and September. Loan demand was slightly improved for agricultural loans, consumer installment loans and commercial and industrial loans. Demand for residential real estate loans was slightly weaker compared to the last survey. Even with the recent modest improvement in loan quality, most bankers indicated loan quality was unchanged compared to a year ago, and many expected it to remain the same over the next six months. Credit standards remained largely unchanged for all major loan categories, and deposit levels were stable for most banks.

Energy
Energy activity continued to expand in late August and September. District contacts reported steady growth in drilling activity, primarily for oil, and expectations for future drilling were solid, though somewhat lower than the previous survey. Oil prices declined in late August and September, as global demand failed to keep up with supply. Most respondents expected oil prices to decline marginally in the coming months, yet most producers anticipated that drilling would remain profitable across the areas where they are active. Natural gas prices continued to decline but remained slightly above year-ago levels; most contacts expected these prices to start to rise modestly as the winter heating season approaches. Energy firms' overall capital expenditure plans remained solid.

Agriculture
Despite expectations of above-average yields, further declines in crop prices weighed on farm income prospects in the District. However, crop insurance and some pre-selling of this year's crop at higher prices earlier in the year may help mitigate the effect on overall farm incomes of recent spot price declines. The corn and soybean crops were mostly rated in good to excellent condition as harvest began. Cattle prices rose since the last survey period while hog prices fell with increased production resulting from higher dressed weights. The demand for farm operating loans has risen substantially from last year as more crop producers borrowed to pay for operating costs. Bankers also reported a rise in requests for agricultural loan renewals and extensions and noted that loan repayment rates have edged down from the high levels seen the past few years. Despite the sharp drop in crop prices, farmland values were typically holding at high levels.

Wages and Prices
Relative to the previous report, prices rose at a slightly slower pace in most industries, and while most firms reported only modest wage pressures, in some cases wage pressures were more pronounced. Retail price growth was minimal, likely because retailers' input costs rose more slowly than in previous surveys. Restaurant menu prices also rose less than in previous surveys despite persistent growth in input costs. Manufacturing selling prices rose slightly, while raw materials prices continued to increase at modest rates. Transportation input prices fell and fewer transportation firms raised their selling prices. Construction materials prices were up in late August and September, and many builders expected further increases. Contacts in most industries expected prices to rise moderately going forward. Increased wage pressures were noted in a few industries, particularly manufacturing, restaurants, transportation, and energy. Some contacts continued to report a short supply of workers, particularly for drivers, construction, and skilled manufacturing positions.

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Eleventh District--Dallas

The Eleventh District economy grew at a moderate pace over the past six weeks. Manufacturers mostly reported increases in demand, and retail and automobile sales expanded at a pace in line with the prior report. Demand for nonfinancial services generally improved and real estate activity remained solid. The energy sector continued to grow, and agricultural conditions improved. Upward price pressures eased slightly and employment held steady or increased. Outlooks remained optimistic across the board.

Prices
Most responding firms said prices held steady over the last six weeks, with fewer reports of firms raising prices than in the previous report. Professional business services firms said rates were unchanged over the reporting period (though higher than a year ago), and retailers and auto dealers also noted steady prices. Changes in selling prices in the manufacturing sector were mixed. Prices for construction materials such as fabricated metals, concrete, brick, and glass rose, while prices for primary metals, transportation equipment, and high-tech products held steady and lumber prices fell slightly. Food producers continued to note selling price increases due to rising input costs. These contacts said selling prices will likely level out before raw materials prices do, and companies will try to cut costs elsewhere.

The price of West Texas Intermediate crude oil fell over the course of the reporting period, as global supply growth met softer international demand. The price of natural gas stabilized at just under $4 per MMbtu over the past six weeks after falling during the prior reporting period. Retail gasoline and diesel prices continued to fall.

Labor Market
Employment at responding firms held steady or increased, and labor market tightness continued to be mentioned by numerous contacts. Reports of hiring came from staffing and transportation services firms and construction-related manufacturers (such as fabricated metal, cement, and brick producers). Legal firms noted a seasonal increase in headcounts from adding new fall associates. A retailer noted difficulty in hiring in the areas of the state where the energy sector was booming, and an auto dealer said they were losing mechanics and technicians to energy companies in the Eagle Ford region to repair oilfield trucks. A shortage of specialized heavy construction workers and chemical engineers was causing some delays in announced construction projects in the petrochemicals industry. Residential construction contacts also noted persistent labor shortages; one contact saw some easing while another said that in Houston, a few builders were placing cameras and armed guards at their construction sites to prevent poaching of workers. Energy contacts saw no relief from the tight labor market, especially in West Texas.

Several contacts continued to report upward wage pressures. Staffing services firms said candidates were often receiving multiple offers, which caused some firms to increase wages to stay competitive. Some primary and fabricated metals manufacturers noted higher wages; increases as high as 30 percent over the last six months were seen in some trades, according to contacts. High-tech manufacturers said wage pressures remained elevated for some higher-skilled workers.

Manufacturing
Most manufacturers noted an increase in demand since the previous report and outlooks were largely positive. Primary metals producers said demand grew but at a slower pace, possibly due to seasonal factors. Demand for fabricated metals strengthened and was up notably from last year, with contacts pointing to increased demand from a number of segments of the construction industry. Demand was mostly flat for lumber, cement, glass, and brick manufacturers, although a couple of contacts noted a pickup in demand for these products in the Dallas area.

Contacts in high-tech manufacturing reported demand was stable or higher over the past six weeks. Respondents expect strong demand growth for the next three to six months, primarily due to expansion in capacity by cloud and mobile computing providers. Food producers said demand increased somewhat over the reporting period, mostly due to seasonal factors, but was largely unchanged from a year ago.

Petrochemical producers reported slightly lower production as various repairs and upgrades to existing facilities had fallen behind schedule. Firms in this sector noted some delays in announced construction projects because of worker and materials shortages as well as delays in securing permits. Refinery utilization rates along the Gulf Coast were strong, and outlooks through year-end remained positive among refiners and chemical producers.

Retail Sales
Retail sales increased at about the same pace as during the prior reporting period. A continued boost from back-to-school shopping was the most-noted driver of recent sales growth, and demand was also up year-over-year. Contacts' outlooks for the remainder of the year were optimistic, and they expect demand during the holiday shopping season to be slightly stronger this year than in 2013.

Automobile sales continued to increase, at a pace similar to the prior reporting period. Demand was up year-over-year. Contacts were satisfied with inventory levels and said they had plenty of vehicles. Outlooks for the rest of the year were positive, although one contact noted that an increase in interest rates could drastically change the landscape of their industry.

Nonfinancial Services
Most nonfinancial services firms reported demand was up from six weeks ago, and outlooks were optimistic. Staffing firms generally noted demand increases, with one contact saying the past two weeks were the company's strongest all year. Contacts said all skill levels were in high demand, and that demand for low-skilled workers had increased. Direct hiring led demand growth, although one contact said contract and temporary worker demand will likely increase as the Affordable Care Act's effects continue to be felt. The accounting sector continued to operate at high levels of activity and demand for these services increased further over the reporting period. Demand for legal services increased as well, with particular strength coming from corporate work.

Transportation services firms said overall cargo volumes increased slightly since the previous report. Small-parcel cargo volumes increased, with retail trade (led by e-commerce) remaining the strongest source of growth. Railroad contacts noted a rise in petroleum and motor vehicle shipments. Air cargo volumes continued to trend upward as increased international air cargo demand outpaced a decline in domestic demand. Outlooks were cautiously optimistic.

Airlines reported passenger demand fell over the reporting period due to seasonal factors, but was up from a year ago. Domestic demand remained stronger than international demand.

Construction and Real Estate
The District's housing sector remained solid overall. Single-family home sales were flat to down over the reporting period. Land prices continued to trend upward at the same pace; however, the pace of home price appreciation slowed, with one respondent noting a slight pushback in pricing from buyers. Contacts said a few homebuilders were expanding production of more-affordable high-density housing. Robust apartment demand kept occupancy high and rent growth solid despite elevated levels of multifamily construction activity. Single- and multifamily housing contacts were optimistic in their near-term outlooks.

Office leasing activity increased in Dallas and Austin and held steady at high levels in Houston. Contacts noted moderate growth in rents. Demand for industrial space remained strong and vacancy rates remained tight in most major metro areas. Construction activity stayed elevated, and outlooks were mostly optimistic.

Financial Services
Demand for loans accelerated slightly since the last report. Financing for mergers and acquisitions as well as capital expenditures rose in recent weeks. Lending to medium-sized businesses continued to grow, and financing activity for commercial real estate development remained robust. Mortgage lending grew slightly, but contacts noted that a low supply of housing was constraining growth. Contacts noted increased optimism among clients.

Energy
Demand for oilfield services in the District continued to grow, although activity in the Permian Basin in September was muted temporarily by flooding. Growth in Texas drilling activity was again concentrated outside of the major basins. Outlooks for the rest of the year remained optimistic and were largely unchanged from the prior reporting period.

Agriculture
District drought conditions eased slightly over the past six weeks, although more than half of Texas remained in a drought that has plagued the state since the end of 2010. Harvesting of row crops like cotton and corn continued, and crop conditions were slightly better than last year. Cattle prices continued to be at a record high while feed prices fell, boosting profitability for cattle producers. Domestic and export beef demand remained strong despite retail beef prices reaching a record high in August. Improved moisture conditions overall have increased optimism for winter crops and expanded prospects for cattle herd rebuilding.

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Twelfth District--San Francisco

Economic activity in the Twelfth District continued to improve moderately during the reporting period of mid-August through late September. Overall price and wage inflation remained modest. Retail sales grew slightly, and demand for business and consumer services increased moderately. Overall manufacturing activity picked up, while agricultural conditions were mixed. Real estate activity advanced, but growth in the residential sector varied across the District. Loan demand increased moderately.

Prices and Wages
Overall price inflation remained modest during the reporting period. Contacts reported that consumers are very price conscious. A shortage of cattle drove up beef prices, and the California drought boosted nut prices. Although operating costs, commodity costs, and packaging costs in the wholesale food industry increased slightly, contacts reported that competition prevented these cost increases from being passed on to retail prices for most food items. Electric utility input prices increased modestly during the reporting period. Prices in the technology sector decreased for both businesses and consumers, driven by competitive pressures and technological advances. Prices of certain building supplies, including wallboard, wood, cement, and insulation increased a bit. Contacts reported that restaurant prices increased slightly in July and August in some states in response to minimum-wage increases. Las Vegas hotel room rates for August were higher than in any August since 2007.

In general, wages continued to increase at a modest pace. Most contacts reported that wages and salaries were up about 2-1/2 percent to 3 percent compared with last year. Wages for software developers, for workers in skilled trades, and, in some areas, for experienced construction workers increased faster. Declines in defense spending led some aerospace manufacturers to institute greater employee cost-sharing on benefits.

Retail Trade and Services
Overall retail sales grew slightly during the reporting period. Sales of higher-end clothing picked up, but somewhat less than respondents expected. Food sales increased a bit, and contacts reported that grocery inventories were stable. However, the droughts in California and other parts of the West resulted in lower-quality produce. Revenue at hobby game stores showed strong growth. Contacts characterized consumers as still cautious in their spending habits but expect retail demand to strengthen further soon.

Demand for business and consumer services increased moderately. Demand for legal services picked up in some areas, in connection with rising real estate activity. Demand for advertising services declined, but businesses increased spending on cloud computing services. Contacts reported that industry leaders expect information technology spending to accelerate in 2015, driven by spending on big data and security services, as well as on cloud computing. Casual dining picked up in August, the first monthly increase in sales in that segment this year. Contacts expect continued slow growth of casual dining in the coming months. Las Vegas year-to-date visitor volume increased moderately over 2013. Total occupied room nights and occupancy percentage at Las Vegas hotels climbed.

Manufacturing
Overall District manufacturing activity picked up during the reporting period. Worldwide semiconductor sales were up markedly over the previous year. Recent sales of manufactured steel and recycled metals also were up over the same period a year earlier. Revenue for biotech and pharmaceutical manufacturers grew notably since the previous reporting period. Industry contacts detected stronger demand for pharmaceuticals stemming from the increase in the number of insured people, and they expect healthy earnings growth to continue. Demand for medical equipment was also very strong. Aerospace and defense capacity utilization declined since the prior reporting period. In contrast, contacts reported that capacity utilization among commercial aircraft producers increased to record levels.

Agriculture and Resource-related Industries
Agricultural conditions in the District were mixed during the reporting period. Continuing droughts in California and parts of Washington and Idaho elevated water costs and depressed harvests of cotton and various grains, vegetables, nuts, and legumes. Farmers increased the number of acres lying fallow and reduced herd sizes. However, low corn prices and stable fertilizer and machinery prices benefited dairy and feedlot operations. Milk prices increased, and export demand for hay from the West Coast reached an historical peak. Sales of electricity and natural gas to the manufacturing sector have increased markedly since the beginning of the year. Agricultural land prices remained relatively high.

Real Estate and Construction
Real estate activity in the District advanced, but growth trends in the residential sector were uneven across the District. Contacts reported that in a few areas, prices of single-family homes accelerated, while in other areas the pace of price increases declined. In a few areas, year-to-date single-family housing starts were down compared with the same period in 2013. Sales of single-family homes were stable during the reporting period. Overall, multifamily construction and development activity remained strong. Commercial office demand was robust in San Francisco and Silicon Valley, and rents increased compared with the previous reporting period. In Los Angeles, commercial real estate construction picked up.

Financial Institutions
Overall loan demand increased moderately since the previous reporting period. In some areas where lending activity had been stagnant for a long time, demand for commercial and industrial and commercial real estate loans picked up. Other areas that had already been experiencing growth in loans showed continued expansion. Asset quality improved since the previous reporting period, and contacts reported that current overall loan performance was comparable to that seen before the recession. Competition among lenders for customers with high-quality credit remained intense. Contacts reported that this competition had depressed interest rates on loans, reducing net interest margins and profitability.


Bank of England holds asset purchase plan at GBP 375B Oct 9, 2014 07:00AM

Bank of England holds asset purchase plan at £375 billion.


Fed Officials Saw Global Slowdown Among Risks to U.S. Outlook Oct 8, 2014 02:01PM

(Updated - October 8, 2014 2:01 PM EDT)

Fed officials saw global slowdown among risks to U.S. outlook.

UPDPATE - More from the FOMC minutes:

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, September 16, 2014, at 11:00 a.m. and continued on Wednesday, September 17, 2014, at 9:00 a.m.

PRESENT:

Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Stanley Fischer
Richard W. Fisher
Narayana Kocherlakota
Loretta J. Mester
Charles I. Plosser
Jerome H. Powell
Daniel K. Tarullo

Christine Cumming, Charles L. Evans, Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Alternate Members of the Federal Open Market Committee

James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively

William B. English, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist

James A. Clouse, Evan F. Koenig, Thomas Laubach, Michael P. Leahy, Mark E. Schweitzer, and William Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System Open Market Account

Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors

Michael S. Gibson,2 Director, Division of Banking Supervision and Regulation, Board of Governors

Matthew J. Eichner,1 Deputy Director, Division of Research and Statistics, Board of Governors; Stephen A. Meyer and William R. Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors; Mark E. Van Der Weide,3 Deputy Director, Division of Banking Supervision and Regulation, Board of Governors

Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors

Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors

Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors

Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors

Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors

Michael T. Kiley4 and Jeremy B. Rudd4,Senior Advisers, Division of Research and Statistics, Board of Governors; Joyce K. Zickler, Senior Adviser, Division of Monetary Affairs, Board of Governors

Eric M. Engen and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci, Associate Director, Division of Monetary Affairs, Board of Governors

Marnie Gillis DeBoer, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors

Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors

Patrick E. McCabe,1 Adviser, Division of Research and Statistics, Board of Governors

Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors

David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors

Katie Ross,1 Manager, Office of the Secretary, Board of Governors

Valerie Hinojosa, Records Project Manager, Division of Monetary Affairs, Board of Governors

Marie Gooding, First Vice President, Federal Reserve Bank of Atlanta

David Altig, Alberto G. Musalem, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, New York, and Chicago, respectively

Troy Davig, Michael Dotsey, Geoffrey Tootell, Christopher J. Waller, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Boston, St. Louis, and Richmond, respectively

Sylvain Leduc, Jonathan P. McCarthy, and Douglas Tillett, Vice Presidents, Federal Reserve Banks of San Francisco, New York, and Chicago, respectively

Kei-Mu Yi, Special Policy Advisor to the President, Federal Reserve Bank of Minneapolis

Developments in Financial Markets and the Federal Reserve's Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets and reviewed the effects of recent foreign central bank policy actions on yields on the international portion of the SOMA portfolio. The deputy manager reported on the System open market operations conducted during the period since the Committee met on July 29-30, 2014, summarized plans for additional test operations of the Term Deposit Facility, and described the results from the fixed-rate overnight reverse repurchase agreement (ON RRP) operational exercise.

The deputy manager also outlined a proposal for changes to the ongoing ON RRP exercise to test possible design features that could allow an ON RRP facility to serve as an effective supplementary tool during policy normalization while also mitigating the potential for unintended effects in financial markets. Participants discussed the proposed changes in the ON RRP exercise, including raising the counterparty-specific limit from $10 billion to $30 billion, limiting the overall size of each operation to $300 billion, and introducing an auction process that would be used to determine the interest rate on such operations and allocate take-up if the sum of bids exceeded the overall limit. Testing these design features was generally seen as furthering the Committee's understanding of how an ON RRP facility might be structured to best balance its objectives of supporting monetary control and of limiting the Federal Reserve's role in financial intermediation as well as reducing potential financial stability risks the facility might pose during periods of stress. Participants also discussed other tests that could be incorporated in the exercise at a later date, including a daily time-varying cap along with the overall limit on the size of ON RRP operations, small variations in the offered rate on ON RRP operations, and moderate increases and decreases in the overall size limit. A number of participants expressed concern that these tests could be misunderstood as providing a signal of the Committee's intentions regarding the parameters of the ON RRP program that will be implemented when normalization begins; they wanted to emphasize that the tests are intended to provide additional information to guide the Committee's decisions. Participants agreed to consider potential additional revisions to the ON RRP exercise at future FOMC meetings. Following the discussion, the Committee unanimously approved the following resolution:

"The Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of overnight reverse repurchase operations involving U.S. government securities for the purpose of further assessing the appropriate structure of such operations in supporting the implementation of monetary policy during normalization. The reverse repurchase operations authorized by this resolution shall be (i) conducted at an offering rate that may vary from zero to five basis points, (ii) for an overnight term, or such longer term as is warranted to accommodate weekend, holiday, and similar trading conventions, (iii) subject to a per-counterparty limit of up to $30 billion per day, (iv) subject to an overall size limit of up to $300 billion per day, (v) awarded to all submitters (A) at the specified offering rate if the sum of the bids received is less than or equal to the overall size limit, or (B) at the stopout rate, determined by evaluating bids in ascending order by submitted rate up to the point at which the total quantity of bids equals the overall size limit, with all bids below this rate awarded in full at the stopout rate and all bids at the stopout rate awarded on a pro rata basis, if the sum of the counterparty offers received is greater than the overall size limit, and (vi) offered beginning with the operation conducted on September 22, 2014, with the resolution adopted at the January 28-29, 2014, FOMC meeting remaining in place until the conclusion of the operation conducted on September 19, 2014. The Chair must approve any change in the offering rate within the range specified in (i) and any changes to the per-counterparty and overall size limits subject to the limits specified in (iii) and (iv). The System Open Market Account manager will notify the FOMC in advance about any changes to the offering rate, per-counterparty limit, or overall size limit applied to operations. These operations shall be authorized through January 30, 2015."

By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.

Monetary Policy Normalization
Meeting participants considered publication of a summary statement of their monetary policy normalization principles and plans based on the discussions at recent Committee meetings. Participants agreed that it was appropriate at this time to provide additional information regarding their approach to normalization. The proposed statement was seen as a concise summary of participants' views that would help the public understand the steps that the Committee plans to take when the time comes to begin the normalization process and that would convey the Committee's confidence in its plans. However, it was emphasized that the Committee would need to be flexible and pragmatic during normalization, adjusting the details of its approach, if necessary, in light of changing conditions. Regarding the specific points in the proposed statement, a couple of participants expressed their preference that the principles make greater allowance for sales of agency mortgage-backed securities (MBS) over the next few years in order to normalize the size and composition of the Federal Reserve's balance sheet more quickly and to limit distortions in the allocation of credit that they believed were associated with the Federal Reserve's holdings of agency MBS. In addition, a few participants noted that they would have preferred that the principles point to an earlier end to the reinvestment of repayments of principal on securities held in the SOMA portfolio. At the end of the discussion, all but one participant could support the publication of the following statement after the meeting:

Policy Normalization Principles and Plans
During its recent meetings, the Federal Open Market Committee (FOMC) discussed ways to normalize the stance of monetary policy and the Federal Reserve's securities holdings. The discussions were part of prudent planning and do not imply that normalization will necessarily begin soon. The Committee continues to judge that many of the normalization principles that it adopted in June 2011 remain applicable. However, in light of the changes in the System Open Market Account (SOMA) portfolio since 2011 and enhancements in the tools the Committee will have available to implement policy during normalization, the Committee has concluded that some aspects of the eventual normalization process will likely differ from those specified earlier. The Committee also has agreed that it is appropriate at this time to provide additional information regarding its normalization plans. All FOMC participants but one agreed on the following key elements of the approach they intend to implement when it becomes appropriate to begin normalizing the stance of monetary policy:
  • The Committee will determine the timing and pace of policy normalization--meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels and to reduce the Federal Reserve's securities holdings--so as to promote its statutory mandate of maximum employment and price stability.
    • When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate.
    • During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances.
    • During normalization, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate.
  • The Committee intends to reduce the Federal Reserve's securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.
    • The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.
    • The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance.
  • The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
  • The Committee is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.

The Board meeting concluded at the end of the discussion of policy normalization principles and plans.

Staff Review of the Economic Situation
The information reviewed for the September 16-17 meeting suggested that economic activity was expanding at a moderate pace in the third quarter. Labor market conditions improved a little further, although the unemployment rate was essentially unchanged over the intermeeting period. Consumer price inflation was running below the FOMC's longer-run objective of 2 percent, but measures of longer-run inflation expectations remained stable.

Total nonfarm payroll employment increased in July and August but at a slower pace than in the first half of the year. The unemployment rate was 6.1 percent in August, the same as in June, and the labor force participation rate and the employment-to-population ratio also were unchanged since that time. Both the share of workers employed part time for economic reasons and the rate of long-duration unemployment declined a little over the past two months. Other recent indicators generally pointed to ongoing improvement in labor market conditions: Although some measures of household expectations of the labor market situation deteriorated somewhat, the rates of job openings and of gross private-sector hiring moved up, initial claims for unemployment insurance were essentially flat at a relatively low level, and some readings on firms' hiring plans improved.

On balance, industrial production edged up over July and August, and the rate of manufacturing capacity utilization was unchanged. Automakers' schedules indicated that the pace of motor vehicle assemblies would decline slightly in the fourth quarter, but broader indicators of manufacturing production, such as the readings on new orders from the national and regional manufacturing surveys, were consistent with moderate increases in factory output in the near term.

Real personal consumption expenditures (PCE) appeared to be rising at a moderate pace in the third quarter.5 The components of nominal retail sales data used by the Bureau of Economic Analysis (BEA) to construct its estimates of PCE increased at a solid rate in July and August, and sales of light motor vehicles surged in August after edging down in July. Recent information pertaining to key factors that influence consumer spending were positive: Real disposable incomes continued to increase in July, households' net worth likely edged up as equity prices and home values rose somewhat further, and consumer sentiment as measured by the Thomson Reuters/University of Michigan Surveys of Consumers improved in August and early September.

The pace of activity in the housing sector seemed to be picking up. Starts and permits of both new single-family homes and multifamily units were higher in July than their average levels in the second quarter. Sales of existing homes increased further in July, although new home sales declined.

Real private expenditures for business equipment and intellectual property products appeared to rise further going into the third quarter. Nominal shipments of nondefense capital goods excluding aircraft moved up in July. Moreover, new orders for these capital goods continued to be above the level of shipments, pointing to increases in shipments in subsequent months. In addition, other forward-looking indicators, such as surveys of business conditions, were consistent with moderate gains in business equipment spending in the near term. Nominal business expenditures for nonresidential construction also increased in July. Recent book-value data for inventories, along with readings on inventories from national and regional manufacturing surveys, did not point to significant inventory imbalances in most industries; in the energy sector, inventories were drawn down significantly early in the year and, despite substantial stockbuilding since then, remained low.

Total real government purchases seemed to be roughly flat in the third quarter. Federal government purchases probably declined a little, as defense spending was lower in July and August than in the second quarter. State and local government purchases appeared to be rising slowly as the payrolls of these governments expanded a bit further in July and August and their nominal construction expenditures increased in July.

The U.S. international trade deficit narrowed in both June and July. Exports were little changed in June, but they expanded robustly in July, with particular strength in industrial supplies and automotive products. Imports fell in June but then partly recovered in July, driven by swings in imports of oil and automotive products.

Total U.S. consumer price inflation, as measured by the PCE price index, was about 1-1/2 percent over the 12 months ending in July. Over the 12 months ending in August, the consumer price index (CPI) rose about 1-3/4 percent. Consumer energy prices declined in both July and August, while consumer food prices rose. Core price inflation (which excludes food and energy prices) was essentially the same as total inflation for the PCE price measure and for the CPI over their most recent 12-month periods. Near-term inflation expectations from the Michigan survey moved down a bit in August and early September, while longer-term inflation expectations in the survey were little changed.

Measures of labor compensation increased a little faster than consumer prices. Compensation per hour in the business sector rose 2-3/4 percent over the year ending in the second quarter; with modest gains in labor productivity, unit labor costs advanced more slowly than compensation per hour. Over the same year-long period, the employment cost index rose only about 2 percent, and average hourly earnings increased at a similar rate over the 12 months ending in August.

Foreign economies continued to expand in the second quarter, but with significant differences across countries. Economic growth rebounded strongly from a weak first-quarter pace in Canada, China, and Mexico, supported by improvement in exports. In contrast, the Japanese economy contracted sharply following the consumption tax increase in April, economic activity stagnated in the euro area, and the Brazilian economy fell into recession. In the third quarter, household spending appeared to be normalizing in Japan, and production continued to rise in Mexico. However, indicators of economic activity in the euro area remained weak, and Chinese economic data for July and August suggested some slowing in the third quarter. With inflation very low in the euro area, the European Central Bank reduced its policy interest rates at its September 4 meeting and announced plans to purchase private assets.

Staff Review of the Financial Situation
Data releases on domestic economic activity were reportedly interpreted by financial market participants as somewhat better than expected, on balance, notwithstanding the disappointing employment report for August. Federal Reserve communications, particularly the July FOMC minutes and the Chair's speech at the Jackson Hole economic policy symposium, were viewed as signaling slightly less policy accommodation than anticipated. Reflecting these and other developments, yields on nominal Treasury securities rose somewhat and equity prices edged up over the intermeeting period. On net, the conflicts in the Middle East and Ukraine and other geopolitical tensions had limited effects on domestic financial markets.

The federal funds rate path implied by financial market quotes was essentially unchanged over the intermeeting period. But the results from the Desk's September Survey of Primary Dealers indicated that the distribution of the likely date of liftoff across dealers shifted to somewhat earlier dates, and showed the second quarter of 2015 as the most likely date for liftoff. However, the dealers' expected levels of various employment and inflation indicators at the time of liftoff did not change materially from the previous survey.

The yield on 10-year nominal Treasury securities moved up about 15 basis points, on net, since the FOMC met in July, likely boosted in part by Federal Reserve communications. Measures of inflation compensation based on Treasury Inflation-Protected Securities edged down, reportedly reflecting the lower-than-expected CPI data in July and recent declines in oil prices.

Broad measures of domestic equity prices were up modestly over the intermeeting period, with some reports suggesting that investors were interpreting incoming economic data as implying that the economic recovery was strengthening.

Yields on corporate bonds and agency MBS rose about in line with those on comparable-maturity Treasury securities. High-yield bond mutual funds experienced sharp outflows early in the intermeeting period, and spreads on such bonds widened noticeably; however, these spreads returned to their initial levels over subsequent weeks, and high-yield bond funds attracted modest inflows. Measures of liquidity in the corporate bond market remained stable in the face of these substantial flows.

Conditions in short-term dollar funding markets were little changed. The Federal Reserve continued its testing of ON RRP operations over the intermeeting period. Take-up in ON RRP operations increased a little, on average, over the period relative to the previous intermeeting period.

Credit conditions for domestic businesses remained favorable. Corporate bond issuance slowed in July and August, reflecting a fairly typical summer lull as well as the elevated volatility in the high-yield bond market early in the intermeeting period, but issuance rebounded strongly in the first week of September. Commercial paper outstanding and commercial and industrial loans at banks expanded briskly. Credit conditions in the commercial real estate (CRE) sector continued to ease, and growth in CRE loans at banks stayed solid. The issuance of commercial mortgage-backed securities remained robust in July and August.

Issuance of institutional leveraged loans continued apace in July and August, traditionally a slow period in this market. The issuance of "new money" loans, which are typically earmarked for corporate leveraged-buyouts and mergers and acquisitions, was strong, and the pipeline of such loans was reported to be quite large heading into the fall. The issuance of collateralized loan obligations was still a major source of demand for leveraged loans.

Financing conditions for households remained mixed. Auto loans were widely available; standards and terms for credit card loans eased somewhat, though they were still tight; and access to residential mortgages continued to be limited for all but those with excellent credit histories.

Responding in part to disappointing economic data abroad, the U.S. dollar appreciated against most currencies over the intermeeting period, including large appreciations against the euro, the yen, and the pound sterling. Greater monetary accommodation in the euro area and expectations of a lower policy rate in the near term added to the downward pressure on the euro while uncertainty about the outcome of the forthcoming referendum on Scottish independence weighed on the value of the pound. In addition, near-term policy rate expectations moved down in the United Kingdom, reacting to both the release of the August Inflation Report and uncertainty induced by the referendum. Sovereign yields in the European economies generally declined, and yield spreads of sovereign bonds from the euro-area periphery over German bunds narrowed considerably. Most foreign equity indexes ended the period modestly higher.

Staff Economic Outlook
In the economic forecast prepared by the staff for the September FOMC meeting, the projection for growth in real gross domestic product (GDP) in the second half of this year was revised down slightly from the one prepared for the previous meeting, primarily because of a somewhat weaker near-term outlook for consumer spending. The staff's medium-term forecast for real GDP was also revised down a little, reflecting a higher projected path for the foreign exchange value of the dollar along with slightly smaller projected gains for home prices. The staff still anticipated that the pace of real GDP growth in 2015 and 2016 would exceed the growth rate of potential output, supported by continued increases in consumer and business confidence, the further easing of the restraint on spending from changes in fiscal policy, additional improvements in credit availability, and a pickup in foreign economic growth. In 2017, real GDP growth was projected to begin slowing toward, but to remain above, the rate of potential output growth. The expansion in economic activity over the projection period was anticipated to steadily reduce resource slack, and the unemployment rate was expected to decline gradually and temporarily move slightly below the staff's estimate of its longer-run natural rate toward the end of the period.

The staff's near-term forecast for inflation was a little lower than the projection prepared for the previous FOMC meeting, reflecting recent readings on core consumer price inflation that were lower than anticipated and declines in oil prices that were faster than expected, but the forecast for inflation over the medium term was little changed. The staff continued to project inflation to be lower in the second half of this year than in the first half and to remain below the Committee's longer-run objective of 2 percent over the next few years. With longer-term inflation expectations assumed to remain stable, resource slack projected to diminish slowly, and changes in commodity and import prices expected to be subdued, inflation was projected to rise gradually and to reach the Committee's objective in the longer run.

Overall, the staff's economic projection for the September meeting was quite similar to the forecast presented at the June meeting, when the FOMC last prepared a Summary of Economic Projections (SEP). The staff's September projection showed a slightly higher path for the unemployment rate, a bit lower real GDP growth, and essentially no change to inflation compared with its June forecast.

The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average over the past 20 years. The risks to the forecast for real GDP growth were still seen as tilted a little to the downside, as neither monetary policy nor fiscal policy was viewed as well positioned to help the economy withstand adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate and for inflation as roughly balanced.

Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and the Federal Reserve Bank presidents submitted their projections of real output growth, the unemployment rate, inflation, and the federal funds rate for each year from 2014 through 2017 and over the longer run, conditional on each participant's assessment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the value to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the SEP, which is attached as an addendum to these minutes.

In their discussion of the economic situation and the outlook, meeting participants viewed the information received over the intermeeting period as suggesting that economic activity was expanding at a moderate rate. On balance, labor market conditions improved somewhat further; however, the unemployment rate was little changed, and most participants judged that there remained significant underutilization of labor resources. Participants generally expected that, over the medium term, real economic activity would increase at a pace sufficient to lead to a further gradual decline in the unemployment rate toward levels consistent with the Committee's objective of maximum employment. Inflation was running below the Committee's longer-run objective, but longer-term inflation expectations were stable. Participants anticipated that inflation would move toward the Committee's 2 percent goal in coming years, with several expressing concern that inflation might persist below the Committee's objective for quite some time. Most viewed the risks to the outlook for economic activity and the labor market as broadly balanced. However, a number of participants noted that economic growth over the medium term might be slower than they expected if foreign economic growth came in weaker than anticipated, structural productivity continued to increase only slowly, or the recovery in residential construction continued to lag.

Household spending appeared to be rising moderately, with several participants noting that the recent positive reports on retail sales, motor vehicle purchases, and health-care spending had reduced their concern about weakness in the underlying pace of household spending. Among the favorable factors attending the outlook for consumer spending, participants cited continued gains in household wealth, improved household balance sheets, low delinquency rates, a high saving rate, or rising confidence in employment and income prospects. However, other participants said they heard mixed reports from business contacts regarding consumer spending or were uncertain about the prospects for stronger gains in real income necessary to sustain moderate growth in household spending.

The recovery in housing activity remained slow in all but a few areas of the country despite relatively low mortgage rates, rising house prices, and improvements in household wealth. Contacts in a couple of Districts reported that new construction was being held back by shortages of materials, of lots available for development, and of skilled workers or by the overhang of vacant homes not on the market. Households with relatively low credit scores continued to have difficulty obtaining mortgage loans. It was noted that this difficulty could be a factor restraining the demand for housing, particularly among younger households who have high levels of student loan debt or weak job prospects. A few participants pointed out the relative strength in construction of and demand for multifamily units, which possibly was due to a shift in demand among younger homebuyers away from single-family homes.

Information from business contacts in most parts of the country indicated improvements in business conditions, rising confidence about the economic outlook, and increasing willingness to undertake new investment projects. According to national and regional surveys, manufacturing activity was strong, and several participants had received reports of hiring and increased capital spending in that sector. Among the other industries cited as relatively strong in recent months were transportation, energy, and services. Several participants noted positive signs of further increases in investment spending going forward, including elevated levels of new orders and shipments of capital goods, strong interest in the technology sector, and the need to replace aging capital. A couple of participants added that nonresidential construction activity was rising in their Districts.

The improvement in business conditions was reflected in reports of increased demand for loans at banks in several Districts. Demand rose for loans to both households and businesses, and a couple of participants indicated that borrowers were expanding their use of existing credit lines as well as obtaining new commitments. Bankers in one District stated that, while they had eased the terms and conditions on loans in response to competition from other lenders, they had not taken on riskier loans. Some financial developments that could undermine financial stability over time were noted, including a deterioration in leveraged lending standards, stretched stock market valuations, and compressed risk spreads. However, one participant suggested that the leveraged loan market seemed to be moving into better balance, and that market participants appeared to be taking appropriate account of the changes in interest rates that might be associated with the eventual normalization of the stance of monetary policy. Moreover, a couple of participants, while stressing the importance of remaining vigilant about potential risks to financial stability, observed that conditions in financial markets at present did not suggest the types of financial stability considerations that would impede the achievement of the Committee's macroeconomic objectives.

Some participants noted that expectations for the path of the federal funds rate implied by market quotes appeared to remain below most of the projections of the federal funds rate provided by Committee participants in the SEP, which represent each individual participant's assessment of the appropriate path for the federal funds rate consistent with his or her economic outlook. However, it was pointed out that measures of financial market participants' expectations incorporate their judgments regarding not only the most likely outcomes, but also the possible downside tail risks that might be associated with especially low paths for the federal funds rate. For example, respondents to the recent Survey of Primary Dealers placed considerable odds on the federal funds rate returning to the zero lower bound during the two years following the initial increase in that rate. The probability that investors attach to such low interest rate scenarios could pull the expected path of the federal funds rate computed from market quotes below most Committee participants' assessments of appropriate policy as reported in the SEP.

The restraint on economic activity from fiscal policy was seen as diminishing, and a couple of participants pointed out that, over the second half of the year, the remaining drag was likely to be small. Nonetheless, the cutbacks in both defense and nondefense federal outlays, as well as state governments' budget restraint, continued to weigh on jobs and income in some parts of the country. Fiscal policy overall was anticipated to be a neutral factor for economic growth over the next several years.

During participants' discussion of prospects for economic activity abroad, they commented on a number of uncertainties and risks attending the outlook. Over the intermeeting period, the foreign exchange value of the dollar had appreciated, particularly against the euro, the yen, and the pound sterling. Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector. Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk. At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC's 2 percent goal.

Labor market conditions continued to improve over the intermeeting period. Although the unemployment rate was little changed, participants variously cited positive readings from other indicators, including a decline in longer-term unemployment, the low level of new claims for unemployment insurance, the rise in job openings, and survey reports of increased hiring plans and job availability. While the most recent estimate of nonfarm payroll employment showed a smaller monthly gain than earlier in the year, it followed six months in which increases had averaged more than 200,000. Some participants were reluctant to place much weight on one monthly report or noted that the first estimate for August has frequently been revised up in recent years. Participants generally agreed that the accumulated progress in labor market conditions since the Committee's current asset purchase program began in September 2012 had been substantial and expected that progress would be sustained. Nonetheless, they continued to express differing views on the extent of remaining slack in labor markets. Most agreed that underutilization of labor resources remained significant; these participants noted variously that the level of nonfarm payroll jobs had only recently returned to its pre-recession level, that the number of individuals working part time for economic reasons was still elevated relative to the level of unemployment, and that the labor force participation rate was still below assessments of its structural trend. In this regard, a couple of participants pointed out that the stability of the participation rate, on balance, over the past year suggested that some of the cyclical shortfall had diminished. Most agreed that the Committee's assessment of labor market slack should be grounded in its review of a range of labor market indicators, although a few saw the gap between the unemployment rate and their estimate of its longer-run normal level as a reliable indicator of slack.

Most measures of labor compensation showed no broad-based increase in wage inflation. However, businesses in several Districts continued to report upward pressure on wages in specific industries and occupations associated with labor shortages or difficult-to-fill jobs, while a couple of participants noted a more general rise in current or planned wage increases in their regions. Several participants commented that the relatively subdued rise in nominal labor compensation was still below longer-run trend rates of productivity growth and inflation and was a signal of slack remaining in the labor market. However, a couple of others suggested some caution in reading subdued wage inflation as an indicator of labor market underutilization. They pointed out that if nominal wages did not adjust downward when unemployment was high, pent-up wage deflation could help explain the modest increases in wages so far during the recovery, and wages could rise more rapidly going forward as the unemployment rate continues to decline.

Inflation had been running below the Committee's longer-run objective, and the readings on consumer prices over the intermeeting period were somewhat softer than during the preceding four months, in part because of declining energy prices. Most participants anticipated that inflation would move gradually back toward its objective over the medium term. However, participants differed somewhat in their assessments of how quickly inflation would move up. Some cited the stability of longer-run inflation expectations at a level consistent with the Committee's objective as an important factor in their forecasts that inflation would reach 2 percent in coming years. Participants' views on the responsiveness of inflation to the level and change in resource utilization varied, with a few seeing labor markets as sufficiently tight that wages and prices would soon begin to move up noticeably but with some others indicating that inflation was unlikely to approach 2 percent until the unemployment rate falls below its longer-run normal level. While most viewed the risk that inflation would run persistently below 2 percent as having diminished somewhat since earlier in the year, a couple noted the possibility that longer-term inflation expectations might be slightly lower than the Committee's 2 percent objective or that domestic inflation might be held down by persistent disinflation among U.S. trading partners and further appreciation of the dollar.

In their discussion of the appropriate path for monetary policy over the medium term, meeting participants agreed that the timing of the first increase in the federal funds rate and the appropriate path of the policy rate thereafter would depend on incoming economic data and their implications for the outlook. That said, several participants thought that the current forward guidance regarding the federal funds rate suggested a longer period before liftoff, and perhaps also a more gradual increase in the federal funds rate thereafter, than they believed was likely to be appropriate given economic and financial conditions. In addition, the concern was raised that the reference to "considerable time" in the current forward guidance could be misunderstood as a commitment rather than as data dependent. However, it was noted that the current formulation of the Committee's forward guidance clearly indicated that the Committee's policy decisions were conditional on its ongoing assessment of realized and expected progress toward its objectives of maximum employment and 2 percent inflation, and that its assessment reflected its review of a broad array of economic indicators. It was emphasized that the current forward guidance for the federal funds rate was data dependent and did not indicate that the first increase in the target range for the federal funds rate would occur mechanically after some fixed calendar interval following the completion of the current asset purchase program. If employment and inflation converged more rapidly toward the Committee's goals than currently expected, the date of liftoff could be earlier, and subsequent increases in the federal funds rate target more rapid, than participants currently anticipated. Conversely, if employment and inflation returned toward the Committee's objectives more slowly than currently anticipated, the date of liftoff for the federal funds rate could be later, and future federal funds rate target increases could be more gradual. In addition, some participants saw the current forward guidance as appropriate in light of risk-management considerations, which suggested that it would be prudent to err on the side of patience while awaiting further evidence of sustained progress toward the Committee's goals. In their view, the costs of downside shocks to the economy would be larger than those of upside shocks because, in current circumstances, it would be less problematic to remove accommodation quickly, if doing so becomes necessary, than to add accommodation. A number of participants also noted that changes to the forward guidance might be misinterpreted as a signal of a fundamental shift in the stance of policy that could result in an unintended tightening of financial conditions.

Participants also discussed how the forward-guidance language might evolve once the Committee decides that the current formulation no longer appropriately conveys its intentions about the future stance of policy. Most participants indicated a preference for clarifying the dependence of the current forward guidance on economic data and the Committee's assessment of progress toward its objectives of maximum employment and 2 percent inflation. A clarification along these lines was seen as likely to improve the public's understanding of the Committee's reaction function while allowing the Committee to retain flexibility to respond appropriately to changes in the economic outlook. One participant favored using a numerical threshold based on the inflation outlook as a form of forward guidance. A few participants, however, noted the difficulties associated with expressing forward guidance in terms of numerical thresholds for some set of economic variables. Another participant indicated a preference for reducing reliance on explicit forward guidance in the statement and conveying instead guidance regarding the future stance of monetary policy through other mechanisms, including the SEP. It was noted that providing explicit forward guidance regarding the future path of the federal funds rate might become less important once a highly accommodative stance of policy is no longer appropriate and the process of policy normalization is well under way. It was generally agreed that when changes to the forward guidance become appropriate, they will likely present communication challenges, and that caution will be needed to avoid sending unintended signals about the Committee's policy outlook.

Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in July indicated that economic activity was expanding at a moderate pace. Household spending appeared to be rising moderately, and business fixed investment was advancing, while the recovery in the housing sector remained slow. Fiscal policy was restraining economic growth, although the extent of restraint was diminishing and would soon be quite small. Inflation was running below the Committee's longer-run objective, but longer-term inflation expectations were stable. The Committee expected that, with appropriate policy accommodation, economic activity would expand at a moderate pace, with labor market indicators and inflation moving toward levels that the Committee judges consistent with its dual mandate.

With incoming information continuing to broadly support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward the Committee's 2 percent objective, members agreed that a further measured reduction in the pace of asset purchases was appropriate at this meeting. Accordingly, the Committee agreed that, beginning in October, it would add to its holdings of agency MBS at a pace of $5 billion per month rather than $10 billion per month, and it would add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee judged that, if incoming information broadly supported its expectations that labor market indicator and inflation would continue to move toward mandate-consistent levels, it would end its current program of asset purchases at its October meeting.

Members discussed their assessments of progress toward the Committee's objectives of maximum employment and 2 percent inflation and considered possible enhancements to the statement that would more clearly communicate the Committee's view on such progress. Regarding the labor market, many members indicated that, although labor market conditions had generally continued to improve, there was still significant slack in labor markets. A few members, however, expressed reservations about continuing to characterize the extent of underutilization of labor resources as significant. In the end, members agreed to indicate that labor market conditions had improved somewhat further, but that the unemployment rate was little changed and a range of labor market indicators continued to suggest that there remained significant underutilization of labor resources. It was noted, however, that the characterization of labor market underutilization might have to be changed if progress in the labor market continued. Regarding inflation, members agreed that inflation had moved closer to the Committee's 2 percent objective during the first half of the year but, more recently, had fallen back somewhat. As a consequence, they updated the language in the statement to indicate that inflation had been running below the Committee's longer-run objective. However, with stable longer-term inflation expectations, the Committee continued to judge that the likelihood of inflation running persistently below 2 percent had diminished somewhat since early in the year.

After the discussion, all members but two voted to maintain the Committee's target range for the federal funds rate and to reiterate its forward guidance about the federal funds rate. The guidance continued to state that the Committee's decisions about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. The Committee again anticipated that it likely would be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continued to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored. The forward guidance also reiterated the Committee's expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Two members, however, dissented because, in their view, the statement language did not accurately reflect the progress made to date toward the Committee's goals of maximum employment and inflation of 2 percent, and they believed that ongoing progress will likely warrant an earlier increase in the federal funds rate than suggested by the forward guidance in the Committee's postmeeting statement.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive:

"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in October, the Desk is directed to purchase longer-term Treasury securities at a pace of about $10 billion per month and to purchase agency mortgage-backed securities at a pace of about $5 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."

The vote encompassed approval of the statement below to be released at 2:00 p.m.:

"Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Stanley Fischer, Narayana Kocherlakota, Loretta J. Mester, Jerome H. Powell, and Daniel K. Tarullo.

Voting against this action: Richard W. Fisher and Charles I. Plosser.

President Fisher dissented because he believed that the continued strengthening of the real economy, the improved outlook for labor utilization and for general price stability, and continued signs of financial market excess will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance.

Mr. Plosser dissented because he objected to the statement's guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends." In his view, the reference to calendar time should be replaced with language that indicates how monetary policy will respond to incoming data. Moreover, he judged that the statement did not acknowledge the substantial progress that had been made toward the Committee's economic goals and thus risks unnecessary and disruptive volatility in financial markets, and perhaps in the economy, if the Committee reduces accommodation sooner or more quickly than financial markets anticipate.

It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, October 28-29, 2014. The meeting adjourned at 10:35 a.m. on September 17, 2014.

Notation Vote
By notation vote completed on August 19, 2014, the Committee unanimously approved the minutes of the Committee meeting held on July 29-30, 2014.

_____________________________

William B. English
Secretary


Fed Officials Saw Global Slowdown Among Risks to U.S. Outlook Oct 8, 2014 02:01PM

(Updated - October 8, 2014 2:01 PM EDT)

Fed officials saw global slowdown among risks to U.S. outlook.

UPDPATE - More from the FOMC minutes:

A meeting of the Federal Open Market Committee was held in the offices of the Board of Governors of the Federal Reserve System in Washington, D.C., on Tuesday, September 16, 2014, at 11:00 a.m. and continued on Wednesday, September 17, 2014, at 9:00 a.m.

PRESENT:

Janet L. Yellen, Chair
William C. Dudley, Vice Chairman
Lael Brainard
Stanley Fischer
Richard W. Fisher
Narayana Kocherlakota
Loretta J. Mester
Charles I. Plosser
Jerome H. Powell
Daniel K. Tarullo

Christine Cumming, Charles L. Evans, Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Alternate Members of the Federal Open Market Committee

James Bullard, Esther L. George, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively

William B. English, Secretary and Economist
Matthew M. Luecke, Deputy Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist

James A. Clouse, Evan F. Koenig, Thomas Laubach, Michael P. Leahy, Mark E. Schweitzer, and William Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

Lorie K. Logan, Deputy Manager, System Open Market Account

Robert deV. Frierson,1 Secretary of the Board, Office of the Secretary, Board of Governors

Michael S. Gibson,2 Director, Division of Banking Supervision and Regulation, Board of Governors

Matthew J. Eichner,1 Deputy Director, Division of Research and Statistics, Board of Governors; Stephen A. Meyer and William R. Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors; Mark E. Van Der Weide,3 Deputy Director, Division of Banking Supervision and Regulation, Board of Governors

Andreas Lehnert, Deputy Director, Office of Financial Stability Policy and Research, Board of Governors

Andrew Figura, David Reifschneider, and Stacey Tevlin, Special Advisers to the Board, Office of Board Members, Board of Governors

Trevor A. Reeve, Special Adviser to the Chair, Office of Board Members, Board of Governors

Linda Robertson, Assistant to the Board, Office of Board Members, Board of Governors

Christopher J. Erceg, Senior Associate Director, Division of International Finance, Board of Governors

Michael T. Kiley4 and Jeremy B. Rudd4,Senior Advisers, Division of Research and Statistics, Board of Governors; Joyce K. Zickler, Senior Adviser, Division of Monetary Affairs, Board of Governors

Eric M. Engen and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors; Fabio M. Natalucci, Associate Director, Division of Monetary Affairs, Board of Governors

Marnie Gillis DeBoer, Deputy Associate Director, Division of Monetary Affairs, Board of Governors; Joshua Gallin, Deputy Associate Director, Division of Research and Statistics, Board of Governors

Edward Nelson, Assistant Director, Division of Monetary Affairs, Board of Governors

Patrick E. McCabe,1 Adviser, Division of Research and Statistics, Board of Governors

Penelope A. Beattie,1 Assistant to the Secretary, Office of the Secretary, Board of Governors

David H. Small, Project Manager, Division of Monetary Affairs, Board of Governors

Katie Ross,1 Manager, Office of the Secretary, Board of Governors

Valerie Hinojosa, Records Project Manager, Division of Monetary Affairs, Board of Governors

Marie Gooding, First Vice President, Federal Reserve Bank of Atlanta

David Altig, Alberto G. Musalem, and Daniel G. Sullivan, Executive Vice Presidents, Federal Reserve Banks of Atlanta, New York, and Chicago, respectively

Troy Davig, Michael Dotsey, Geoffrey Tootell, Christopher J. Waller, and John A. Weinberg, Senior Vice Presidents, Federal Reserve Banks of Kansas City, Philadelphia, Boston, St. Louis, and Richmond, respectively

Sylvain Leduc, Jonathan P. McCarthy, and Douglas Tillett, Vice Presidents, Federal Reserve Banks of San Francisco, New York, and Chicago, respectively

Kei-Mu Yi, Special Policy Advisor to the President, Federal Reserve Bank of Minneapolis

Developments in Financial Markets and the Federal Reserve's Balance Sheet
In a joint session of the Federal Open Market Committee (FOMC) and the Board of Governors of the Federal Reserve System, the manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets and reviewed the effects of recent foreign central bank policy actions on yields on the international portion of the SOMA portfolio. The deputy manager reported on the System open market operations conducted during the period since the Committee met on July 29-30, 2014, summarized plans for additional test operations of the Term Deposit Facility, and described the results from the fixed-rate overnight reverse repurchase agreement (ON RRP) operational exercise.

The deputy manager also outlined a proposal for changes to the ongoing ON RRP exercise to test possible design features that could allow an ON RRP facility to serve as an effective supplementary tool during policy normalization while also mitigating the potential for unintended effects in financial markets. Participants discussed the proposed changes in the ON RRP exercise, including raising the counterparty-specific limit from $10 billion to $30 billion, limiting the overall size of each operation to $300 billion, and introducing an auction process that would be used to determine the interest rate on such operations and allocate take-up if the sum of bids exceeded the overall limit. Testing these design features was generally seen as furthering the Committee's understanding of how an ON RRP facility might be structured to best balance its objectives of supporting monetary control and of limiting the Federal Reserve's role in financial intermediation as well as reducing potential financial stability risks the facility might pose during periods of stress. Participants also discussed other tests that could be incorporated in the exercise at a later date, including a daily time-varying cap along with the overall limit on the size of ON RRP operations, small variations in the offered rate on ON RRP operations, and moderate increases and decreases in the overall size limit. A number of participants expressed concern that these tests could be misunderstood as providing a signal of the Committee's intentions regarding the parameters of the ON RRP program that will be implemented when normalization begins; they wanted to emphasize that the tests are intended to provide additional information to guide the Committee's decisions. Participants agreed to consider potential additional revisions to the ON RRP exercise at future FOMC meetings. Following the discussion, the Committee unanimously approved the following resolution:

"The Federal Open Market Committee (FOMC) authorizes the Federal Reserve Bank of New York to conduct a series of overnight reverse repurchase operations involving U.S. government securities for the purpose of further assessing the appropriate structure of such operations in supporting the implementation of monetary policy during normalization. The reverse repurchase operations authorized by this resolution shall be (i) conducted at an offering rate that may vary from zero to five basis points, (ii) for an overnight term, or such longer term as is warranted to accommodate weekend, holiday, and similar trading conventions, (iii) subject to a per-counterparty limit of up to $30 billion per day, (iv) subject to an overall size limit of up to $300 billion per day, (v) awarded to all submitters (A) at the specified offering rate if the sum of the bids received is less than or equal to the overall size limit, or (B) at the stopout rate, determined by evaluating bids in ascending order by submitted rate up to the point at which the total quantity of bids equals the overall size limit, with all bids below this rate awarded in full at the stopout rate and all bids at the stopout rate awarded on a pro rata basis, if the sum of the counterparty offers received is greater than the overall size limit, and (vi) offered beginning with the operation conducted on September 22, 2014, with the resolution adopted at the January 28-29, 2014, FOMC meeting remaining in place until the conclusion of the operation conducted on September 19, 2014. The Chair must approve any change in the offering rate within the range specified in (i) and any changes to the per-counterparty and overall size limits subject to the limits specified in (iii) and (iv). The System Open Market Account manager will notify the FOMC in advance about any changes to the offering rate, per-counterparty limit, or overall size limit applied to operations. These operations shall be authorized through January 30, 2015."

By unanimous vote, the Committee ratified the Open Market Desk's domestic transactions over the intermeeting period. There were no intervention operations in foreign currencies for the System's account over the intermeeting period.

Monetary Policy Normalization
Meeting participants considered publication of a summary statement of their monetary policy normalization principles and plans based on the discussions at recent Committee meetings. Participants agreed that it was appropriate at this time to provide additional information regarding their approach to normalization. The proposed statement was seen as a concise summary of participants' views that would help the public understand the steps that the Committee plans to take when the time comes to begin the normalization process and that would convey the Committee's confidence in its plans. However, it was emphasized that the Committee would need to be flexible and pragmatic during normalization, adjusting the details of its approach, if necessary, in light of changing conditions. Regarding the specific points in the proposed statement, a couple of participants expressed their preference that the principles make greater allowance for sales of agency mortgage-backed securities (MBS) over the next few years in order to normalize the size and composition of the Federal Reserve's balance sheet more quickly and to limit distortions in the allocation of credit that they believed were associated with the Federal Reserve's holdings of agency MBS. In addition, a few participants noted that they would have preferred that the principles point to an earlier end to the reinvestment of repayments of principal on securities held in the SOMA portfolio. At the end of the discussion, all but one participant could support the publication of the following statement after the meeting:

Policy Normalization Principles and Plans
During its recent meetings, the Federal Open Market Committee (FOMC) discussed ways to normalize the stance of monetary policy and the Federal Reserve's securities holdings. The discussions were part of prudent planning and do not imply that normalization will necessarily begin soon. The Committee continues to judge that many of the normalization principles that it adopted in June 2011 remain applicable. However, in light of the changes in the System Open Market Account (SOMA) portfolio since 2011 and enhancements in the tools the Committee will have available to implement policy during normalization, the Committee has concluded that some aspects of the eventual normalization process will likely differ from those specified earlier. The Committee also has agreed that it is appropriate at this time to provide additional information regarding its normalization plans. All FOMC participants but one agreed on the following key elements of the approach they intend to implement when it becomes appropriate to begin normalizing the stance of monetary policy:
  • The Committee will determine the timing and pace of policy normalization--meaning steps to raise the federal funds rate and other short-term interest rates to more normal levels and to reduce the Federal Reserve's securities holdings--so as to promote its statutory mandate of maximum employment and price stability.
    • When economic conditions and the economic outlook warrant a less accommodative monetary policy, the Committee will raise its target range for the federal funds rate.
    • During normalization, the Federal Reserve intends to move the federal funds rate into the target range set by the FOMC primarily by adjusting the interest rate it pays on excess reserve balances.
    • During normalization, the Federal Reserve intends to use an overnight reverse repurchase agreement facility and other supplementary tools as needed to help control the federal funds rate. The Committee will use an overnight reverse repurchase agreement facility only to the extent necessary and will phase it out when it is no longer needed to help control the federal funds rate.
  • The Committee intends to reduce the Federal Reserve's securities holdings in a gradual and predictable manner primarily by ceasing to reinvest repayments of principal on securities held in the SOMA.
    • The Committee expects to cease or commence phasing out reinvestments after it begins increasing the target range for the federal funds rate; the timing will depend on how economic and financial conditions and the economic outlook evolve.
    • The Committee currently does not anticipate selling agency mortgage-backed securities as part of the normalization process, although limited sales might be warranted in the longer run to reduce or eliminate residual holdings. The timing and pace of any sales would be communicated to the public in advance.
  • The Committee intends that the Federal Reserve will, in the longer run, hold no more securities than necessary to implement monetary policy efficiently and effectively, and that it will hold primarily Treasury securities, thereby minimizing the effect of Federal Reserve holdings on the allocation of credit across sectors of the economy.
  • The Committee is prepared to adjust the details of its approach to policy normalization in light of economic and financial developments.

The Board meeting concluded at the end of the discussion of policy normalization principles and plans.

Staff Review of the Economic Situation
The information reviewed for the September 16-17 meeting suggested that economic activity was expanding at a moderate pace in the third quarter. Labor market conditions improved a little further, although the unemployment rate was essentially unchanged over the intermeeting period. Consumer price inflation was running below the FOMC's longer-run objective of 2 percent, but measures of longer-run inflation expectations remained stable.

Total nonfarm payroll employment increased in July and August but at a slower pace than in the first half of the year. The unemployment rate was 6.1 percent in August, the same as in June, and the labor force participation rate and the employment-to-population ratio also were unchanged since that time. Both the share of workers employed part time for economic reasons and the rate of long-duration unemployment declined a little over the past two months. Other recent indicators generally pointed to ongoing improvement in labor market conditions: Although some measures of household expectations of the labor market situation deteriorated somewhat, the rates of job openings and of gross private-sector hiring moved up, initial claims for unemployment insurance were essentially flat at a relatively low level, and some readings on firms' hiring plans improved.

On balance, industrial production edged up over July and August, and the rate of manufacturing capacity utilization was unchanged. Automakers' schedules indicated that the pace of motor vehicle assemblies would decline slightly in the fourth quarter, but broader indicators of manufacturing production, such as the readings on new orders from the national and regional manufacturing surveys, were consistent with moderate increases in factory output in the near term.

Real personal consumption expenditures (PCE) appeared to be rising at a moderate pace in the third quarter.5 The components of nominal retail sales data used by the Bureau of Economic Analysis (BEA) to construct its estimates of PCE increased at a solid rate in July and August, and sales of light motor vehicles surged in August after edging down in July. Recent information pertaining to key factors that influence consumer spending were positive: Real disposable incomes continued to increase in July, households' net worth likely edged up as equity prices and home values rose somewhat further, and consumer sentiment as measured by the Thomson Reuters/University of Michigan Surveys of Consumers improved in August and early September.

The pace of activity in the housing sector seemed to be picking up. Starts and permits of both new single-family homes and multifamily units were higher in July than their average levels in the second quarter. Sales of existing homes increased further in July, although new home sales declined.

Real private expenditures for business equipment and intellectual property products appeared to rise further going into the third quarter. Nominal shipments of nondefense capital goods excluding aircraft moved up in July. Moreover, new orders for these capital goods continued to be above the level of shipments, pointing to increases in shipments in subsequent months. In addition, other forward-looking indicators, such as surveys of business conditions, were consistent with moderate gains in business equipment spending in the near term. Nominal business expenditures for nonresidential construction also increased in July. Recent book-value data for inventories, along with readings on inventories from national and regional manufacturing surveys, did not point to significant inventory imbalances in most industries; in the energy sector, inventories were drawn down significantly early in the year and, despite substantial stockbuilding since then, remained low.

Total real government purchases seemed to be roughly flat in the third quarter. Federal government purchases probably declined a little, as defense spending was lower in July and August than in the second quarter. State and local government purchases appeared to be rising slowly as the payrolls of these governments expanded a bit further in July and August and their nominal construction expenditures increased in July.

The U.S. international trade deficit narrowed in both June and July. Exports were little changed in June, but they expanded robustly in July, with particular strength in industrial supplies and automotive products. Imports fell in June but then partly recovered in July, driven by swings in imports of oil and automotive products.

Total U.S. consumer price inflation, as measured by the PCE price index, was about 1-1/2 percent over the 12 months ending in July. Over the 12 months ending in August, the consumer price index (CPI) rose about 1-3/4 percent. Consumer energy prices declined in both July and August, while consumer food prices rose. Core price inflation (which excludes food and energy prices) was essentially the same as total inflation for the PCE price measure and for the CPI over their most recent 12-month periods. Near-term inflation expectations from the Michigan survey moved down a bit in August and early September, while longer-term inflation expectations in the survey were little changed.

Measures of labor compensation increased a little faster than consumer prices. Compensation per hour in the business sector rose 2-3/4 percent over the year ending in the second quarter; with modest gains in labor productivity, unit labor costs advanced more slowly than compensation per hour. Over the same year-long period, the employment cost index rose only about 2 percent, and average hourly earnings increased at a similar rate over the 12 months ending in August.

Foreign economies continued to expand in the second quarter, but with significant differences across countries. Economic growth rebounded strongly from a weak first-quarter pace in Canada, China, and Mexico, supported by improvement in exports. In contrast, the Japanese economy contracted sharply following the consumption tax increase in April, economic activity stagnated in the euro area, and the Brazilian economy fell into recession. In the third quarter, household spending appeared to be normalizing in Japan, and production continued to rise in Mexico. However, indicators of economic activity in the euro area remained weak, and Chinese economic data for July and August suggested some slowing in the third quarter. With inflation very low in the euro area, the European Central Bank reduced its policy interest rates at its September 4 meeting and announced plans to purchase private assets.

Staff Review of the Financial Situation
Data releases on domestic economic activity were reportedly interpreted by financial market participants as somewhat better than expected, on balance, notwithstanding the disappointing employment report for August. Federal Reserve communications, particularly the July FOMC minutes and the Chair's speech at the Jackson Hole economic policy symposium, were viewed as signaling slightly less policy accommodation than anticipated. Reflecting these and other developments, yields on nominal Treasury securities rose somewhat and equity prices edged up over the intermeeting period. On net, the conflicts in the Middle East and Ukraine and other geopolitical tensions had limited effects on domestic financial markets.

The federal funds rate path implied by financial market quotes was essentially unchanged over the intermeeting period. But the results from the Desk's September Survey of Primary Dealers indicated that the distribution of the likely date of liftoff across dealers shifted to somewhat earlier dates, and showed the second quarter of 2015 as the most likely date for liftoff. However, the dealers' expected levels of various employment and inflation indicators at the time of liftoff did not change materially from the previous survey.

The yield on 10-year nominal Treasury securities moved up about 15 basis points, on net, since the FOMC met in July, likely boosted in part by Federal Reserve communications. Measures of inflation compensation based on Treasury Inflation-Protected Securities edged down, reportedly reflecting the lower-than-expected CPI data in July and recent declines in oil prices.

Broad measures of domestic equity prices were up modestly over the intermeeting period, with some reports suggesting that investors were interpreting incoming economic data as implying that the economic recovery was strengthening.

Yields on corporate bonds and agency MBS rose about in line with those on comparable-maturity Treasury securities. High-yield bond mutual funds experienced sharp outflows early in the intermeeting period, and spreads on such bonds widened noticeably; however, these spreads returned to their initial levels over subsequent weeks, and high-yield bond funds attracted modest inflows. Measures of liquidity in the corporate bond market remained stable in the face of these substantial flows.

Conditions in short-term dollar funding markets were little changed. The Federal Reserve continued its testing of ON RRP operations over the intermeeting period. Take-up in ON RRP operations increased a little, on average, over the period relative to the previous intermeeting period.

Credit conditions for domestic businesses remained favorable. Corporate bond issuance slowed in July and August, reflecting a fairly typical summer lull as well as the elevated volatility in the high-yield bond market early in the intermeeting period, but issuance rebounded strongly in the first week of September. Commercial paper outstanding and commercial and industrial loans at banks expanded briskly. Credit conditions in the commercial real estate (CRE) sector continued to ease, and growth in CRE loans at banks stayed solid. The issuance of commercial mortgage-backed securities remained robust in July and August.

Issuance of institutional leveraged loans continued apace in July and August, traditionally a slow period in this market. The issuance of "new money" loans, which are typically earmarked for corporate leveraged-buyouts and mergers and acquisitions, was strong, and the pipeline of such loans was reported to be quite large heading into the fall. The issuance of collateralized loan obligations was still a major source of demand for leveraged loans.

Financing conditions for households remained mixed. Auto loans were widely available; standards and terms for credit card loans eased somewhat, though they were still tight; and access to residential mortgages continued to be limited for all but those with excellent credit histories.

Responding in part to disappointing economic data abroad, the U.S. dollar appreciated against most currencies over the intermeeting period, including large appreciations against the euro, the yen, and the pound sterling. Greater monetary accommodation in the euro area and expectations of a lower policy rate in the near term added to the downward pressure on the euro while uncertainty about the outcome of the forthcoming referendum on Scottish independence weighed on the value of the pound. In addition, near-term policy rate expectations moved down in the United Kingdom, reacting to both the release of the August Inflation Report and uncertainty induced by the referendum. Sovereign yields in the European economies generally declined, and yield spreads of sovereign bonds from the euro-area periphery over German bunds narrowed considerably. Most foreign equity indexes ended the period modestly higher.

Staff Economic Outlook
In the economic forecast prepared by the staff for the September FOMC meeting, the projection for growth in real gross domestic product (GDP) in the second half of this year was revised down slightly from the one prepared for the previous meeting, primarily because of a somewhat weaker near-term outlook for consumer spending. The staff's medium-term forecast for real GDP was also revised down a little, reflecting a higher projected path for the foreign exchange value of the dollar along with slightly smaller projected gains for home prices. The staff still anticipated that the pace of real GDP growth in 2015 and 2016 would exceed the growth rate of potential output, supported by continued increases in consumer and business confidence, the further easing of the restraint on spending from changes in fiscal policy, additional improvements in credit availability, and a pickup in foreign economic growth. In 2017, real GDP growth was projected to begin slowing toward, but to remain above, the rate of potential output growth. The expansion in economic activity over the projection period was anticipated to steadily reduce resource slack, and the unemployment rate was expected to decline gradually and temporarily move slightly below the staff's estimate of its longer-run natural rate toward the end of the period.

The staff's near-term forecast for inflation was a little lower than the projection prepared for the previous FOMC meeting, reflecting recent readings on core consumer price inflation that were lower than anticipated and declines in oil prices that were faster than expected, but the forecast for inflation over the medium term was little changed. The staff continued to project inflation to be lower in the second half of this year than in the first half and to remain below the Committee's longer-run objective of 2 percent over the next few years. With longer-term inflation expectations assumed to remain stable, resource slack projected to diminish slowly, and changes in commodity and import prices expected to be subdued, inflation was projected to rise gradually and to reach the Committee's objective in the longer run.

Overall, the staff's economic projection for the September meeting was quite similar to the forecast presented at the June meeting, when the FOMC last prepared a Summary of Economic Projections (SEP). The staff's September projection showed a slightly higher path for the unemployment rate, a bit lower real GDP growth, and essentially no change to inflation compared with its June forecast.

The staff continued to view the uncertainty around its projections for real GDP growth, the unemployment rate, and inflation as similar to the average over the past 20 years. The risks to the forecast for real GDP growth were still seen as tilted a little to the downside, as neither monetary policy nor fiscal policy was viewed as well positioned to help the economy withstand adverse shocks. At the same time, the staff viewed the risks around its outlook for the unemployment rate and for inflation as roughly balanced.

Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, members of the Board of Governors and the Federal Reserve Bank presidents submitted their projections of real output growth, the unemployment rate, inflation, and the federal funds rate for each year from 2014 through 2017 and over the longer run, conditional on each participant's assessment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the value to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. These economic projections and policy assessments are described in the SEP, which is attached as an addendum to these minutes.

In their discussion of the economic situation and the outlook, meeting participants viewed the information received over the intermeeting period as suggesting that economic activity was expanding at a moderate rate. On balance, labor market conditions improved somewhat further; however, the unemployment rate was little changed, and most participants judged that there remained significant underutilization of labor resources. Participants generally expected that, over the medium term, real economic activity would increase at a pace sufficient to lead to a further gradual decline in the unemployment rate toward levels consistent with the Committee's objective of maximum employment. Inflation was running below the Committee's longer-run objective, but longer-term inflation expectations were stable. Participants anticipated that inflation would move toward the Committee's 2 percent goal in coming years, with several expressing concern that inflation might persist below the Committee's objective for quite some time. Most viewed the risks to the outlook for economic activity and the labor market as broadly balanced. However, a number of participants noted that economic growth over the medium term might be slower than they expected if foreign economic growth came in weaker than anticipated, structural productivity continued to increase only slowly, or the recovery in residential construction continued to lag.

Household spending appeared to be rising moderately, with several participants noting that the recent positive reports on retail sales, motor vehicle purchases, and health-care spending had reduced their concern about weakness in the underlying pace of household spending. Among the favorable factors attending the outlook for consumer spending, participants cited continued gains in household wealth, improved household balance sheets, low delinquency rates, a high saving rate, or rising confidence in employment and income prospects. However, other participants said they heard mixed reports from business contacts regarding consumer spending or were uncertain about the prospects for stronger gains in real income necessary to sustain moderate growth in household spending.

The recovery in housing activity remained slow in all but a few areas of the country despite relatively low mortgage rates, rising house prices, and improvements in household wealth. Contacts in a couple of Districts reported that new construction was being held back by shortages of materials, of lots available for development, and of skilled workers or by the overhang of vacant homes not on the market. Households with relatively low credit scores continued to have difficulty obtaining mortgage loans. It was noted that this difficulty could be a factor restraining the demand for housing, particularly among younger households who have high levels of student loan debt or weak job prospects. A few participants pointed out the relative strength in construction of and demand for multifamily units, which possibly was due to a shift in demand among younger homebuyers away from single-family homes.

Information from business contacts in most parts of the country indicated improvements in business conditions, rising confidence about the economic outlook, and increasing willingness to undertake new investment projects. According to national and regional surveys, manufacturing activity was strong, and several participants had received reports of hiring and increased capital spending in that sector. Among the other industries cited as relatively strong in recent months were transportation, energy, and services. Several participants noted positive signs of further increases in investment spending going forward, including elevated levels of new orders and shipments of capital goods, strong interest in the technology sector, and the need to replace aging capital. A couple of participants added that nonresidential construction activity was rising in their Districts.

The improvement in business conditions was reflected in reports of increased demand for loans at banks in several Districts. Demand rose for loans to both households and businesses, and a couple of participants indicated that borrowers were expanding their use of existing credit lines as well as obtaining new commitments. Bankers in one District stated that, while they had eased the terms and conditions on loans in response to competition from other lenders, they had not taken on riskier loans. Some financial developments that could undermine financial stability over time were noted, including a deterioration in leveraged lending standards, stretched stock market valuations, and compressed risk spreads. However, one participant suggested that the leveraged loan market seemed to be moving into better balance, and that market participants appeared to be taking appropriate account of the changes in interest rates that might be associated with the eventual normalization of the stance of monetary policy. Moreover, a couple of participants, while stressing the importance of remaining vigilant about potential risks to financial stability, observed that conditions in financial markets at present did not suggest the types of financial stability considerations that would impede the achievement of the Committee's macroeconomic objectives.

Some participants noted that expectations for the path of the federal funds rate implied by market quotes appeared to remain below most of the projections of the federal funds rate provided by Committee participants in the SEP, which represent each individual participant's assessment of the appropriate path for the federal funds rate consistent with his or her economic outlook. However, it was pointed out that measures of financial market participants' expectations incorporate their judgments regarding not only the most likely outcomes, but also the possible downside tail risks that might be associated with especially low paths for the federal funds rate. For example, respondents to the recent Survey of Primary Dealers placed considerable odds on the federal funds rate returning to the zero lower bound during the two years following the initial increase in that rate. The probability that investors attach to such low interest rate scenarios could pull the expected path of the federal funds rate computed from market quotes below most Committee participants' assessments of appropriate policy as reported in the SEP.

The restraint on economic activity from fiscal policy was seen as diminishing, and a couple of participants pointed out that, over the second half of the year, the remaining drag was likely to be small. Nonetheless, the cutbacks in both defense and nondefense federal outlays, as well as state governments' budget restraint, continued to weigh on jobs and income in some parts of the country. Fiscal policy overall was anticipated to be a neutral factor for economic growth over the next several years.

During participants' discussion of prospects for economic activity abroad, they commented on a number of uncertainties and risks attending the outlook. Over the intermeeting period, the foreign exchange value of the dollar had appreciated, particularly against the euro, the yen, and the pound sterling. Some participants expressed concern that the persistent shortfall of economic growth and inflation in the euro area could lead to a further appreciation of the dollar and have adverse effects on the U.S. external sector. Several participants added that slower economic growth in China or Japan or unanticipated events in the Middle East or Ukraine might pose a similar risk. At the same time, a couple of participants pointed out that the appreciation of the dollar might also tend to slow the gradual increase in inflation toward the FOMC's 2 percent goal.

Labor market conditions continued to improve over the intermeeting period. Although the unemployment rate was little changed, participants variously cited positive readings from other indicators, including a decline in longer-term unemployment, the low level of new claims for unemployment insurance, the rise in job openings, and survey reports of increased hiring plans and job availability. While the most recent estimate of nonfarm payroll employment showed a smaller monthly gain than earlier in the year, it followed six months in which increases had averaged more than 200,000. Some participants were reluctant to place much weight on one monthly report or noted that the first estimate for August has frequently been revised up in recent years. Participants generally agreed that the accumulated progress in labor market conditions since the Committee's current asset purchase program began in September 2012 had been substantial and expected that progress would be sustained. Nonetheless, they continued to express differing views on the extent of remaining slack in labor markets. Most agreed that underutilization of labor resources remained significant; these participants noted variously that the level of nonfarm payroll jobs had only recently returned to its pre-recession level, that the number of individuals working part time for economic reasons was still elevated relative to the level of unemployment, and that the labor force participation rate was still below assessments of its structural trend. In this regard, a couple of participants pointed out that the stability of the participation rate, on balance, over the past year suggested that some of the cyclical shortfall had diminished. Most agreed that the Committee's assessment of labor market slack should be grounded in its review of a range of labor market indicators, although a few saw the gap between the unemployment rate and their estimate of its longer-run normal level as a reliable indicator of slack.

Most measures of labor compensation showed no broad-based increase in wage inflation. However, businesses in several Districts continued to report upward pressure on wages in specific industries and occupations associated with labor shortages or difficult-to-fill jobs, while a couple of participants noted a more general rise in current or planned wage increases in their regions. Several participants commented that the relatively subdued rise in nominal labor compensation was still below longer-run trend rates of productivity growth and inflation and was a signal of slack remaining in the labor market. However, a couple of others suggested some caution in reading subdued wage inflation as an indicator of labor market underutilization. They pointed out that if nominal wages did not adjust downward when unemployment was high, pent-up wage deflation could help explain the modest increases in wages so far during the recovery, and wages could rise more rapidly going forward as the unemployment rate continues to decline.

Inflation had been running below the Committee's longer-run objective, and the readings on consumer prices over the intermeeting period were somewhat softer than during the preceding four months, in part because of declining energy prices. Most participants anticipated that inflation would move gradually back toward its objective over the medium term. However, participants differed somewhat in their assessments of how quickly inflation would move up. Some cited the stability of longer-run inflation expectations at a level consistent with the Committee's objective as an important factor in their forecasts that inflation would reach 2 percent in coming years. Participants' views on the responsiveness of inflation to the level and change in resource utilization varied, with a few seeing labor markets as sufficiently tight that wages and prices would soon begin to move up noticeably but with some others indicating that inflation was unlikely to approach 2 percent until the unemployment rate falls below its longer-run normal level. While most viewed the risk that inflation would run persistently below 2 percent as having diminished somewhat since earlier in the year, a couple noted the possibility that longer-term inflation expectations might be slightly lower than the Committee's 2 percent objective or that domestic inflation might be held down by persistent disinflation among U.S. trading partners and further appreciation of the dollar.

In their discussion of the appropriate path for monetary policy over the medium term, meeting participants agreed that the timing of the first increase in the federal funds rate and the appropriate path of the policy rate thereafter would depend on incoming economic data and their implications for the outlook. That said, several participants thought that the current forward guidance regarding the federal funds rate suggested a longer period before liftoff, and perhaps also a more gradual increase in the federal funds rate thereafter, than they believed was likely to be appropriate given economic and financial conditions. In addition, the concern was raised that the reference to "considerable time" in the current forward guidance could be misunderstood as a commitment rather than as data dependent. However, it was noted that the current formulation of the Committee's forward guidance clearly indicated that the Committee's policy decisions were conditional on its ongoing assessment of realized and expected progress toward its objectives of maximum employment and 2 percent inflation, and that its assessment reflected its review of a broad array of economic indicators. It was emphasized that the current forward guidance for the federal funds rate was data dependent and did not indicate that the first increase in the target range for the federal funds rate would occur mechanically after some fixed calendar interval following the completion of the current asset purchase program. If employment and inflation converged more rapidly toward the Committee's goals than currently expected, the date of liftoff could be earlier, and subsequent increases in the federal funds rate target more rapid, than participants currently anticipated. Conversely, if employment and inflation returned toward the Committee's objectives more slowly than currently anticipated, the date of liftoff for the federal funds rate could be later, and future federal funds rate target increases could be more gradual. In addition, some participants saw the current forward guidance as appropriate in light of risk-management considerations, which suggested that it would be prudent to err on the side of patience while awaiting further evidence of sustained progress toward the Committee's goals. In their view, the costs of downside shocks to the economy would be larger than those of upside shocks because, in current circumstances, it would be less problematic to remove accommodation quickly, if doing so becomes necessary, than to add accommodation. A number of participants also noted that changes to the forward guidance might be misinterpreted as a signal of a fundamental shift in the stance of policy that could result in an unintended tightening of financial conditions.

Participants also discussed how the forward-guidance language might evolve once the Committee decides that the current formulation no longer appropriately conveys its intentions about the future stance of policy. Most participants indicated a preference for clarifying the dependence of the current forward guidance on economic data and the Committee's assessment of progress toward its objectives of maximum employment and 2 percent inflation. A clarification along these lines was seen as likely to improve the public's understanding of the Committee's reaction function while allowing the Committee to retain flexibility to respond appropriately to changes in the economic outlook. One participant favored using a numerical threshold based on the inflation outlook as a form of forward guidance. A few participants, however, noted the difficulties associated with expressing forward guidance in terms of numerical thresholds for some set of economic variables. Another participant indicated a preference for reducing reliance on explicit forward guidance in the statement and conveying instead guidance regarding the future stance of monetary policy through other mechanisms, including the SEP. It was noted that providing explicit forward guidance regarding the future path of the federal funds rate might become less important once a highly accommodative stance of policy is no longer appropriate and the process of policy normalization is well under way. It was generally agreed that when changes to the forward guidance become appropriate, they will likely present communication challenges, and that caution will be needed to avoid sending unintended signals about the Committee's policy outlook.

Committee Policy Action
In their discussion of monetary policy for the period ahead, members judged that information received since the FOMC met in July indicated that economic activity was expanding at a moderate pace. Household spending appeared to be rising moderately, and business fixed investment was advancing, while the recovery in the housing sector remained slow. Fiscal policy was restraining economic growth, although the extent of restraint was diminishing and would soon be quite small. Inflation was running below the Committee's longer-run objective, but longer-term inflation expectations were stable. The Committee expected that, with appropriate policy accommodation, economic activity would expand at a moderate pace, with labor market indicators and inflation moving toward levels that the Committee judges consistent with its dual mandate.

With incoming information continuing to broadly support the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward the Committee's 2 percent objective, members agreed that a further measured reduction in the pace of asset purchases was appropriate at this meeting. Accordingly, the Committee agreed that, beginning in October, it would add to its holdings of agency MBS at a pace of $5 billion per month rather than $10 billion per month, and it would add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee judged that, if incoming information broadly supported its expectations that labor market indicator and inflation would continue to move toward mandate-consistent levels, it would end its current program of asset purchases at its October meeting.

Members discussed their assessments of progress toward the Committee's objectives of maximum employment and 2 percent inflation and considered possible enhancements to the statement that would more clearly communicate the Committee's view on such progress. Regarding the labor market, many members indicated that, although labor market conditions had generally continued to improve, there was still significant slack in labor markets. A few members, however, expressed reservations about continuing to characterize the extent of underutilization of labor resources as significant. In the end, members agreed to indicate that labor market conditions had improved somewhat further, but that the unemployment rate was little changed and a range of labor market indicators continued to suggest that there remained significant underutilization of labor resources. It was noted, however, that the characterization of labor market underutilization might have to be changed if progress in the labor market continued. Regarding inflation, members agreed that inflation had moved closer to the Committee's 2 percent objective during the first half of the year but, more recently, had fallen back somewhat. As a consequence, they updated the language in the statement to indicate that inflation had been running below the Committee's longer-run objective. However, with stable longer-term inflation expectations, the Committee continued to judge that the likelihood of inflation running persistently below 2 percent had diminished somewhat since early in the year.

After the discussion, all members but two voted to maintain the Committee's target range for the federal funds rate and to reiterate its forward guidance about the federal funds rate. The guidance continued to state that the Committee's decisions about how long to maintain the current target range for the federal funds rate would depend on its assessment of actual and expected progress toward its objectives of maximum employment and 2 percent inflation. The Committee again anticipated that it likely would be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continued to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remained well anchored. The forward guidance also reiterated the Committee's expectation that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run. Two members, however, dissented because, in their view, the statement language did not accurately reflect the progress made to date toward the Committee's goals of maximum employment and inflation of 2 percent, and they believed that ongoing progress will likely warrant an earlier increase in the federal funds rate than suggested by the forward guidance in the Committee's postmeeting statement.

At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the SOMA in accordance with the following domestic policy directive:

"Consistent with its statutory mandate, the Federal Open Market Committee seeks monetary and financial conditions that will foster maximum employment and price stability. In particular, the Committee seeks conditions in reserve markets consistent with federal funds trading in a range from 0 to 1/4 percent. The Committee directs the Desk to undertake open market operations as necessary to maintain such conditions. Beginning in October, the Desk is directed to purchase longer-term Treasury securities at a pace of about $10 billion per month and to purchase agency mortgage-backed securities at a pace of about $5 billion per month. The Committee also directs the Desk to engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency mortgage-backed securities transactions. The Committee directs the Desk to maintain its policy of rolling over maturing Treasury securities into new issues and its policy of reinvesting principal payments on all agency debt and agency mortgage-backed securities in agency mortgage-backed securities. The System Open Market Account manager and the secretary will keep the Committee informed of ongoing developments regarding the System's balance sheet that could affect the attainment over time of the Committee's objectives of maximum employment and price stability."

The vote encompassed approval of the statement below to be released at 2:00 p.m.:

"Information received since the Federal Open Market Committee met in July suggests that economic activity is expanding at a moderate pace. On balance, labor market conditions improved somewhat further; however, the unemployment rate is little changed and a range of labor market indicators suggests that there remains significant underutilization of labor resources. Household spending appears to be rising moderately and business fixed investment is advancing, while the recovery in the housing sector remains slow. Fiscal policy is restraining economic growth, although the extent of restraint is diminishing. Inflation has been running below the Committee's longer-run objective. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace, with labor market indicators and inflation moving toward levels the Committee judges consistent with its dual mandate. The Committee sees the risks to the outlook for economic activity and the labor market as nearly balanced and judges that the likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year.
The Committee currently judges that there is sufficient underlying strength in the broader economy to support ongoing improvement in labor market conditions. In light of the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions since the inception of the current asset purchase program, the Committee decided to make a further measured reduction in the pace of its asset purchases. Beginning in October, the Committee will add to its holdings of agency mortgage-backed securities at a pace of $5 billion per month rather than $10 billion per month, and will add to its holdings of longer-term Treasury securities at a pace of $10 billion per month rather than $15 billion per month. The Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee's sizable and still-increasing holdings of longer-term securities should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative, which in turn should promote a stronger economic recovery and help to ensure that inflation, over time, is at the rate most consistent with the Committee's dual mandate.
The Committee will closely monitor incoming information on economic and financial developments in coming months and will continue its purchases of Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. If incoming information broadly supports the Committee's expectation of ongoing improvement in labor market conditions and inflation moving back toward its longer-run objective, the Committee will end its current program of asset purchases at its next meeting. However, asset purchases are not on a preset course, and the Committee's decisions about their pace will remain contingent on the Committee's outlook for the labor market and inflation as well as its assessment of the likely efficacy and costs of such purchases.
To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that a highly accommodative stance of monetary policy remains appropriate. In determining how long to maintain the current 0 to 1/4 percent target range for the federal funds rate, the Committee will assess progress--both realized and expected--toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. The Committee continues to anticipate, based on its assessment of these factors, that it likely will be appropriate to maintain the current target range for the federal funds rate for a considerable time after the asset purchase program ends, especially if projected inflation continues to run below the Committee's 2 percent longer-run goal, and provided that longer-term inflation expectations remain well anchored.
When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."

Voting for this action: Janet L. Yellen, William C. Dudley, Lael Brainard, Stanley Fischer, Narayana Kocherlakota, Loretta J. Mester, Jerome H. Powell, and Daniel K. Tarullo.

Voting against this action: Richard W. Fisher and Charles I. Plosser.

President Fisher dissented because he believed that the continued strengthening of the real economy, the improved outlook for labor utilization and for general price stability, and continued signs of financial market excess will likely warrant an earlier reduction in monetary accommodation than is suggested by the Committee's stated forward guidance.

Mr. Plosser dissented because he objected to the statement's guidance indicating that it likely will be appropriate to maintain the current target range for the federal funds rate for "a considerable time after the asset purchase program ends." In his view, the reference to calendar time should be replaced with language that indicates how monetary policy will respond to incoming data. Moreover, he judged that the statement did not acknowledge the substantial progress that had been made toward the Committee's economic goals and thus risks unnecessary and disruptive volatility in financial markets, and perhaps in the economy, if the Committee reduces accommodation sooner or more quickly than financial markets anticipate.

It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, October 28-29, 2014. The meeting adjourned at 10:35 a.m. on September 17, 2014.

Notation Vote
By notation vote completed on August 19, 2014, the Committee unanimously approved the minutes of the Committee meeting held on July 29-30, 2014.

_____________________________

William B. English
Secretary


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