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FOMC Summary of Economic Projections

RMR Wealth Management - Wednesday, July 10, 2013

FOMC Summary of Economic Projections

http://www.federalreserve.gov/monetarypolicy/fomcminutes20110622ep.htm

FOMC minutes

RMR Wealth Management - Wednesday, July 10, 2013

 

http://www.federalreserve.gov/monetarypolicy/fomcminutes20110622.htm

 

A joint meeting of the Federal Open Market Committee and the Board of Governors of the Federal Reserve System was held in the offices of the Board of Governors in Washington, D.C., on Tuesday, June 21, 2011, at 10:30 a.m. and continued on Wednesday, June 22, 2011, at 9:00 a.m.

PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
Elizabeth Duke
Charles L. Evans
Richard W. Fisher
Narayana Kocherlakota
Charles I. Plosser
Sarah Bloom Raskin
Daniel K. Tarullo
Janet L. Yellen

Jeffrey M. Lacker, Dennis P. Lockhart, Sandra Pianalto, and John C. Williams, Alternate Members of the Federal Open Market Committee

James Bullard, Thomas M. Hoenig, and Eric Rosengren, Presidents of the Federal Reserve Banks of St. Louis, Kansas City, and Boston, respectively

William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
David J. Stockton, Economist

James A. Clouse, Thomas A. Connors, Steven B. Kamin, Loretta J. Mester, David Reifschneider, Harvey Rosenblum, Daniel G. Sullivan, David W. Wilcox, and Kei-Mu Yi, Associate Economists

Brian Sack, Manager, System Open Market Account

Jennifer J. Johnson, Secretary of the Board, Office of the Secretary, Board of Governors

Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors

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

William Nelson, Deputy Director, Division of Monetary Affairs, Board of Governors

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

Charles S. Struckmeyer, Deputy Staff Director, Office of the Staff Director, Board of Governors

Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors; Michael Foley, Senior Associate Director, Division of Banking Supervision and Regulation, Board of Governors; Lawrence Slifman and William Wascher, Senior Associate Directors, Division of Research and Statistics, Board of Governors

Andrew T. Levin, Senior Adviser, Office of Board Members, Board of Governors

Joyce K. Zickler, Visiting Senior Adviser, Division of Monetary Affairs, Board of Governors

Daniel M. Covitz and Eric M. Engen, Associate Directors, Division of Research and Statistics, Board of Governors; Trevor A. Reeve, Associate Director, Division of International Finance, Board of Governors

Egon Zakrajsek, Deputy Associate Director, Division of Monetary Affairs, Board of Governors

Beth Anne Wilson, Assistant Director, Division of International Finance, Board of Governors

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

Brahima Coulibaly, Senior Economist, Division of International Finance, Board of Governors; Louise Sheiner, Senior Economist, Division of Research and Statistics, Board of Governors

Jean-Philippe Laforte,1 Economist, Division of Research and Statistics, Board of Governors

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

Randall A. Williams, Records Management Analyst, Division of Monetary Affairs, Board of Governors

Jeff Fuhrer, Executive Vice President, Federal Reserve Bank of Boston

David Altig, Glenn D. Rudebusch, and Mark E. Schweitzer, Senior Vice Presidents, Federal Reserve Banks of Atlanta, San Francisco, and Cleveland, respectively

Michael Dotsey,1 William Gavin, Andreas L. Hornstein, and Edward S. Knotek II, Vice Presidents, Federal Reserve Banks of Philadelphia, St. Louis, Richmond, and Kansas City, respectively

Marco Del Negro,1 Joshua L. Frost, Deborah L. Leonard, and Jonathan P. McCarthy, Assistant Vice Presidents, Federal Reserve Bank of New York

Jeff Campbell,1 Senior Economist, Federal Reserve Bank of Chicago

Developments in Financial Markets and the Federal Reserve's Balance Sheet
The manager of the System Open Market Account (SOMA) reported on developments in domestic and foreign financial markets during the period since the Federal Open Market Committee (FOMC) met on April 26-27, 2011. He also reported on System open market operations, including the continuing reinvestment into longer-term Treasury securities of principal payments received on the SOMA's holdings of agency debt and agency-guaranteed mortgage-backed securities, as well as the ongoing purchases of additional Treasury securities authorized at the November 2-3, 2010, FOMC meeting. Since November, purchases by the Open Market Desk of the Federal Reserve Bank of New York had increased the SOMA's holdings by nearly the full $600 billion authorized.

In light of ongoing strains in some foreign financial markets, the Committee considered a proposal to extend its dollar liquidity swap arrangements with foreign central banks past August 1, 2011. Following their discussion, members unanimously approved the following resolution:

The Federal Open Market Committee directs the Federal Reserve Bank of New York to extend the existing temporary reciprocal currency arrangements ("swap arrangements") for the System Open Market Account with the Bank of Canada, the Bank of England, the European Central Bank, the Bank of Japan, and the Swiss National Bank. The swap arrangements shall now terminate on August 1, 2012, unless further extended by the Committee.

Dynamic Stochastic General Equilibrium Models
A staff presentation provided an overview of ongoing Federal Reserve research on dynamic stochastic general equilibrium (DSGE) models. DSGE models attempt to capture the dynamics of the overall economy in a way that is consistent both with the historical data and with optimizing behavior by forward-looking households and firms. The presentation began by discussing the general features of DSGE models and considering their advantages and limitations relative to other approaches of analyzing macroeconomic dynamics; with regard to the latter, the presentation noted that while the current generation of DSGE models is still somewhat limited in the range of policy issues these models can address, further advances in modeling should increase the usefulness of DSGE models for forecasting and policy analysis. The presentation then reviewed some specific features of DSGE models that are currently being studied at the Federal Reserve Board and the Federal Reserve Banks of New York, Philadelphia, and Chicago. This review included the four models' characterizations of the forces affecting the economy in recent years and the models' current forecasts for real economic activity, inflation, and short-term interest rates. In discussing the staff presentation, meeting participants expressed the view that DSGE models are a useful addition to the wide range of analytical approaches traditionally used at the Federal Reserve, in part because they provide an internally consistent way of exploring how the behavior of economic agents might change in response to systematic adjustments to policy. Some participants also expressed interest in seeing on a regular basis projections of key macroeconomic variables and other products from the DSGE models developed in the System. Finally, participants encouraged further staff work to improve these models by, for example, expanding the range of questions they can be used to address.

Exit Strategy Principles
The Committee discussed strategies for normalizing the stance and conduct of monetary policy, following up on its discussion of this topic at the April meeting. Participants stressed that the Committee's discussions of this topic were undertaken as part of prudent planning and did not imply that a move toward such normalization would necessarily begin sometime soon. For concreteness, the Committee considered a set of specific principles that would guide its strategy of normalizing the stance and conduct of monetary policy. Participants discussed several specific elements of the principles, including how they should characterize the monetary policy framework that the Committee would adopt after the conduct of policy returned to normal and whether the principles should encompass the possible timing between the normalization steps. At the conclusion of the discussion, all but one of the participants agreed on the following key elements of the strategy that they expect to follow when it becomes appropriate to begin normalizing the stance and conduct of monetary policy:
 

  • The Committee will determine the timing and pace of policy normalization to promote its statutory mandate of maximum employment and price stability.
  • To begin the process of policy normalization, the Committee will likely first cease reinvesting some or all payments of principal on the securities holdings in the SOMA.
  • At the same time or sometime thereafter, the Committee will modify its forward guidance on the path of the federal funds rate and will initiate temporary reserve-draining operations aimed at supporting the implementation of increases in the federal funds rate when appropriate.
  • When economic conditions warrant, the Committee's next step in the process of policy normalization will be to begin raising its target for the federal funds rate, and from that point on, changing the level or range of the federal funds rate target will be the primary means of adjusting the stance of monetary policy. During the normalization process, adjustments to the interest rate on excess reserves and to the level of reserves in the banking system will be used to bring the funds rate toward its target.
  • Sales of agency securities from the SOMA will likely commence sometime after the first increase in the target for the federal funds rate. The timing and pace of sales will be communicated to the public in advance; that pace is anticipated to be relatively gradual and steady, but it could be adjusted up or down in response to material changes in the economic outlook or financial conditions.
  • Once sales begin, the pace of sales is expected to be aimed at eliminating the SOMA's holdings of agency securities over a period of three to five years, thereby minimizing the extent to which the SOMA portfolio might affect the allocation of credit across sectors of the economy. Sales at this pace would be expected to normalize the size of the SOMA securities portfolio over a period of two to three years. In particular, the size of the securities portfolio and the associated quantity of bank reserves are expected to be reduced to the smallest levels that would be consistent with the efficient implementation of monetary policy.
  • The Committee is prepared to make adjustments to its exit strategy if necessary in light of economic and financial developments.

Staff Review of the Economic Situation
The information reviewed at the June 21-22 meeting indicated that the pace of the economic recovery slowed in recent months and that conditions in the labor market had softened. Measures of inflation picked up this year, reflecting in part higher prices for some commodities and imported goods. Longer-run inflation expectations, however, remained stable.

The expansion of private nonfarm payroll employment in May was markedly below the average pace of job gains in the previous months of this year. Initial claims for unemployment insurance rose, on net, between the first half of April and the first half of June. The unemployment rate moved up in April and then rose further to 9.1 percent in May, while the labor force participation rate remained unchanged. Both long-duration unemployment and the share of workers employed part time for economic reasons continued to be elevated.

Total industrial production expanded only a bit during April and May after rising at a solid pace in the first quarter. Shortages of specialized components imported from Japan contributed to a decline in the output of motor vehicles and parts. Manufacturing production outside of the motor vehicles sector increased moderately, on balance, during the past two months. The manufacturing capacity utilization rate remained close to its first-quarter level, but it was still well below its longer-run average. Forward-looking indicators of industrial activity, such as the new orders diffusion indexes in the national and regional manufacturing surveys, weakened noticeably during the intermeeting period to levels consistent with only tepid gains in factory output in coming months. However, motor vehicle assemblies were scheduled to rise notably in the third quarter from their levels in recent months, as bottlenecks in parts supplies were anticipated to ease.

Growth in consumer spending declined in recent months from the already modest pace in the first quarter. Total real personal consumption expenditures only edged up in April. Nominal retail sales, excluding purchases at motor vehicles and parts outlets, increased somewhat in May, but sales of new light motor vehicles declined markedly. Labor income rose moderately, as aggregate hours worked trended up, but total real disposable income remained flat in March and April, as increases in consumer prices offset gains in nominal income. In addition, consumer sentiment stayed relatively low through early June.

Activity in the housing market remained depressed, as both weak demand and the sizable inventory of foreclosed or distressed properties continued to hold back new construction. Starts and permits of new single-family homes were essentially unchanged in April and May, and they stayed near the very low levels seen since the middle of last year. Sales of new and existing homes remained at subdued levels in recent months, while measures of home prices fell further.

The available indicators suggested that real business investment in equipment and software was rising a bit more slowly in the second quarter than the solid pace seen in the first quarter. Nominal orders and shipments of nondefense capital goods declined in April. Business purchases of light motor vehicles edged up in April but dropped in May, while spending for medium and heavy trucks continued to increase in recent months. Survey measures of business conditions and sentiment weakened during the intermeeting period. Business expenditures for office and commercial buildings remained depressed by elevated vacancy rates, low prices for commercial real estate, and tight credit conditions for construction loans. In contrast, outlays for drilling and mining structures continued to be lifted by high energy prices.

Real nonfarm inventory investment rose moderately in the first quarter, but data for April suggested that the pace of inventory accumulation had slowed. Book-value inventory-to-sales ratios in April were similar to their pre-recession norms, and survey data also suggested that inventory positions generally remained in a comfortable range.

The available data on government spending indicated that real federal purchases increased in recent months, led by a rebound in outlays for defense in April and May from unusually low levels in the first quarter. In contrast, real expenditures by state and local governments appeared to have declined further, as outlays for construction projects fell in March and April, and state and local employment continued to contract in April and May.

The U.S. international trade deficit widened slightly in March and then narrowed in April to a level below its average in the first quarter. Exports rose strongly in both months, with increases widespread across major categories in March, while the gains in April were concentrated in industrial supplies and capital goods. Imports grew robustly in March, but they fell slightly in April, as the drop in automotive imports from Japan together with the decline in imports of petroleum products more than offset increases in other imported products.

Headline consumer price inflation, which had risen in the first quarter, edged down a bit in April and May, as the prices of consumer food and energy decelerated from the pace seen in previous months. More recently, survey data through the middle of June pointed to declines in retail gasoline prices, and prices of food commodities appeared to have decreased somewhat. Excluding food and energy, core consumer price inflation picked up in April and May, pushing the 12-month change in the core consumer price index through May above its level of a year earlier. Upward pressures on core consumer prices appeared to reflect the elevated prices of commodities and other imports, along with notable increases in motor vehicle prices likely arising from the effects of recent supply chain disruptions and the resulting extremely low level of automobile inventories. However, near-term inflation expectations from the Thomson Reuters/University of Michigan Surveys of Consumers moved down a little in May and early June from the high level seen in April, and longer-term inflation expectations remained within the range that has generally prevailed over the preceding few years.

Available measures of labor compensation showed that labor cost pressures were still subdued, as wage increases continued to be restrained by the large amount of slack in the labor market. In the first quarter, unit labor costs only edged up, as the modest rise in hourly compensation in the nonfarm business sector was mostly offset by further gains in productivity. More recently, average hourly earnings for all employees rose in April and May, but the average rate of increase over the preceding 12 months remained quite low.

Global economic activity appeared to have increased more slowly in the second quarter than in the first quarter. The rate of growth in the emerging market economies stepped down from its rapid pace in the first quarter, although it remained generally solid. The Japanese economy contracted sharply following the earthquake in March, and the associated supply chain disruptions weighed on the economies of many of Japan's trading partners. The pace of economic growth in the euro area remained uneven, with Germany and France posting moderate gains in economic activity, while the peripheral European economies continued to struggle. Recent declines in the prices of oil and other commodities contributed to some easing of inflationary pressures abroad.

Staff Review of the Financial Situation
Investors appeared to adopt a more cautious attitude toward risk, particularly later in the intermeeting period. The shift in investors' sentiment likely reflected the weak tone of incoming economic data in the United States along with concerns about the outlook for global economic growth and about potential spillovers from a possible further deterioration of the situation in peripheral Europe.

The decisions by the FOMC at its April meeting to continue its asset purchase program and to maintain the 0 to 1/4 percent target range for the federal funds rate were generally in line with market expectations. The accompanying statement and subsequent press briefing by the Chairman prompted a modest decline in nominal yields, as market participants reportedly perceived a somewhat less optimistic tone in the Committee's economic outlook. Over the remainder of the intermeeting period, the expected path for the federal funds rate, along with yields on nominal Treasury securities, moved down appreciably further, as the bulk of the incoming economic data was more downbeat than market participants had apparently anticipated. Consistent with the weaker-than-expected economic data and the recent decline in the prices of oil and other commodities, measures of inflation compensation over the next 5 years and 5 to 10 years ahead based on nominal and inflation-protected Treasury securities decreased considerably over the intermeeting period.

Market quotes did not suggest expectations of significant movements in nominal Treasury yields following the anticipated completion of the asset purchase program by the Federal Reserve at the end of June. Although discussions about the federal debt ceiling attracted attention in financial markets, judging from Treasury yields and other asset prices, investors seemed to anticipate that the debt ceiling would be increased in time to avoid any significant market disruptions.

Yields on corporate bonds stepped down modestly, on net, over the intermeeting period, but by less than the decline in yields on comparable-maturity Treasury securities, leaving credit risk spreads a little wider. In the secondary market for syndicated loans, conditions were little changed, with average bid prices for leveraged loans holding steady.

Broad U.S. stock price indexes declined, on net, over the intermeeting period, apparently in response to the downbeat economic data. Stock prices of financial firms underperformed the broader market, reflecting the weaker economic outlook, potential credit rating downgrades, and heightened concerns about the anticipated capital surcharge for systemically important financial institutions. Option-adjusted volatility on the S&P 500 index rose somewhat on net.

In the June 2011 Senior Credit Officer Opinion Survey on Dealer Financing Terms, dealers pointed to a continued gradual easing over the previous three months in credit terms applicable to major classes of counterparties across all types of transactions covered in the survey. Dealers also reported that the demand for funding had increased over the same period for a broad range of securities, with the exception of equities. More recently, however, against a backdrop of disappointing economic data, heightened uncertainty about the situation in Europe, and, possibly, concerns about the U.S. federal debt ceiling, market participants reported a general pullback from risk-taking and a decline in liquidity in a range of financial markets.

Net debt financing by nonfinancial corporations was strong in April and May. Gross issuance of both investment- and speculative-grade bonds by nonfinancial corporations hit a record high in May before slowing somewhat in June, and outstanding amounts of commercial and industrial (C&I) loans and nonfinancial commercial paper increased. Gross public equity issuance by nonfinancial firms maintained a solid pace over the intermeeting period, and most indicators of business credit quality improved further.

Commercial mortgage markets continued to show tentative signs of stabilization. In recent months, delinquency rates for commercial real estate loans edged down from their previous peaks. However, commercial real estate markets remained weak. Property sales were tepid, and prices remained at depressed levels. Issuance of commercial mortgage-backed securities slowed somewhat in the second quarter.

Conditions in residential mortgage markets were little changed overall but remained strained. Rates on conforming fixed-rate residential mortgages declined about in line with 10-year Treasury yields over the intermeeting period. Mortgage refinancing activity picked up, on net, over the intermeeting period but was still relatively subdued. Outstanding residential mortgage debt contracted further in the first quarter. Rates of serious delinquency for subprime and prime mortgages were little changed at elevated levels. The rate of new delinquencies on prime mortgages ticked up in April but remained well below the level of a few months ago. In March and April, delinquencies on mortgages backed by the Federal Housing Administration declined noticeably.

The Federal Reserve continued its competitive sales of non-agency residential mortgage-backed securities held by Maiden Lane II LLC over the intermeeting period. Although the initial offerings of these securities were well received, investor demand at the most recent sales was not as strong, a development consistent with the declines in the prices of non-agency residential mortgage-backed securities over the intermeeting period.

Conditions in consumer credit markets continued to improve. Growth in total consumer credit picked up in April, as the gain in nonrevolving credit more than offset a further contraction in revolving credit. Delinquency rates for consumer debt edged down further in recent months, with delinquency rates on some categories moving back to pre-crisis levels. Issuance of consumer asset-backed securities remained robust over the intermeeting period.

Bank credit was flat, on balance, in April and May. Core loans--the sum of C&I, real estate, and consumer loans--continued to contract modestly, pulled down by the ongoing decline in commercial and residential real estate loans. In contrast, C&I loans increased at a brisk pace in April and May. The most recent Survey of Terms of Business Lending conducted in May indicated that banks had eased some lending terms on C&I loans. The survey responses also suggested that the average size of loan commitments and their average maturity had trended up in recent quarters

M2 expanded at a robust pace in April and May. Liquid deposits, the largest component of M2, maintained a solid rate of expansion, likely reflecting the very low opportunity costs of holding such deposits. Currency continued to advance, supported by strong demand for U.S. bank notes from abroad.

The broad nominal index of the U.S. dollar fluctuated over the intermeeting period in response to changes in investors' assessment of the outlook for the U.S. economy and the situation in the peripheral European economies. Since the April FOMC meeting, the dollar rose modestly, on net, after depreciating over the preceding several months. Headline equity indexes abroad and foreign benchmark sovereign yields declined over the intermeeting period in apparent response to signs of a slowdown in the pace of global economic activity and reduced demand for risky assets. Concerns about the possibility of a restructuring of Greek government debt drove spreads of yields on the sovereign debts of Greece, Ireland, and Portugal to record highs relative to yields on German bunds.

In the advanced foreign economies, most central banks left their policy rates unchanged, and the anticipated pace of monetary policy tightening indicated by money market futures quotes was pared back. However, central banks in several emerging market economies continued to tighten policy, and the monetary authorities in China increased required reserve ratios further.

Staff Economic Outlook
With the recent data on spending, income, production, and labor market conditions mostly weaker than the staff had anticipated at the time of the April FOMC meeting, the near-term projection for the rate of increase in real gross domestic product (GDP) was revised down. The effects of the disaster in Japan and of higher commodity prices on the rate of increase in real consumer spending were expected to hold down U.S. real GDP growth in the near term, but those effects were anticipated to be transitory. However, the staff also read the incoming economic data as suggesting that the underlying pace of the recovery was softer than they had previously anticipated, and they marked down their outlook for economic growth over the medium term. Nevertheless, the staff still projected real GDP to increase at a moderate rate in the second half of 2011 and in 2012, with the ongoing recovery in activity receiving continued support from accommodative monetary policy, further increases in credit availability, and anticipated improvements in household and business confidence. The average pace of real GDP growth was expected to be sufficient to bring the unemployment rate down very slowly over the projection period, and the jobless rate was anticipated to remain elevated at the end of 2012.

Although increases in consumer food and energy prices slowed a bit in recent months, the continued step-up in core consumer price inflation led the staff to raise slightly its projection for core inflation over the coming quarters. However, headline inflation was still expected to recede over the medium term, as increases in food and energy prices and in non-oil import prices were anticipated to ease further. As in previous forecasts, the staff continued to project that core consumer price inflation would remain relatively subdued over the projection period, reflecting both stable long-term inflation expectations and persistent slack in labor and product markets.

Participants' Views on Current Conditions and the Economic Outlook
In conjunction with this FOMC meeting, all meeting participants--the five members of the Board of Governors and the presidents of the 12 Federal Reserve Banks--provided projections of output growth, the unemployment rate, and inflation for each year from 2011 through 2013 and over the longer run. Longer-run projections represent each participant's assessment of the rate 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. Participants' forecasts are described in the Summary of Economic Projections, which is attached as an addendum to these minutes.

In their discussion of the economic situation and outlook, meeting participants agreed that the economic information received during the intermeeting period indicated that the economic recovery was continuing at a moderate pace, though somewhat more slowly than they had anticipated at the time of the April meeting. Participants noted several transitory factors that were restraining growth, including the global supply chain disruptions in the wake of the Japanese earthquake, the unusually severe weather in some parts of the United States, a drop in defense spending, and the effects of increases in oil and other commodity prices this year on household purchasing power and spending. Participants expected that the expansion would gain strength as the influence of these temporary factors waned.

Nonetheless, most participants judged that the pace of the economic recovery was likely to be somewhat slower over coming quarters than they had projected in April. This judgment reflected the persistent weakness in the housing market, the ongoing efforts by some households to reduce debt burdens, the recent sluggish growth of income and consumption, the fiscal contraction at all levels of government, and the effects of uncertainty regarding the economic outlook and future tax and regulatory policies on the willingness of firms to hire and invest. Moreover, the recovery remained subject to some downside risks, such as the possibility of a more extended period of weak activity and declining prices in the housing sector, the chance of a larger-than-expected near-term fiscal tightening, and potential financial and economic spillovers if the situation in peripheral Europe were to deteriorate further. Participants still projected that the unemployment rate would decline gradually toward levels they saw as consistent with the Committee's dual mandate, but at a more gradual pace than they had forecast in April. While higher prices for energy and other commodities had boosted inflation this year, with commodity prices expected to change little going forward and longer-term inflation expectations stable, most participants anticipated that inflation would subside to levels at or below those consistent with the Committee's dual mandate.

Activity in the business sector appeared to have slowed somewhat over the intermeeting period. Although the effects of the Japanese disaster on U.S. motor vehicle production accounted for much of the deceleration in industrial production since March, the most recent readings from various regional manufacturing surveys suggested a slowing in the pace of manufacturing activity more broadly. However, business contacts in some sectors--most notably energy and high tech--reported that activity and business sentiment had strengthened further in recent months. Business investment in equipment and software generally remained robust, but growth in new orders for nondefense capital goods--though volatile from month to month--appeared to have slowed. While FOMC participants expected a rebound in investment in motor vehicles to boost capital outlays in coming months, some also noted that indicators of current and planned business investment in equipment and software had weakened somewhat, and surveys showed some deterioration in business sentiment. Business contacts in some regions reported that they were reducing capital budgets in response to the less certain economic outlook, but in other parts of the country, contacts noted that business sentiment remained on a firm footing, supported in part by strong export demand. Compared with the relatively robust outlook for the business sector, meeting participants noted that the housing sector, including residential construction and home sales, remained depressed. Despite efforts aimed at mitigation, foreclosures continued to add to the already very large inventory of vacant homes, putting downward pressure on home prices and housing construction.

Meeting participants generally noted that the most recent data on employment had been disappointing, and new claims for unemployment insurance remained elevated. The recent deterioration in labor market conditions was a particular concern for FOMC participants because the prospects for job growth were seen as an important source of uncertainty in the economic outlook, particularly in the outlook for consumer spending. Several participants reported feedback from business contacts who were delaying hiring until the economic and regulatory outlook became more certain and who indicated that they expected to meet any near-term increase in the demand for their products without boosting employment; these participants noted the risk that such cautious attitudes toward hiring could slow the pace at which the unemployment rate normalized. Wage gains were generally reported to be subdued, although wages for a few skilled job categories in which workers were in short supply were said to be increasing relatively more rapidly.

Changes in financial market conditions since the April meeting suggested that investors had become more concerned about risk. Equity markets had seen a broad selloff, and risk spreads for many corporate borrowers had widened noticeably. Large businesses that have access to capital markets continued to enjoy ready access to credit--including syndicated loans--on relatively attractive terms; however, credit conditions remained tight for smaller, bank-dependent firms. Bankers again reported gradual improvements in credit quality and generally weak loan demand. In identifying possible risks to financial stability, a few participants expressed concern that credit conditions in some sectors--most notably the agriculture sector--might have eased too much amid signs that investors in these markets were aggressively taking on more leverage and risk in order to obtain higher returns. Meeting participants also noted that an escalation of the fiscal difficulties in Greece and spreading concerns about other peripheral European countries could cause significant financial strains in the United States. It was pointed out that some U.S. money market mutual funds have significant exposures to financial institutions from core European countries, which, in turn, have substantial exposures to Greek sovereign debt. Participants were also concerned about the possible effect on financial markets of a failure to raise the statutory federal debt ceiling in a timely manner. While admitting that it was difficult to know what the precise effects of such a development would be, participants emphasized that even a short delay in the payment of principal or interest on the Treasury Department's debt obligations would likely cause severe market disruptions and could also have a lasting effect on U.S. borrowing costs.

Participants noted several factors that had contributed to the increase in inflation this year. The run-up in energy prices, as well as an increase in prices of other commodities and imported goods, had boosted both headline and core inflation. At same time, extremely low motor vehicle inventories resulting from global supply disruptions in the wake of the Japanese earthquake--by contributing to higher motor vehicle prices--had significantly raised inflation, although participants anticipated that these temporary pressures would lessen as motor vehicle inventories were rebuilt. Participants also observed that crude oil prices fell over the intermeeting period and other commodity prices also moderated, developments that were likely to damp headline inflation at the consumer level going forward. However, a number of participants pointed out that the recent faster pace of price increases was widespread across many categories of spending and was evident in inflation measures such as trimmed means or medians, which exclude the most extreme price movements in each period. The discussion of core inflation and similar indicators reflected the view expressed by some participants that such measures are useful for forecasting the path of inflation over the medium run. In addition, reports from business contacts indicated that some already had passed on, or were intending to try to pass on, at least a portion of their higher costs to customers in order to maintain profit margins.

Most participants expected that much of the rise in headline inflation this year would prove transitory and that inflation over the medium term would be subdued as long as commodity prices did not continue to rise rapidly and longer-term inflation expectations remained stable. Nevertheless, a number of participants judged the risks to the outlook for inflation as tilted to the upside. Moreover, a few participants saw a continuation of the current stance of monetary policy as posing some upside risk to inflation expectations and actual inflation over time. However, other participants observed that measures of longer-term inflation compensation derived from financial instruments had remained stable of late, and that survey-based measures of longer-term inflation expectations also had not changed appreciably, on net, in recent months. These participants noted that labor costs were rising only slowly, and that persistent slack in labor and product markets would likely limit upward pressures on prices in coming quarters. Participants agreed that it would be important to pay close attention to the evolution of both inflation and inflation expectations. A few participants noted that the adoption by the Committee of an explicit numerical inflation objective could help keep longer-term inflation expectations well anchored. Another participant, however, expressed concern that the adoption of such an objective could, in effect, alter the relative importance of the two components of the Committee's dual mandate.

Participants also discussed the medium-term outlook for monetary policy. Some participants noted that if economic growth remained too slow to make satisfactory progress toward reducing the unemployment rate and if inflation returned to relatively low levels after the effects of recent transitory shocks dissipated, it would be appropriate to provide additional monetary policy accommodation. Others, however, saw the recent configuration of slower growth and higher inflation as suggesting that there might be less slack in labor and product markets than had been thought. Several participants observed that the necessity of reallocating labor across sectors as the recovery proceeds, as well as the loss of skills caused by high levels of long-term unemployment and permanent separations, may have temporarily reduced the economy's level of potential output. In that case, the withdrawal of monetary accommodation may need to begin sooner than currently anticipated in financial markets. A few participants expressed uncertainty about the efficacy of monetary policy in current circumstances but disagreed on the implications for future policy.

Committee Policy Action 
In the discussion of monetary policy for the period ahead, members agreed that the Committee should complete its $600 billion asset purchase program at the end of the month and that no changes to the target range for the federal funds rate were warranted at this meeting. The information received over the intermeeting period indicated that the economic recovery was continuing at a moderate pace, though somewhat more slowly than the Committee had expected, and that the labor market was weaker than anticipated. Inflation had increased in recent months as a result of higher prices for some commodities, as well as supply chain disruptions related to the tragic events in Japan. Nonetheless, members saw the pace of the economic expansion as picking up over the coming quarters and the unemployment rate resuming its gradual decline toward levels consistent with the Committee's dual mandate. Moreover, with longer-term inflation expectations stable, members expected that inflation would subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, many members saw the outlook for both employment and inflation as unusually uncertain. Against this backdrop, members agreed that it was appropriate to maintain the Committee's current policy stance and accumulate further information regarding the outlook for growth and inflation before deciding on the next policy step. On the one hand, a few members noted that, depending on how economic conditions evolve, the Committee might have to consider providing additional monetary policy stimulus, especially if economic growth remained too slow to meaningfully reduce the unemployment rate in the medium run. On the other hand, a few members viewed the increase in inflation risks as suggesting that economic conditions might well evolve in a way that would warrant the Committee taking steps to begin removing policy accommodation sooner than currently anticipated.

In the statement to be released following the meeting, all members agreed that it was appropriate to acknowledge that the recovery had been slower than the Committee had expected at the time of the April meeting and to note the factors that were currently weighing on economic growth and boosting inflation. The Committee agreed that the statement should briefly describe its current projections for unemployment and inflation relative to the levels of those variables that members see as consistent with the Committee's dual mandate. In the discussion of inflation in the statement, members decided to reference inflation--meaning overall inflation--rather than underlying inflation or inflation trends, in order to be clear that the Committee's objective is the level of overall inflation in the medium term. The Committee also decided to reiterate that economic conditions were likely to warrant exceptionally low levels for the federal funds rate for an extended period; in addition, the Committee noted that it would review regularly the size and composition of its securities holdings, and that it is prepared to adjust those holdings as appropriate.

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 System Account in accordance with the following domestic policy directive:

"The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, 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 complete purchases of $600 billion of longer-term Treasury securities by the end of this month. The Committee also directs the Desk to maintain its existing policy of reinvesting principal payments on all domestic securities in the System Open Market Account in Treasury securities in order to maintain the total face value of domestic securities at approximately $2.6 trillion. 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 12:30 p.m.:

"Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected. Also, recent labor market indicators have been weaker than anticipated. The slower pace of the recovery reflects in part factors that are likely to be temporary, including the damping effect of higher food and energy prices on consumer purchasing power and spending as well as supply chain disruptions associated with the tragic events in Japan. Household spending and business investment in equipment and software continue to expand. However, investment in nonresidential structures is still weak, and the housing sector continues to be depressed. Inflation has picked up in recent months, mainly reflecting higher prices for some commodities and imported goods, as well as the recent supply chain disruptions. However, longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The unemployment rate remains elevated; however, the Committee expects the pace of recovery to pick up over coming quarters and the unemployment rate to resume its gradual decline toward levels that the Committee judges to be consistent with its dual mandate. Inflation has moved up recently, but the Committee anticipates that inflation will subside to levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.

To promote the ongoing economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent. The Committee continues to anticipate that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate for an extended period. The Committee will complete its purchases of $600 billion of longer-term Treasury securities by the end of this month and will maintain its existing policy of reinvesting principal payments from its securities holdings. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.

The Committee will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability."

Voting for this action: Ben Bernanke, William C. Dudley, Elizabeth Duke, Charles L. Evans, Richard W. Fisher, Narayana Kocherlakota, Charles I. Plosser, Sarah Bloom Raskin, Daniel K. Tarullo, and Janet L. Yellen.

Voting against this action: None.

External Communications
In follow-up to discussions at the January meeting, the Committee turned to consideration of policies aimed at supporting effective communication with the public regarding the outlook for the economy and monetary policy. The subcommittee on communication, chaired by Governor Yellen and composed of Governor Duke and Presidents Fisher and Rosengren, proposed policies for Committee participants and for Federal Reserve System staff to follow in their communications with the public in order to reinforce the public's confidence in the transparency and integrity of the monetary policy process. By unanimous vote, the Committee approved the policies.2 Participants all supported the policies, but several of them emphasized that the policy for staff, in particular, should be applied with judgment and common sense so as to avoid interfering with legitimate research.

It was agreed that the next meeting of the Committee would be held on Tuesday, August 9, 2011. The meeting adjourned at 12:10 p.m. on June 22, 2011.

Notation Vote
By notation vote completed on May 17, 2011, the Committee unanimously approved the minutes of the FOMC meeting held on April 26-27, 2011.

 

_____________________________
William B. English
Secretary

1. Attended the portion of the meeting relating to dynamic stochastic general equilibrium models. Return to text

2. The policies are available at http://www.federalreserve.gov/monetarypolicy/files/FOMC_ExtCommunicationParticipants.pdf and http://www.federalreserve.gov/monetarypolicy/files/FOMC_ExtCommunicationStaff.pdf. Return to text

Report to Congress on International Economic and Exchange Rate Policies link posted by Ryan C. Rogers RMR Wealth Mangagement, LLC

RMR Wealth Management - Friday, April 12, 2013

Report to Congress on International Economic and Exchange Rate Policies

 

U.S. Department of the Treasury

 

Office of International Affairs

April 12, 2013

 

http://www.treasury.gov/resource-center/international/exchange-rate-policies/Documents/Foreign%20Exchange%20Report%20April%202013.pdf

FOMC Minutes: Several Members See QE Ending by End of 2013 by Ryan C. Rogers, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, April 10, 2013
Several members of the Federal Open Market Committee (FOMC) state the central bank should begin tapering its bond buying program before the end of 2013.
The members "thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and stop them by year end".

(early release) FOMC: Summary of Economic Projections posted by Ryan C. Rogers, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, April 10, 2013

 

In conjunction with the March 19-20, 2013, Federal Open Market Committee (FOMC) meeting, meeting participants--the 7 members of the Board of Governors and the 12 presidents of the Federal Reserve Banks, all of whom participate in the deliberations of the FOMC--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2013 through 2015 and over the longer run. Each participant's assessment was based on information available at the time of the meeting plus his or her judgment of appropriate monetary policy and assumptions about the factors likely to affect economic outcomes. The longer-run projections represent each participant's judgment 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. "Appropriate monetary policy" is defined as the future path of policy that each participant deems most likely to foster outcomes for economic activity and inflation that best satisfy his or her individual interpretation of the Federal Reserve's objectives of maximum employment and stable prices.

Overall, the assessments submitted in March indicated that FOMC participants projected that, under appropriate monetary policy, the pace of economic recovery would gradually pick up over the 2013-15 period and inflation would remain subdued (table 1 and figure 1). Participants anticipated that the growth rate of real gross domestic product (GDP) would increase somewhat over the forecast period to a pace that generally exceeded their estimates of the longer-run sustainable rate of growth. Participants expected the unemployment rate to decline gradually through 2015. Nearly all participants projected that inflation, as measured by the annual change in the price index for personal consumption expenditures (PCE), would remain somewhat below the longer-run goal in 2013 and then rise toward 2 percent over the forecast period.

Table 1. Economic projections of Federal Reserve Board members and Federal Reserve Bank presidents, March 2013
Percent

 

Variable Central tendency1 Range2
2013 2014 2015 Longer run 2013 2014 2015 Longer run
Change in real GDP 2.3 to 2.8 2.9 to 3.4 2.9 to 3.7 2.3 to 2.5 2.0 to 3.0 2.6 to 3.8 2.5 to 3.8 2.0 to 3.0
December projection 2.3 to 3.0 3.0 to 3.5 3.0 to 3.7 2.3 to 2.5 2.0 to 3.2 2.8 to 4.0 2.5 to 4.2 2.2 to 3.0
Unemployment rate 7.3 to 7.5 6.7 to 7.0 6.0 to 6.5 5.2 to 6.0 6.9 to 7.6 6.1 to 7.1 5.7 to 6.5 5.0 to 6.0
December projection 7.4 to 7.7 6.8 to 7.3 6.0 to 6.6 5.2 to 6.0 6.9 to 7.8 6.1 to 7.4 5.7 to 6.8 5.0 to 6.0
PCE inflation 1.3 to 1.7 1.5 to 2.0 1.7 to 2.0 2.0 1.3 to 2.0 1.4 to 2.1 1.6 to 2.6 2.0
December projection 1.3 to 2.0 1.5 to 2.0 1.7 to 2.0 2.0 1.3 to 2.0 1.4 to 2.2 1.5 to 2.2 2.0
Core PCE inflation3 1.5 to 1.6 1.7 to 2.0 1.8 to 2.1   1.5 to 2.0 1.5 to 2.1 1.7 to 2.6  
December projection 1.6 to 1.9 1.6 to 2.0 1.8 to 2.0   1.5 to 2.0 1.5 to 2.0 1.7 to 2.2  

 

Note: Projections of change in real gross domestic product (GDP) and projections for both measures of inflation are from the fourth quarter of the previous year to the fourth quarter of the year indicated. PCE inflation and core PCE inflation are the percentage rates of change in, respectively, the price index for personal consumption expenditures (PCE) and the price index for PCE excluding food and energy. Projections for the unemployment rate are for the average civilian unemployment rate in the fourth quarter of the year indicated. Each participant's projections are based on his or her assessment of appropriate monetary policy. Longer-run projections represent each participant's assessment of the rate to which each variable would be expected to converge under appropriate monetary policy and in the absence of further shocks to the economy. The December projections were made in conjunction with the meeting of the Federal Open Market Committee on December 11-12, 2012.

1. The central tendency excludes the three highest and three lowest projections for each variable in each year. Return to table

2. The range for a variable in a given year includes all participant' projections, from lowest to highest, for that variable in that year. Return to table

3. Longer-run projections for core PCE inflation are not collected. Return to table

As shown in figure 2, most participants judged that highly accommodative monetary policy was likely to be warranted over the next few years to support stable prices and continued progress toward maximum employment. In particular, 14 participants thought that it would be appropriate for the first increase in the target federal funds rate to occur during 2015 or later. Most participants also judged that it would be appropriate to continue purchasing agency mortgage-backed securities (MBS) and longer-term Treasury securities into the second half of 2013.

Figure 1. Central tendencies and ranges of economic projections, 2013-15 and over the longer run*

Figure 1. Central tendencies and ranges of economic projections, 2013-15 and over the longer run

*NOTE: Definitions of variables are in the general note to table 1. The data for the actual values of the variables are annual.

Accessible version of figure 1 | Return to figure 1

Many participants continued to judge the uncertainty associated with the outlook for real activity and the unemployment rate to be unusually high compared with the norm of the past 20 years. In contrast to December, however, more participants viewed the risks to those outlooks as broadly balanced than saw the risks as skewed toward adverse outcomes. A majority of participants indicated that the uncertainty surrounding their projections for PCE inflation was broadly similar to historical norms, and nearly all considered the risks to inflation to be either broadly balanced or weighted to the downside.

Figure 2. Overview of FOMC participants' assessments of appropriate monetary policy*

Figure 2. Overview of FOMC participants' assessments of appropriate monetary policy

* NOTE: In the upper panel, the height of each bar denotes the number of FOMC participants who judge that, under appropriate monetary policy, the first increase in the target federal funds rate from its current range of 0 to 1/4 percent will occur in the specified calendar year. In December 2012, the numbers of FOMC participants who judged that the first increase in the target federal funds rate would occur in 2013, 2014, 2015, and 2016 were, respectively, 2, 3, 13, and 1. In the lower panel, each shaded circle indicates the value (rounded to the nearest 1/4 percentage point) of an individual participant’s judgment of the appropriate level of the target federal funds rate at the end of the specified calendar year or over the longer run.

Accessible version of figure 2 | Return to figure 2

The Outlook for Economic Activity
Participants projected that, conditional on their individual assumptions about appropriate monetary policy, the economy would grow at a somewhat faster pace in 2013 than it had in 2012. They also generally judged that growth would strengthen further in 2014 and 2015, in most cases to a rate above what participants saw as the longer-run rate of output growth. Most participants noted that the high degree of monetary policy accommodation assumed in their projections would help promote the economic recovery over the forecast period and expected that continued improvement in the housing sector would add more broadly to private demand; however, they also judged that increased fiscal restraint in the United States would hold back the pace of economic expansion, especially in 2013, and pointed to the situation in Europe as an ongoing downside risk.

The central tendency of participants' projections for the change in real GDP was 2.3 to 2.8 percent for 2013, 2.9 to 3.4 percent for 2014, and 2.9 to 3.7 percent for 2015; these projections were little changed, to slightly below, the ones in December. When participants compared their own March forecast with the one they made in December, many mentioned that stronger-than-anticipated incoming data on private economic activity had nearly offset the effects of greater-than-expected fiscal restraint likely to be put in place this year. The central tendency for the longer-run rate of increase of real GDP was 2.3 to 2.5 percent, unchanged from December.

Participants anticipated a gradual decline in the unemployment rate over the forecast period; even so, they generally thought that the unemployment rate at the end of 2015 would remain well above their individual estimates of its longer-run normal level. The central tendencies of participants' forecasts for the unemployment rate were 7.3 to 7.5 percent at the end of 2013 and 6.7 to 7.0 percent at the end of 2014. These projections are slightly lower than in December, with a few participants attributing their revisions to the more favorable data from the labor market or small changes in their estimated rate of potential output growth. However, the central tendency of the forecasts for the end of 2015, at 6.0 to 6.5 percent, changed little. The central tendency of participants' estimates of the longer-run normal rate of unemployment that would prevail under appropriate monetary policy and in the absence of further shocks to the economy was 5.2 to 6.0 percent, the same as in December. Most participants projected that the unemployment rate would converge to their estimates of its longer-run normal rate in five or six years, while some judged that less time would be needed.

As shown in figures 3.A and 3.B, participants' views regarding the likely outcomes for real GDP growth and the unemployment rate over the next three years and over the longer run remained diverse, reflecting their individual assessments of appropriate monetary policy and its economic effects, the likely rate of improvement in the housing sector and domestic spending more generally, the domestic implications of foreign economic developments, the extent of structural dislocations to the labor market and the economy's productive potential, and a number of other factors. The dispersion of participants' projections of real GDP growth was little changed relative to December, with a small reduction in the upper end of the distribution in all three years of the forecast period and a slight overall downward shift in 2014. The distributions of the unemployment rate projections in each year narrowed a few tenths, reflecting decreases in the high ends of the ranges. The dispersion of estimates for the longer-run rate of output growth stayed fairly narrow, with all but four within the central tendency of 2.3 to 2.5 percent; two participants, however, dropped their estimates to below 2.2 percent. The range of participants' estimates of the longer-run rate of unemployment, at 5.0 to 6.0 percent, was unchanged relative to December.

Figure 3.A. Distribution of participants' projections for the change in real GDP, 2013-15 and over the longer run*

Figure 3.A. Distribution of participants' projections for the change in real GDP, 2013-15 and over the longer run

*NOTE: Definitions of variables are in the general note to table 1.

Accessible version of figure 3.A | Return to figure 3.A

The Outlook for Inflation
Participants' broad outlook for inflation under appropriate monetary policy suggested that both headline and core inflation would remain subdued over the 2013-15 period, with nearly all participants judging that inflation would be equal to or below the FOMC's longer-run objective of 2 percent in each year. Specifically, the central tendency of participants' projections for overall inflation in 2013, as measured by the growth in the PCE price index, narrowed to 1.3 to 1.7 percent, while the central tendencies for 2014 and 2015 were unchanged at 1.5 to 2.0 percent and 1.7 to 2.0 percent, respectively. The central tendency of the forecasts for core inflation in 2013 also narrowed, to 1.5 to 1.6 percent, but, unlike overall inflation, edged up slightly in 2014 and 2015; nevertheless, the central tendencies remained near or below 2 percent in both years. In discussing factors likely to keep inflation near the Committee's inflation objective of 2 percent, several participants cited the role of stable inflation expectations and existing resource slack that was expected to diminish only gradually.

Figure 3.B. Distribution of participants' projections for the unemployment rate, 2013-15 and over the longer run*

Figure 3.B. Distribution of participants' projections for the unemployment rate, 2013-15 and over the longer run

*NOTE: Definitions of variables are in the general note to table 1.

Accessible version of figure 3.B | Return to figure 3.B

Figures 3.C and 3.D provide information on the diversity of participants' views about the outlook for inflation. The ranges of participants' projections for overall inflation in 2013 and 2014 were almost unchanged compared with the corresponding distributions for December. The ranges for core inflation were also little changed, but, in 2013, many of the projections shifted toward the lower end of the range. The distributions for core and overall inflation in 2015 remained concentrated near the Committee's longer-run objective, and all participants continued to project that overall inflation would converge to the 2 percent goal over the longer run.

Figure 3.C. Distribution of participants' projections for PCE inflation, 2013-15 and over the longer run*

Figure 3.C. Distribution of participants' projections for PCE inflation, 2013-15 and over the longer run

*NOTE: Definitions of variables are in the general note to table 1.

Accessible version of figure 3.C | Return to figure 3.C

Appropriate Monetary Policy
As indicated in figure 2, most participants judged that exceptionally low levels of the federal funds rate would remain appropriate for a couple more years. In particular, 13 participants thought that the first increase in the target federal funds rate would not be warranted until sometime in 2015, and one judged that policy firming would likely not be appropriate until 2016 (upper panel). Five participants judged that an earlier increase in the federal funds rate, in 2013 or 2014, would be most consistent with the Committee's statutory mandate.

All of the participants who judged that raising the federal funds rate target would first be appropriate in 2015 also projected that the unemployment rate would first decline below 6-1/2 percent during that year and that inflation would remain near or below 2 percent. In addition, those participants, as well as the participant who saw liftoff in 2016 as appropriate, also projected that a sizable gap between the unemployment rate and the longer-run normal level of the unemployment rate would persist until 2015 or later. The majority of the five participants who judged that policy firming should begin in 2013 or 2014 indicated that the Committee would need to act relatively soon in order to keep inflation near the FOMC's longer-run objective of 2 percent and to prevent a rise in inflation expectations.

Figure 3.D. Distribution of participants' projections for core PCE inflation, 2013-15*

Figure 3.D. Distribution of participants' projections for core PCE inflation, 2013-15

*NOTE: Definitions of variables are in the general note to table 1.

Accessible version of figure 3.D | Return to figure 3.D

Figure 3.E provides the distribution of participants' judgments regarding the appropriate level of the target federal funds rate at the end of each calendar year from 2013 to 2015 and over the longer run. As previously noted, most participants judged that economic conditions would warrant maintaining the current low level of the federal funds rate until 2015. Among the five participants who saw the federal funds rate leaving the effective lower bound earlier, their projections for the federal funds rate at the end of 2014 range from 1/2 to 2-3/4 percent. Views on the appropriate level of the federal funds rate at the end of 2015 varied, with 15 participants seeing the appropriate level of the federal funds rate as 1-1/4 percent or lower and the others seeing the appropriate level as 2 percent or higher. On balance, participants' projections for the appropriate federal funds rate at the end of 2015 shifted down a bit from those in their December forecasts.

Nearly all participants saw the appropriate target for the federal funds rate at the end of 2015 as still well below their assessment of its expected longer-run value. Estimates of the longer-run target federal funds rate ranged from 3-1/4 to 4-1/2 percent, reflecting the Committee's inflation objective of 2 percent and participants' individual judgments about the longer-run level of the real federal funds rate.

Participants also described their views regarding the appropriate path of the Federal Reserve's balance sheet. All but a few participants thought that, given the current economic outlook, it would be appropriate for the Committee to continue purchasing MBS and longer-term Treasury securities at about the current pace at least through midyear. A number of these participants anticipated that the pace would be tapered down around midyear. A few others thought that it would be appropriate for the Committee to purchase securities at the current pace through the third quarter of 2013 before beginning to adjust the pace and a few saw the current rate of purchases continuing at least through the end of 2013, with two participants specifying that some purchases would likely extend into 2014. Several participants emphasized that the asset purchase program was effective in supporting the economic expansion, that the benefits continued to exceed the costs, and that additional purchases would be necessary to achieve a substantial improvement in the outlook for the labor market. In contrast, a couple of participants indicated that the Committee could best foster its dual objectives and limit the potential costs of the program by beginning to taper its purchases before midyear or by ending purchases altogether.

Key factors informing participants' views of the economic outlook and the appropriate setting for monetary policy included their judgments regarding labor market conditions that would be consistent with maximum employment, the extent to which employment currently deviated from maximum employment, the extent to which projected inflation over the medium term deviated from the Committee's longer-term objective of 2 percent, and participants' projections of the likely time horizon necessary to return employment and inflation to mandate-consistent levels. Participants generally discussed their forecasts for the time of the first increase in the federal funds rate in the context of the thresholds adopted by the Committee in December 2012. A couple of participants noted that their assessments of the appropriate path for the federal funds rate took into account the likelihood that the neutral level of the federal funds rate was currently somewhat below its historical norm. It was also noted that, because the appropriate stance of monetary policy is conditional on the path of real activity and inflation over time, assessments of the appropriate future path of the federal funds rate and the balance sheet could change if economic conditions were to evolve in an unexpected manner.

Figure 3.E. Distribution of participants' projections for the target federal funds rate, 2013-15 and over the longer run*

Figure 3.E. Distribution of participants' projections for the target federal funds rate, 2013-15 and over the longer run

*NOTE: The target federal funds rate is measured as the level of the target rate at the end of the calendar year or in the longer run.

Accessible version of figure 3.E | Return to figure 3.E

Uncertainty and Risks
A majority of the participants continued to judge that the levels of uncertainty about their projections for real GDP growth and unemployment remained higher than was the norm during the previous 20 years; however, the number of participants with this view was noticeably smaller than in December (figure 4).1 The main factor cited as contributing to the elevated uncertainty about economic outcomes was the challenge associated with forecasting the path of the U.S. economic recovery following a financial crisis and recession that differed markedly from recent historical experience. Several participants also noted the difficulties involved in predicting fiscal policy in the United States and the potential for European developments to threaten U.S. financial stability, though a few participants noted a decline in the likely severity of those risks as a reason for changing their assessments of uncertainty from "higher" to "broadly similar" to the norm.

Table 2. Average historical projection error ranges
Percentage points

 

Variable 2013 2014 2015
Change in real GDP1 ±1.3 ±1.7 ±1.8
Unemployment rate1 ±0.6 ±1.2 ±1.7
Total consumer prices2 ±0.9 ±1.0 ±1.1

 

Note: Error ranges shown are measured as plus or minus the root mean squared error of projections for 1993 through 2012 that were released in the spring by various private and government forecasters. As described in the box "Forecast Uncertainty," under certain assumptions, there is about a 70 percent probability that actual outcomes for real GDP, unemployment, and consumer prices will be in ranges implied by the average size of projection errors made in the past. Further information is in David Reifschneider and Peter Tulip (2007), "Gauging the Uncertainty of the Economic Outlook from Historical Forecasting Errors," Finance and Economics Discussion Series 2007-60 (Washington: Board of Governors of the Federal Reserve System, November).

1. Definitions of variables are in the general note to table 1. Return to table

2. Measure is the overall consumer price index, the price measure that has been most widely used in government and private economic forecasts. Projection is percent change, fourth quarter of the previous year to the fourth quarter of the year indicated. Return to table

A majority of participants, somewhat more than in December, reported that they saw the risks to their forecasts of real GDP growth and unemployment as broadly balanced, with the remainder generally indicating that they saw the risks to their forecasts for real GDP growth as weighted to the downside and for unemployment as weighted to the upside. Some participants who changed their assessment to "broadly balanced" indicated that, while U.S. fiscal policy had become more restrictive this year, the future path of that policy had become less uncertain than it was in December.

Participants reported little change in their assessments of the level of uncertainty and the balance of risks around their forecasts for overall PCE inflation and core inflation. Thirteen participants judged the levels of uncertainty associated with their forecasts for those inflation measures to be broadly similar to, or lower than, historical norms; the same number assessed the risks to those projections to be broadly balanced. Several participants highlighted the likely role played by the Committee's adoption of a 2 percent inflation goal or its commitment to maintaining accommodative monetary policy as contributing to the recent stability of longer-term inflation expectations. Four participants saw the risks to their inflation forecast as tilted to the downside, reflecting, for example, risks of disinflation that could arise from adverse shocks to the economy that policy would have limited scope to offset in the current environment. Conversely, a couple of the participants saw the risks to inflation as weighted to the upside in light of the current highly accommodative stance of monetary policy and their concerns about the Committee's ability to shift to a less accommodative policy stance when it becomes appropriate to do so.

Figure 4. Uncertainty and risks in economic projections*

Figure 4. Uncertainty and risks in economic projections

*NOTE: For definitions of uncertainty and risks in economic projections, see the box "Forecast Uncertainty." Definitions of variables are in the general note to table 1.

Accessible version of figure 4 | Return to figure 4

Forecast Uncertainty

The economic projections provided by the members of the Board of Governors and the presidents of the Federal Reserve Banks inform discussions of monetary policy among policymakers and can aid public understanding of the basis for policy actions. Considerable uncertainty attends these projections, however. The economic and statistical models and relationships used to help produce economic forecasts are necessarily imperfect descriptions of the real world, and the future path of the economy can be affected by myriad unforeseen developments and events. Thus, in setting the stance of monetary policy, participants consider not only what appears to be the most likely economic outcome as embodied in their projections, but also the range of alternative possibilities, the likelihood of their occurring, and the potential costs to the economy should they occur.

Table 2 summarizes the average historical accuracy of a range of forecasts, including those reported in past Monetary Policy Reports and those prepared by the Federal Reserve Board's staff in advance of meetings of the Federal Open Market Committee. The projection error ranges shown in the table illustrate the considerable uncertainty associated with economic forecasts. For example, suppose a participant projects that real gross domestic product (GDP) and total consumer prices will rise steadily at annual rates of, respectively, 3 percent and 2 percent. If the uncertainty attending those projections is similar to that experienced in the past and the risks around the projections are broadly balanced, the numbers reported in table 2 would imply a probability of about 70 percent that actual GDP would expand within a range of 1.7 to 4.3 percent in the current year, 1.3 to 4.7 percent in the second year, and 1.2 to 4.8 percent in the third year. The corresponding 70 percent confidence intervals for overall inflation would be 1.1 to 2.9 percent in the current year, 1.0 to 3.0 percent in the second year, and 0.9 to 3.1 percent in the third year.

Because current conditions may differ from those that prevailed, on average, over history, participants provide judgments as to whether the uncertainty attached to their projections of each variable is greater than, smaller than, or broadly similar to typical levels of forecast uncertainty in the past, as shown in table 2. Participants also provide judgments as to whether the risks to their projections are weighted to the upside, are weighted to the downside, or are broadly balanced. That is, participants judge whether each variable is more likely to be above or below their projections of the most likely outcome. These judgments about the uncertainty and the risks attending each participant's projections are distinct from the diversity of participants' views about the most likely outcomes. Forecast uncertainty is concerned with the risks associated with a particular projection rather than with divergences across a number of different projections.

As with real activity and inflation, the outlook for the future path of the federal funds rate is subject to considerable uncertainty. This uncertainty arises primarily because each participant's assessment of the appropriate stance of monetary policy depends importantly on the evolution of real activity and inflation over time. If economic conditions evolve in an unexpected manner, then assessments of the appropriate setting of the federal funds rate would change from that point forward.

1. Table 2 provides estimates of the forecast uncertainty for the change in real GDP, the unemployment rate, and total consumer price inflation over the period from 1993 through 2012. At the end of this summary, the box "Forecast Uncertainty" discusses the sources and interpretation of uncertainty in the economic forecasts and explains the approach used to assess the uncertainty and risks attending the participants' projections. Return to text

(early release) FOMC: Minutes of the Federal Open Market Committee posted by Ryan C. Rogers, RMR Wealth Management

RMR Wealth Management - Wednesday, April 10, 2013

 

March 19-20, 2013

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, March 19, 2013, at 10:00 a.m., and continued on Wednesday, March 20, 2013, at 9:00 a.m.

PRESENT:
Ben Bernanke, Chairman
William C. Dudley, Vice Chairman
James Bullard
Elizabeth Duke
Charles L. Evans
Esther L. George
Jerome H. Powell
Sarah Bloom Raskin
Eric Rosengren
Jeremy C. Stein
Daniel K. Tarullo
Janet L. Yellen

Christine Cumming, Richard W. Fisher, Narayana Kocherlakota, Sandra Pianalto, and Charles I. Plosser, Alternate Members of the Federal Open Market Committee

Jeffrey M. Lacker, Dennis P. Lockhart, and John C. Williams, Presidents of the Federal Reserve Banks of Richmond, Atlanta, and San Francisco, respectively

William B. English, Secretary and Economist
Deborah J. Danker, Deputy Secretary
Matthew M. Luecke, Assistant Secretary
David W. Skidmore, Assistant Secretary
Michelle A. Smith, Assistant Secretary
Scott G. Alvarez, General Counsel
Thomas C. Baxter, Deputy General Counsel
Steven B. Kamin, Economist
David W. Wilcox, Economist

Thomas A. Connors, Troy Davig, Michael P. Leahy, Stephen A. Meyer, David Reifschneider, Christopher J. Waller, and William Wascher, Associate Economists

Simon Potter, Manager, System Open Market Account

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

Nellie Liang, Director, Office of Financial Stability Policy and Research, Board of Governors

James A. Clouse and William Nelson, Deputy Directors, Division of Monetary Affairs, Board of Governors

Jon W. Faust, Special Adviser to the Board, Office of Board Members, Board of Governors

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

Seth B. Carpenter, Senior Associate Director, Division of Monetary Affairs, Board of Governors

Ellen M. Meade, Senior Adviser, Division of Monetary Affairs, Board of Governors

Eric M. Engen, Thomas Laubach, David E. Lebow, and Michael G. Palumbo, Associate Directors, Division of Research and Statistics, Board of Governors

William F. Bassett, Deputy Associate Director, Division of Monetary Affairs, Board of Governors

Stacey Tevlin, Assistant Director, Division of Research and Statistics, Board of Governors; Min Wei, Assistant Director, Division of Monetary Affairs, Board of Governors

Jeremy B. Rudd, Adviser, Division of Research and Statistics, Board of Governors

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

Gregory L. Stefani, First Vice President, Federal Reserve Bank of Cleveland

David Altig, Loretta J. Mester, Glenn D. Rudebusch, and Mark S. Sniderman, Executive Vice Presidents, Federal Reserve Banks of Atlanta, Philadelphia, San Francisco, and Cleveland, respectively

Spencer Krane, Lorie K. Logan, Kevin Stiroh, and Kei-Mu Yi, Senior Vice Presidents, Federal Reserve Banks of Chicago, New York, New York, and Minneapolis, respectively

Evan F. Koenig, Jonathan P. McCarthy, Giovanni Olivei, and Julie Ann Remache,1 Vice Presidents, Federal Reserve Banks of Dallas, New York, Boston, and New York, respectively

Robert L. Hetzel, Senior Economist, Federal Reserve Bank of Richmond

Developments in Financial Markets and the Federal Reserve's Balance Sheet
The Manager of the System Open Market Account reported on developments in domestic and foreign financial markets as well as the System open market operations during the period since the Federal Open Market Committee (FOMC) met on January 29-30, 2013. The Manager also reported on developments in foreign money markets and implications for the assets that the Federal Reserve holds in its foreign currency portfolio. 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.

Staff Review of the Economic Situation
The information reviewed at the March 19-20 meeting suggested that economic activity was expanding at a moderate rate in the first quarter of this year after the slowdown late last year. Private-sector employment increased at a fairly solid pace, on balance, and the unemployment rate, though still elevated, was slightly lower in February than in the fourth quarter of last year. Consumer price inflation, excluding some temporary fluctuations in energy prices, was subdued, while measures of longer-run inflation expectations remained stable.

Private nonfarm employment increased at a modest rate in January but expanded more briskly in February, while government employment continued to decrease. The unemployment rate was 7.7 percent in February, slightly less than its fourth-quarter average; the labor force participation rate was also a bit below its fourth-quarter average. The rate of long-duration unemployment and the share of workers employed part time for economic reasons were little changed, on net, and both measures remained high. Initial claims for unemployment insurance trended down somewhat over the intermeeting period. The rate of private-sector hiring, along with indicators of job openings and firms' hiring plans, were generally subdued and were consistent with continued moderate increases in employment in the coming months.

Manufacturing production increased strongly in February after declining in January, and the rate of manufacturing capacity utilization in February was a little higher than in the fourth quarter. The production of motor vehicles and parts rose considerably in February, and there were also widespread increases in factory output in other sectors. Automakers' schedules, however, indicated that the pace of motor vehicle assemblies in the coming months would be a bit below that in February. Broader indicators of manufacturing production, such as the diffusion indexes of new orders from the national and regional manufacturing surveys, were at levels that pointed to moderate increases in factory production in the near term.

Real personal consumption expenditures rose modestly in January. In February, nominal retail sales, excluding those at motor vehicle and parts outlets, increased at a strong rate, while light motor vehicle sales edged up. Some key factors that tend to influence household spending were mixed: Households' real disposable incomes declined in January, reflecting in part the increases in both payroll and income taxes that went into effect at the beginning of the year and the previous pulling forward of taxable income from 2013 into 2012; in contrast, household net worth likely rose in recent months as a result of higher equity values and home prices. Consumer sentiment in the Thomson Reuters/University of Michigan Surveys of Consumers rose somewhat in February, but it declined in early March and remained relatively downbeat.

Conditions in the housing sector improved further, but construction activity was still at a relatively low level and continued to be restrained by tight credit standards for mortgages. Both starts and permits of new single-family homes increased, on net, over January and February. Starts of multifamily units declined, on balance, but permits rose, consistent with additional gains in construction in coming months. Sales of both new and existing homes advanced in January, and home prices increased further.

Real business expenditures on equipment and software appeared to slow somewhat early this year after rising at a brisk rate in the fourth quarter. Nominal shipments for nondefense capital goods excluding aircraft decreased in January, but nominal orders increased to a level above that of shipments, pointing to higher shipments in the near term. Other forward-looking indicators, such as surveys of business conditions and capital spending plans, also suggested that outlays for business equipment would rise in the coming months. Nominal business spending for nonresidential construction declined in January. Business inventories in most industries appeared to be generally aligned with sales in recent months.

Real federal government purchases appeared to decrease further in January and February, as defense spending continued to contract on balance. Real state and local government purchases looked to have declined as nonfederal government payrolls decreased in January and February and nominal construction expenditures fell in January.

The U.S. international trade deficit narrowed in December but widened in January. Imports rose in January, largely reflecting a rebound in the value of oil imports, and exports decreased, driven by a decline in the value of exports of petroleum products. Exports of capital goods increased; the other major categories of exports remained about unchanged.

Indexes of overall U.S. consumer prices were little changed in January but the consumer price index moved up briskly in February, largely reflecting a sharp rise in gasoline prices. Consumer food prices were flat in January and only edged up in February. Consumer prices excluding food and energy increased moderately in January and February. Near-term inflation expectations from the Michigan survey were unchanged in February and early March; longer-term inflation expectations in the survey were also little changed and remained within the narrow range that they have occupied for some time.

Measures of labor compensation indicated that gains in nominal wages remained relatively slow, only slightly above the rate of price inflation. Compensation per hour in the nonfarm business sector rose modestly over 2012, and, with small increases in productivity, unit labor costs also advanced only modestly. Gains in the employment cost index were even slower than for the measure of compensation per hour last year. In January and February, increases in average hourly earnings for all employees continued to be subdued.

Economic growth weakened in a number of the advanced foreign economies in the fourth quarter of 2012. In the euro area, real gross domestic product (GDP) contracted for a fifth consecutive quarter. Recent data for European economies, including retail sales and purchasing managers indexes, suggest that the rate of economic contraction may have diminished since the beginning of the year. In emerging market economies (EMEs), an increase in exports contributed to a pickup in the pace of economic growth in the fourth quarter, including for China. More-recent indicators suggest that economic activity in China has slowed some. Inflation remained generally contained in both advanced foreign economies and EMEs.

Staff Review of the Financial Situation
Generally favorable U.S. economic data releases, along with communications from Federal Reserve policymakers regarding the outlook for the economy and monetary policy, appeared to contribute to improved sentiment in domestic financial markets over the intermeeting period despite some renewed concerns about economic and financial conditions in Europe.

The expected path for the federal funds rate implied by market quotes moved down over the intermeeting period, likely reflecting policymakers' communications that reinforced market expectations of continued monetary policy accommodation. Results from the Desk's survey of primary dealers conducted prior to the March meeting showed that dealers continued to view the third quarter of 2015 as the most likely time of the first increase in the target federal funds rate. In addition, the median dealer continued to see the first quarter of 2014 as the most probable time for the Federal Reserve's asset purchases to end, and most dealers anticipated that the pace of purchases would be adjusted down before ending.

Yields on nominal Treasury securities were modestly lower, on net, over the intermeeting period. In late February, these yields declined notably following the inconclusive election outcomes in Italy but mostly retraced this decline as economic data releases in subsequent weeks exceeded expectations. Measures of inflation compensation derived from nominal and inflation-protected Treasury securities edged down over the period.

Conditions in domestic and offshore dollar funding markets were generally little changed, on balance, during the intermeeting period. The outstanding amount of unsecured commercial paper (CP) issued by financial institutions with European parents increased slightly on net, and CP issued by institutions with U.S. parents remained stable.

In the March Senior Credit Officer Opinion Survey on Dealer Financing Terms, respondents reported that leveraged investors seemed to have become somewhat more willing to take positions in risky assets since December.

Market reaction to the results of the Dodd-Frank Act annual stress tests and of the Comprehensive Capital Analysis and Review was limited. Overall, a broad index of U.S. bank equity prices rose, on net, over the intermeeting period, and credit default swap spreads for most large domestic banks edged down on balance.

Broad equity price indexes increased over the intermeeting period, bolstered by favorable incoming economic data. Option-implied volatility for the S&P 500 index over the near term rose slightly but remained low, at levels last seen in early 2007. Fourth-quarter earnings per share for S&P 500 firms were estimated to have increased modestly from the previous quarter.

Yields on investment- and speculative-grade corporate bonds rose a bit over the intermeeting period, leaving risk spreads a little wider. Corporate bond issuance by nonfinancial firms remained fairly robust in February; commercial and industrial (C&I) loans and nonfinancial CP also continued to expand. After picking up in January, gross public issuance of equity by nonfinancial firms remained strong in February, and issuance of collateralized loan obligations reached a post-financial-crisis high.

Conditions in the commercial real estate (CRE) sector improved somewhat. Commercial mortgage debt increased in the fourth quarter after having decreased in each quarter since the beginning of 2009, and commercial mortgage-backed security (CMBS) issuance continued to be robust over the intermeeting period. Nonetheless, delinquency rates on loans underlying existing CMBS remained near historically high levels in February, and CRE prices flattened out in the fourth quarter after several quarters of increases.

Both conforming home mortgage rates and yields on agency mortgage-backed securities (MBS) rose, on net, during the intermeeting period, and the spread between the primary mortgage rate and MBS yields narrowed a bit. Despite the increase in mortgage rates since the start of the year, mortgage refinancing originations declined only slightly.

Consumer credit sustained its moderate expansion in December and January. Nonrevolving credit continued to increase at a solid pace because of growth in student and auto loans, while revolving credit was roughly flat. Issuance of consumer asset-backed securities remained strong.

Driven largely by continued growth in C&I loans, total bank credit expanded in January and February at roughly its fourth-quarter pace. The February Survey of Terms of Business Lending indicated some easing in loan pricing.

The level of M2 was about unchanged, on net, over January and February. In contrast, the monetary base expanded briskly from January through mid-March, driven mainly by the increase in reserve balances resulting from the Federal Reserve's purchases of Treasury securities and agency MBS.

Financial market concerns regarding the euro area rose over the intermeeting period amid weaker-than-expected economic data releases and political uncertainties generated by the inconclusive election results in Italy. Adding to the concerns was the proposal in Cyprus to tax insured, along with uninsured, deposits as part of the country's effort to secure an aid package from the euro area and the International Monetary Fund. Ten-year sovereign yields in most peripheral euro-area countries rose relative to German bond yields, with spreads for Italian sovereign debt increasing noticeably; euro-area banking-sector share prices fell sharply. With economic data for the euro area, the United Kingdom, and Canada coming in weaker than anticipated, yields on bunds, gilts, and long-term Canadian government securities fell. In addition, market-based measures of expected overnight interest rates also declined in those countries, and the dollar appreciated against the euro, sterling, and the Canadian dollar. Expectations intensified that the Bank of Japan would pursue aggressive monetary easing after the new governor of the Bank of Japan was installed; over the intermeeting period, the yen depreciated further, 10-year Japanese government bond yields declined to near record lows, and the Nikkei stock price index rose substantially. Movements in the currencies of EMEs against the dollar were generally small. Although inflows into emerging market mutual funds continued, they slowed notably in recent weeks, and EME equity indexes were, on average, slightly lower. Some EME central banks cut interest rates, citing concerns about economic growth.

The staff also reported on potential risks to financial stability, including those associated with the current low interest rate environment. Some observers have suggested that a lengthy period of low long-term rates could encourage excessive risk-taking that could have adverse consequences for financial stability at some point in the future. The staff surveyed a wide range of asset markets and financial institutions for signs of excess valuations, leverage, or risk-taking that could pose systemic risks. Low interest rates likely have supported gains in asset prices and encouraged the flow of credit to households and businesses, but these changes to date do not appear to have been accompanied by significant financial imbalances. However, trends in a few specific markets bore watching, and the staff will continue to monitor for signs of developments that could pose risks to financial stability.

Staff Economic Outlook
In the economic forecast prepared by the staff for the March FOMC meeting, real GDP growth was revised down somewhat in the near term, largely reflecting the federal spending sequestration that went into effect on March 1 and the resulting drag from reduced government purchases. The staff's medium-term forecast for real GDP growth was little changed, on balance, as the effects of somewhat more fiscal policy restraint and a higher assumed path for the foreign exchange value of the dollar were essentially offset by a brighter outlook for domestic energy production and a higher projection for household wealth, which reflected upward revisions to the projected paths for both equity prices and home prices. On balance, with fiscal policy expected to be tighter in 2013 than in 2012, the staff expected that increases in real GDP this year would only modestly exceed the growth rate of potential output. Fiscal policy restraint on economic growth was assumed to ease over time, and real GDP was projected to accelerate gradually in 2014 and 2015, supported by increases in consumer and business sentiment, further improvements in credit availability and financial conditions, and accommodative monetary policy. The expansion in economic activity was anticipated to slowly reduce the slack in labor and product markets over the projection period, and progress in reducing the unemployment rate was expected to be gradual.

The staff's forecast for inflation was little changed from the projection prepared for the January FOMC meeting. With crude oil prices anticipated to trend down slowly from their current levels, long-run inflation expectations assumed to remain stable, and significant resource slack persisting over the forecast period, the staff continued to project that inflation would be subdued through 2015.

The staff viewed the uncertainty around its forecast for economic activity as similar to the average level over the past 20 years. However, the risks were viewed as skewed to the downside, reflecting in part the concerns about the situation in Europe and the possibility of a more severe tightening in U.S. fiscal policy than currently anticipated. The staff saw the uncertainty around its projection for inflation as about average, and it viewed the risks to the inflation outlook as roughly balanced.

Participants' Views on Current Conditions and Economic Outlook
In conjunction with this FOMC meeting, meeting participants--the 7 members of the Board of Governors and the presidents of the 12 Federal Reserve Banks, all of whom participate in the deliberations of the FOMC--submitted their assessments of real output growth, the unemployment rate, inflation, and the target federal funds rate for each year from 2013 through 2015 and over the longer run, under each participant's judgment of appropriate monetary policy. The longer-run projections represent each participant's assessment of the rate 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 Summary of Economic Projections, which is attached as an addendum to these minutes.

Meeting participants generally indicated that they viewed the economic data received during the intermeeting period as somewhat more positive than had been expected, but that fiscal policy appeared to have become more restrictive, leaving the outlook for the economy little changed on balance since the January meeting. Participants judged that the economy had returned to moderate growth following a pause late last year, and a few noted that the downside risks may have diminished. Conditions in labor markets had shown signs of improvement, although the unemployment rate remained elevated. Spending by households and businesses was continuing to expand, perhaps reflecting some increased optimism. Participants noted that the housing market, in particular, had firmed somewhat further. Accommodative monetary policy was likely providing important support to these developments. In contrast, participants thought that fiscal policy was exerting significant near-term restraint on the economy. Participants generally anticipated that growth would proceed at a moderate pace and that the unemployment rate would decline gradually toward levels consistent with the Committee's mandate. Inflation had been running below the Committee's 2 percent objective for some time, and nearly all of the participants anticipated that it would run at or below 2 percent over the medium term.

In their discussion of the household sector, most participants noted that the data on spending were somewhat encouraging, particularly with regard to spending on automobiles, other consumer durables, and housing. Several participants stated that the moderate acceleration in spending might in part reflect pent-up demand following years of deleveraging and was importantly supported by the stance of monetary policy, which has reduced the cost of financing purchases and improved credit availability to some degree. A couple of participants noted that the increase in the payroll tax appeared to have not yet had a material effect on household spending; however, another suggested that the payroll tax increase, along with higher gasoline prices, may be one reason why spending by lower-income households appeared to be depressed, as those changes disproportionately cut into the disposable income of those households. A couple of other participants thought that overall consumer spending was likely still held back, at least in part, by ongoing concerns about future income and employment prospects. Both fiscal restraint and the high level of student debt were mentioned as risks to aggregate household spending over the forecast period.

Participants generally saw conditions in the housing market as having improved further over the intermeeting period. Rising house prices were strengthening household balance sheets by raising wealth and by increasing the ability of some homeowners to refinance their mortgages at lower rates. Such a dynamic was seen as potentially leading to a virtuous cycle that could help support household spending and financial market conditions over time. Reports from homebuilders in many parts of the country were encouraging. One participant pointed to ongoing changes in a range of factors--including demographics, credit conditions, business models, and consumer preferences--that were likely shifting both supply and demand in the housing sector and concluded that the outlook for the sector was quite uncertain and potentially subject to rapid changes.

Many participants reported that their business contacts were seeing some further improvement in the economic outlook. Firms reported increased planning for capital expenditures, supported by low interest rates and substantial cash holdings. Investment spending on productivity-enhancing technology was strong, as was pipeline construction in the energy sector. A few participants indicated that their contacts saw the level of uncertainty about the economic outlook as having declined recently, a development that could lead to increased investment expenditures.

Most participants remarked on the federal spending sequester and its potential effects on the economy; they judged that recent tax and spending changes were already restraining aggregate demand or would do so over the course of the year. A couple of participants, however, suggested that they had cut their estimates of the effect of recent federal austerity measures or had never considered the effects to be substantial.

Recent readings on private employment and the unemployment rate indicated some improvement in labor market conditions. Nonetheless, participants generally saw the unemployment rate as still elevated and were not yet confident that the recent progress toward the Committee's employment objective would be sustained. The need to use a range of indicators to gauge labor market conditions was noted. One participant highlighted that hiring rates and quit rates remained somewhat low. Another participant discussed evidence that the labor market may have become less dynamic over time, with the result that recent payroll gains might be more meaningful than would first appear. Inference about the labor force participation rate was complicated by its long-run downward trend. One participant cited research indicating that long-term unemployment, which is currently especially high, could lead to persistently lower income and wealth for those affected, even after they found jobs. More broadly, firms reportedly remained cautious about hiring, which some participants attributed in part to restrictive fiscal policy combined with growing regulatory burden. This caution appeared to have resulted in jobs remaining vacant for substantially longer than would normally be the case, given the unemployment rate.

Recent price developments were consistent with subdued inflation pressures and inflation remaining at or below the Committee's 2 percent objective over the medium run. Participants saw little near-term inflationary pressure, with a few noting that the appreciation of the dollar was holding down import costs or that the recent increases in gasoline prices did not appear to have passed through more broadly to prices of other goods. Pointing to inflation that had been running below their objective for some time, some participants saw downside risks to inflation, especially if economic activity did not pick up as projected. But a few participants noted that the risk remained that inflationary pressures could rise as the expansion continued, especially if monetary policy remained highly accommodative for too long.

Participants discussed their assessments of risks to financial stability, particularly in light of the Committee's highly accommodative stance of monetary policy. Many participants noted that in the current low-interest rate environment, investors in some financial markets were taking on additional risk--either credit risk or interest rate risk--in an effort to boost returns. As a result, vigilance on the part of policymakers and regulators was warranted, especially in light of episodic strains in European markets. A couple of participants noted that U.S. banks had expanded their capital positions and were generally in sound financial condition. Meeting participants generally agreed that there was an ongoing need to evaluate the possible interactions between monetary policy decisions and financial stability, with some noting that adverse shocks to financial stability can affect progress toward the Committee's dual mandate.

Review of Efficacy and Costs of Asset Purchases
The staff provided presentations covering the efficacy of the Federal Reserve's asset purchases, the effects of the purchases on security market functioning, the ways in which asset purchases might amplify or reduce risks to financial stability, and the fiscal implications of purchases. In their discussion of this topic, meeting participants generally judged the macroeconomic benefits of the current purchase program to outweigh the likely costs and risks, but they agreed that an ongoing assessment of the benefits and costs was necessary. Pointing to academic and Federal Reserve staff research, most participants saw asset purchases as having a meaningful effect in easing financial conditions and so supporting economic growth. Some expressed the view that these effects had likely been stronger during the Federal Reserve's initial large-scale asset purchases because that program also helped support market functioning during the financial crisis. Other participants, however, saw little evidence that the efficacy of asset purchases had declined over time, and a couple of these suggested that the effectiveness of purchases might even have increased more recently, as the easing of credit constraints allowed more borrowers to take advantage of lower interest rates. One participant emphasized the role of recent asset purchases in keeping inflation from declining further below the Committee's longer-run goal. A few participants felt that MBS purchases provided more support to the economy than purchases of longer-term Treasury securities because they stimulated the housing sector directly; however, a few preferred to focus any purchases in the Treasury market to avoid allocating credit to a specific sector of the economy. It was noted that, in addition to the standard channels through which monetary policy affects the economy, asset purchases could help signal the Committee's commitment to accommodative monetary policy, thereby making the forward guidance about the federal funds rate more effective. However, a few participants were not convinced of the benefits of asset purchases, stating that the effects on financial markets appeared to be short lived or that they saw little evidence of a significant macroeconomic effect. One participant suggested that the signaling effect of asset purchases may have been reduced by the adoption of threshold-based forward guidance. In general, reflecting the limited experience with large-scale asset purchases, participants recognized that estimates of the economic effects were necessarily imprecise and covered a wide range.

Participants generally agreed that asset purchases also have potential costs and risks. In particular, participants pointed to possible risks to the stability of the financial system, the functioning of particular financial markets, the smooth withdrawal of monetary accommodation when it eventually becomes appropriate, and the Federal Reserve's net income. Their views on the practical importance of these risks varied, as did their prescriptions for mitigating them. Asset purchases were seen by some as having a potential to contribute to imbalances in financial markets and asset prices, which could undermine financial stability over time. Moreover, to the extent that asset purchases push down longer-term interest rates, they potentially expose financial markets to a rapid rise in those rates in the future, which could impose significant losses on some investors and intermediaries. Several participants suggested that enhanced supervision could serve to limit, at least to some extent, the increased risk-taking associated with a lengthy period of low long-term interest rates, and that effective policy communication or balance sheet management by the Committee could reduce the probability of excessively rapid increases in longer-term rates. It was also noted that the accommodative stance of policy could be supporting financial stability by returning the economy to a stable footing sooner than would otherwise be the case and perhaps by allowing borrowers to secure longer-term financing and thereby reduce funding risks; by contrast, curtailing asset purchases could slow the recovery and so extend the period of very low interest rates. Nevertheless, a number of participants remained concerned about the potential for financial stability risks to build. One consequence of asset purchases has been the increase in the Federal Reserve's net income and its remittances to the Treasury, but those values were projected to decline, perhaps even to zero for a time, as the Committee eventually withdraws policy accommodation. Some participants were concerned that a substantial decline in remittances might lead to an adverse public reaction or potentially undermine Federal Reserve credibility or effectiveness. The possibility of such outcomes was seen as necessitating clear communications about the outlook for Federal Reserve net income. Several participants stated that such risks should not inhibit the Committee from pursuing its mandated objectives for inflation and employment. In any case, it was indicated that the fiscal benefits of a stronger economy would be much greater than any short-term fluctuations in remittances, and moreover, a couple of participants noted that cumulative remittances to the Treasury would likely be higher than would have been the case without any asset purchases. Some participants also were concerned that additional asset purchases could complicate the eventual firming of policy--for example, by impairing the Committee's control over the federal funds rate. A few participants raised the possibility of an undesirable rise in inflation. However, others expressed confidence in the Committee's exit tools and its resolve to keep inflation near its longer-run goal. Another exit-related concern was a possible adverse effect on market functioning from MBS sales during the normalization of the Federal Reserve's balance sheet. Although the Committee's asset purchases have had little apparent effect on securities market functioning to date, some participants felt that future asset sales could prove more challenging. In this regard, several participants noted that a decision by the Committee to hold its MBS to maturity instead of selling them would essentially eliminate this risk. A decision not to sell MBS, or to sell MBS only very slowly, would also mitigate some of the financial stability risks that could be associated with such sales as well as damp the decline in remittances to the Treasury at that time. Such a decision was also seen by some as a potential source of additional near-term policy accommodation. Overall, most meeting participants thought the risks and costs of additional asset purchases remained manageable, but also that continued close attention to these issues was warranted. A few participants noted that curtailing the purchase program was the most direct way to mitigate the costs and risks.

In light of their discussion of the benefits and costs of asset purchases, participants discussed their views on the appropriate course for the current asset purchase program. A few participants noted that they already viewed the costs as likely outweighing the benefits and so would like to bring the program to a close relatively soon. A few others saw the risks as increasing fairly quickly with the size of the Federal Reserve's balance sheet and judged that the pace of purchases would likely need to be reduced before long. Many participants, including some of those who were focused on the increasing risks, expressed the view that continued solid improvement in the outlook for the labor market could prompt the Committee to slow the pace of purchases beginning at some point over the next several meetings, while a few participants suggested that economic conditions would likely justify continuing the program at its current pace at least until late in the year. A range of views was expressed regarding the economic and labor market conditions that would call for an adjustment in the pace of purchases. Many participants emphasized that any decision to reduce the pace of purchases should reflect both an improvement in their overall outlook for labor market conditions, as implied by a wide range of available indicators, and their confidence in the sustainability of that improvement. A couple of these participants noted that if progress toward the Committee's economic goals were not maintained, the pace of purchases might appropriately be increased. A number of participants suggested that the Committee could change the mix of its policy tools if necessary to increase or maintain overall accommodation, including potentially adjusting its forward guidance or its balance sheet policies.

Committee Policy Action
Committee members saw the information received over the intermeeting period as suggesting that moderate economic growth had resumed following a pause late last year. Labor market conditions had shown signs of improvement, but the unemployment rate remained elevated. Household spending and business fixed investment had advanced, and the housing sector had strengthened further, but fiscal policy had become somewhat more restrictive. The Committee expected that, with appropriate monetary policy accommodation, economic growth would proceed at a moderate pace and result in a gradual decline in the unemployment rate toward levels that the Committee judges consistent with its dual mandate. Members generally continued to anticipate that, with longer-term inflation expectations stable and slack in resource utilization remaining, inflation over the medium term would likely run at or below the Committee's 2 percent objective.

In their discussion of monetary policy for the period ahead, members saw the economic outlook as little changed since the previous meeting, and, consequently, all but one member judged that a highly accommodative stance of monetary policy was warranted in order to foster a stronger economic recovery in a context of price stability. The Committee agreed that it would be appropriate to continue purchases of MBS at a pace of $40 billion per month and purchases of longer-term Treasury securities at a pace of $45 billion per month, as well as to maintain the Committee's reinvestment policies. The Committee also retained its forward guidance about the federal funds rate, including the thresholds on the unemployment and inflation rates. One member dissented from the Committee's policy decision, expressing concern that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in inflation expectations.

Members stressed that any changes to the purchase program should be conditional on continuing assessments both of labor market and inflation developments and of the efficacy and costs of asset purchases. In light of the current review of benefits and costs, one member judged that the pace of purchases should ideally be slowed immediately. A few members felt that the risks and costs of purchases, along with the improved outlook since last fall, would likely make a reduction in the pace of purchases appropriate around midyear, with purchases ending later this year. Several others thought that if the outlook for labor market conditions improved as anticipated, it would probably be appropriate to slow purchases later in the year and to stop them by year-end. Two members indicated that purchases might well continue at the current pace at least through the end of the year. It was also noted that were the outlook to deteriorate, the pace of purchases could be increased. In light of this discussion, the Committee included language in the statement to be released following the meeting in part to make explicit that the size, pace, and composition of its asset purchases were conditional not only on the likely efficacy and costs of those purchases, but also on the extent of progress toward the Committee's economic objectives.

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 System Account 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. The Desk is directed to continue purchasing longer-term Treasury securities at a pace of about $45 billion per month and to continue purchasing agency mortgage-backed securities at a pace of about $40 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 January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. 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 growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 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. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee 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. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. 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."

Voting for this action: Ben Bernanke, William C. Dudley, James Bullard, Elizabeth Duke, Charles L. Evans, Jerome H. Powell, Sarah Bloom Raskin, Eric Rosengren, Jeremy C. Stein, Daniel K. Tarullo, and Janet L. Yellen.

Voting against this action: Esther L. George.

Ms. George dissented because she continued to view monetary policy as too accommodative and therefore as posing risks to the achievement of the Committee's economic objectives in the long run. In particular, the current stance of policy could lead to financial imbalances, a mispricing of risk, and, over time, higher long-term inflation expectations. In her view, the Committee's asset purchases were providing relatively small benefits, and, given the risks that they posed as well as the improvement in the outlook for the labor market, she thought they should be wound down.

It was agreed that the next meeting of the Committee would be held on Tuesday-Wednesday, April 30-May 1, 2013. The meeting adjourned at 11:30 a.m. on March 20, 2013.

Notation Vote
By notation vote completed on February 19, 2013, the Committee unanimously approved the minutes of the FOMC meeting held on January 29-30, 2013.

_____________________________

William B. English
Secretary

1. Attended Tuesday's session only. Return to text

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FOMC statement posted by Ryan C. Rogers, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, March 20, 2013
Release Date: March 20, 2013

For immediate release

Information received since the Federal Open Market Committee met in January suggests a return to moderate economic growth following a pause late last year. Labor market conditions have shown signs of improvement in recent months but the unemployment rate remains elevated. Household spending and business fixed investment advanced, and the housing sector has strengthened further, but fiscal policy has become somewhat more restrictive. Inflation has been running somewhat below the Committee's longer-run objective, apart from temporary variations that largely reflect fluctuations in energy prices. 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 growth will proceed at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate. The Committee continues to see downside risks to the economic outlook. The Committee also anticipates that inflation over the medium term likely will run at or below its 2 percent objective.

To support a stronger economic recovery and to help ensure that inflation, over time, is at the rate most consistent with its dual mandate, the Committee decided to continue purchasing additional agency mortgage-backed securities at a pace of $40 billion per month and longer-term Treasury securities at a pace of $45 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. Taken together, these actions should maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.

The Committee will closely monitor incoming information on economic and financial developments in coming months. The Committee 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. In determining the size, pace, and composition of its asset purchases, the Committee will continue to take appropriate account of the likely efficacy and costs of such purchases as well as the extent of progress toward its economic objectives.

To support continued progress toward maximum employment and price stability, the Committee expects that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In particular, the Committee decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that this exceptionally low range for the federal funds rate will be appropriate at least as long as the unemployment rate remains above 6-1/2 percent, inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal, and longer-term inflation expectations continue to be well anchored. In determining how long to maintain a highly accommodative stance of monetary policy, the Committee will also consider other information, including additional measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments. 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.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Charles L. Evans; Jerome H. Powell; Sarah Bloom Raskin; Eric S. Rosengren; Jeremy C. Stein; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action was Esther L. George, who was concerned that the continued high level of monetary accommodation increased the risks of future economic and financial imbalances and, over time, could cause an increase in long-term

Beige Book January 16, 2013 Summary post By Ryan C. Rogers, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, January 16, 2013

 Summary of Commentary on Current Economic Conditions by Federal Reserve District

Prepared at the Federal Reserve Bank of Philadelphia and based on information collected on or before January 4, 2013. This document summarizes comments received from businesses and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials.

 

Reports from the twelve Federal Reserve Districts indicated that economic activity has expanded since the previous Beige Book report, with all twelve Districts characterizing the pace of growth as either modest or moderate. Since the previous Beige Book, activity in the New York and Philadelphia Districts rebounded from the immediate impacts of Hurricane Sandy. Growth in the Boston, Richmond, and Atlanta Districts appears to have increased slightly, while the St. Louis District reports some slowing.

All twelve districts reported some growth in consumer spending. Overall, holiday sales were reported as being modestly higher than in 2011, though sales were below expectations for contacts in many of the Districts. Auto sales were reported as steady or stronger in ten Districts. Citing concerns that consumers will spend cautiously due to ongoing fiscal uncertainty, retail contacts and auto dealers reported a slightly dimmer, though positive, outlook for future sales. Tourism activity was reported to have increased across much of the nation due to strong business and international travel, early snowfall in some ski areas, and a rebound in areas disrupted by Hurricane Sandy.

Activity among nonfinancial service sectors improved overall. Firms within the six Districts reporting on transportation services generally noted increased volumes. Manufacturing was mixed overall since the previous Beige Book; six Districts reported an expansion of activity and three reported a decrease. Among Districts reporting on their firms' near-term expectations, the manufacturing outlook remained generally optimistic; however, capital spending plans were less uniformly positive.

Since the previous Beige Book, real estate activity has expanded or held steady in eleven Districts for existing home sales and leasing; eight Districts for residential construction; eleven Districts for nonresidential sales and leasing; and nine Districts for nonresidential construction. Overall loan demand was steady in five Districts, rose in four, and fell in one. Credit standards were largely unchanged, except in two Districts where there were some signs of loosening. Six Districts reported improving credit quality and/or falling delinquency rates.

Although rain partially eased drought conditions for some agricultural regions in three Districts, reports of agricultural activity remained mixed. Districts reported that energy and mining sector activity was steady at high levels for most energy-related products but significantly weaker in coal production and coal-related investments.

Trends in wages, prices, and employment conditions were relatively unchanged in the Federal Reserve Districts. Input price pressures were reported to be steady overall with mixed reports for specific commodity prices in various Districts. Employment conditions were also little changed since the last report. However, hiring plans were more cautious for firms doing business in Europe or in the defense sector. Wage pressures were stable in all twelve Districts, though several Districts cited greater pressures for firms that reported difficulties finding qualified workers with specific skills.

Consumer Spending and Tourism
Since the previous Beige Book, consumer spending increased to some degree in all twelve Districts. Across the nation, holiday sales grew modestly compared with last year but came in below expectations in the New York, Cleveland, Atlanta, Chicago, and San Francisco Districts. Boston reported continued strong demand for clothing, shoes, and furniture, and San Francisco reported robust online sales. A major retail chain in New York indicated that sales picked up in early January. Retail sales were flat in Richmond except for gains in food and auto sales. Expectations for future sales were positive but mild, particularly in Philadelphia, Kansas City, and Dallas where contacts cited the impact of fiscal cliff uncertainty on consumer spending.

Reports of auto sales were steady to stronger in ten Districts. Richmond, Atlanta, and San Francisco noted strong sales. New York and Dallas cited mixed sales that were generally positive, while auto sales in Kansas City slowed but remained higher than a year ago. Some dealers in the Chicago and Kansas City Districts reported high levels of inventory. Contacts in Philadelphia, Cleveland, Kansas City, and Dallas expect consumers to react to ongoing fiscal uncertainty, thus dimming a positive outlook for future sales. Chicago auto dealers were more upbeat, expecting stronger new car sales due to pent-up consumer demand, easing credit conditions, and rising used vehicle prices.

Tourism held steady or grew in all but one of eight reporting Districts. Coastal activity had fallen in the immediate aftermath of Hurricane Sandy throughout most of the New York and Philadelphia Districts but has rebounded in all but the hardest hit areas. Boston, Atlanta, and San Francisco reported strong tourism in their Districts, with Boston and Atlanta citing business and international travel as strong contributors. Winter tourism activity in the Minneapolis District was strong in areas with snow, while Richmond reported normal winter activity in its District.

Nonfinancial Services
Overall, nonfinancial services have grown modestly since the previous Beige Book. Businesses in the New York and Philadelphia Districts recovered from the disruption of Hurricane Sandy. The Boston, Minneapolis, and San Francisco Districts reported positive growth among various service sectors, while the Richmond District reported stable to stronger demand for service firms. Boston reported strong demand for some health-care IT services and drug impact research, while San Francisco noted relatively weak demand for health-care services. Staffing firms in the Dallas District reported steady to slightly softened demand. Respondents remained optimistic about growth over the near-term in the Boston, New York, Philadelphia, Minneapolis, and Dallas Districts.

Transportation services were generally positive among the six Districts that reported. Freight transport shipping volume improved in the Cleveland District due to rising demand from the retail sector and areas affected by Hurricane Sandy. Atlanta reported increases in trucking tonnage and total railroad carloads, but low river levels caused delays in Mississippi River traffic. Reports from transportation services in the Dallas District were mixed, and most firms expect weak growth in the near-term. Trucking firms in the Richmond District reported a flattening in revenues; however, the District's port activity was boosted by ships diverted by Hurricane Sandy.

Manufacturing
Reports of manufacturing activity were mixed overall, with six Districts growing since the last Beige Book, three Distracts contracting, and two Districts reporting little or no change. Firms in the Boston and Chicago Districts reported continued expansion of activity at modest and moderate rates of growth, respectively. Overall activity once again appeared to expand in the San Francisco District, although it was mixed across sectors. Gains in the aerospace and chemical sectors contributed to growth in the Boston and San Francisco Districts, as well as in the Dallas District. Manufacturing in the Chicago District grew with contributions from the auto and housing-related sectors. Manufacturing continued to expand, but at a more modest pace, in the Richmond District. Several firms cited falling export demand, especially from Europe.

In contrast to slight declines in the past Beige Book, firms in the Philadelphia and Minneapolis Districts reported slightly increased manufacturing activity. As in other Districts, product flowing into supply channels for auto production and housing construction contributed to Philadelphia's gains. Prior trends continued as firms in the New York District experienced little or no growth, except for the revenues of firms in the New York City area that recovered after Hurricane Sandy disruptions. Reports continued to be mixed among sectors in the Dallas District.

Manufacturing activity within the Cleveland and Atlanta Districts, and reported plans in the St. Louis District, declined somewhat--a trend reversal from the prior Beige Book. Contributing to the declines were steel and auto producers in Cleveland and makers of HVAC equipment, electric components, food, and automobile parts in St. Louis. Despite production gains in electrical equipment, appliances, and components, more pronounced contractions within the broad nondurable goods sector led to a continuation of declining activity in the Kansas City District.

Manufacturing firms' expectations of future activity were generally optimistic in the New York, Philadelphia, Atlanta, Minneapolis, and Kansas City Districts; the level of optimism has significantly increased in the Philadelphia and Atlanta Districts since the previous Beige Book. Contacts in the Chicago District expect vehicle production to expand in 2013, while reports of activity from manufacturers in the St. Louis District have been negative on net. Boston District firms reported that capital spending was slow, except for select growth sectors. Capital spending was on track in the Cleveland District and was slowly increasing in the Chicago District. Looking ahead, Philadelphia District firms have significantly increased their capital spending plans, while the outlook in the Minneapolis District was reported as flat. In the Cleveland District, more contacts plan to reduce outlays than expand capacity.

Real Estate and Construction
Existing residential real estate activity expanded in all Districts that reported; growth rates were described as moderate or strong in nine Districts. Contacts in the Boston District attributed their strong sales growth to low interest rates, affordable prices, and rising rents. All Districts reporting on price levels saw increases; New York and Chicago reported only very minor increases. The five Districts that reported on housing inventories all reported falling levels. New residential construction (including repairs) expanded in all but one District of those Districts that reported. Contacts in the Kansas City District reported that increased lumber and drywall costs limited construction, causing a slight decline this period. Hurricane Sandy disrupted construction activity initially in New York, but this has since led to increased work for subcontractors on repairs and reconstruction.

Though a little weaker than residential real estate, reports on sales and leasing of nonresidential real estate are still mostly positive--described as modest on average. The Boston District reported a drop in leasing beyond normal seasonal trends; contacts cited fiscal cliff uncertainty as a factor. Minneapolis and Kansas City reported increased demand and tightening commercial real estate markets. Philadelphia, St. Louis, and Dallas all reported more modest increases in nonresidential real estate activity. Nonresidential construction is weaker than residential, with only slight to modest growth. The Boston District reported that demand for commercial real estate loans appears to be softening and that the pipeline for new construction projects has diminished significantly since the last report. Dallas reported that construction was expected to pick up in the commercial real estate sector in 2013.

Banking and Finance
Overall, loan demand was largely unchanged in the Philadelphia, Cleveland, Richmond, Kansas City, and San Francisco Districts, with most of these Districts reporting a continuation of slight to moderate growth in total volume. The New York, Atlanta, Chicago, and Dallas Districts reported stronger demand than previously, while the St. Louis District reported a slight decline. Some increased lending in Philadelphia, Chicago, and Dallas was driven by businesses taking out loans for special year-end purposes such as tax planning and dividend payments. Cleveland, Atlanta, Chicago, Dallas, and San Francisco all reported strong auto lending. Demand for residential mortgages improved in Cleveland, Atlanta, Chicago, Kansas City, Dallas, and San Francisco. Commercial real estate lending was cited as a particular bright spot by New York, Cleveland, Kansas City, and Dallas. However, lenders in San Francisco remained reluctant to lend to real estate investors outside of the multifamily residential sector. San Francisco also reported a slight slowdown in IPO, venture capital, and private equity activity in that District's technology sector.

Banks in the New York, Philadelphia, Cleveland, Chicago, Kansas City, and San Francisco Districts reported improvements in asset quality. Lenders were described as competing aggressively for highly qualified borrowers in Philadelphia, Richmond, Atlanta, and San Francisco. In Atlanta, this stiff competition may be leading to loosening credit standards, as there was some indication that banks were more willing to increase their tolerance for risk. Chicago banks also reported some loosening of standards. On the other hand, lending standards remained largely unchanged in New York, Cleveland, and Kansas City.

Agriculture and Natural Resources
Reports of agricultural activity were mixed, although rain and mild temperatures delivered some relief from drought conditions to parts of the Richmond, Atlanta, and Chicago Districts. Low water levels along the Mississippi River also hampered transport for some contacts in the Chicago and Kansas City Districts. Despite the drought, some contacts in these Districts reported that farm income remained high with adequate crop insurance and historically high prices. Producers in the Kansas City and Dallas Districts expect ongoing dry conditions to hurt the winter wheat crop.

Activity in the energy sector had mixed reports. Production of oil and natural gas held steady at high--sometimes record--levels in the Cleveland, Richmond, Minneapolis, and Dallas Districts. San Francisco reported that activity expanded to historic levels. Contacts in the Cleveland District reported that shale gas activity grew at a robust pace. In contrast, coal production has declined in the Cleveland, Richmond, Chicago, St. Louis, and Kansas City Districts since the previous Beige Book. Firms in the Atlanta District continue to plan investments, ranging from reserve development to increased refining and petrochemical operations to new pipeline infrastructure.

Employment, Wages, and Prices
Labor market conditions remained mostly unchanged in all Districts. The Boston, Richmond, Atlanta, Chicago, Kansas City, and San Francisco Districts all reported delayed hiring, often in defense manufacturing, due to fiscal cliff uncertainties. Companies in the Chicago District with trade or investment exposures to Europe reduced their hiring plans as well. Chicago reported that manufacturers are choosing to cut hours instead of reducing head count in expectation of production rebounds in 2013. Atlanta and Kansas City cited health-care policy changes and costs as another cause for minimal hiring. On the other hand, the New York, Atlanta, Minneapolis, and Dallas Districts saw the labor market firming modestly. Finally, contacts in several Districts reported difficulties finding qualified workers in some specialized fields, such as skilled manufacturing, energy, and IT.

For those Districts that reported, wage pressures have been stable since the previous Beige Book and were most frequently described as contained or subdued. The San Francisco District reported modest wage pressures that were held down by an abundance of workers. The Richmond, Chicago, and Minneapolis Districts characterized wage growth as moderate. Specifically, business contacts in the Minneapolis District expected to increase wages 2 to 3 percent in 2013, while oil drilling companies in North Dakota and Montana expected higher increases. Several Districts reported wage pressures in sectors experiencing labor shortages, such as energy and IT. The New York and Chicago Districts reported higher year-end bonuses ahead of anticipated tax increases in 2013.

Overall, input price pressures appear to be stable. The Boston, Philadelphia, Cleveland, Richmond, Minneapolis, Dallas, and San Francisco Districts reported steady input prices, while Chicago reported decreasing raw materials prices. The New York, Atlanta, and Kansas City Districts characterized input prices as slightly increasing; price pressures in these Districts were passed through to consumers somewhat in the form of higher finished goods prices. However, Chicago noted that businesses were unable to fully pass on meat and milk price increases to consumers. The Philadelphia, Cleveland, Chicago, Kansas City, and San Francisco Districts all cited rising prices for construction-related materials. Specifically, a Philadelphia builder noted that over the past 90 days these rising prices added about 3 percent to the cost of a new home.

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First District--Boston

Economic activity in the First District continues to grow modestly, according to business contacts. Most retailers and the tourism industry cite year-over-year increases in demand. Aside from some firms with industry-specific or customer-specific issues, First District manufacturers also report growth in sales from a year ago. Similarly, consulting and advertising firms are ahead of a year earlier, although a couple of companies with fast growth over the last few years have recently seen business level off. Commercial real estate contacts are somewhat downbeat; office leasing is slow and demand for commercial real estate loans and pipelines for commercial construction activity are weaker than in recent reports. Residential real estate markets continue to recover, with both sales and prices in November above year-earlier levels. In all sectors, most respondents are holding their selling prices level. Contacts say their hiring depends on demand growth; as a result, most firms are doing little to no hiring, but some firms are expanding headcounts substantially. Notwithstanding ongoing concerns with uncertainty, contacts generally expect continued modest growth in 2013.

Retail and Tourism
One contact reports a small single-digit year-over-year decrease in December sales while the others cite increases ranging from near zero to 7 percent. Demand remains strong for clothing, shoes, and furniture. Responding retail firms expect to hold their selling prices steady based on an absence of price increases at the wholesale level. These contacts anticipate that 2013 will be characterized by low single-digit growth in sales.

The tourism industry ended 2012:Q4 on a high note, establishing new records for hotel room occupancy rates and revenues. Strong domestic and international corporate business travel and international leisure travel account for much of this performance. Restaurants saw less spending on corporate entertaining and end-of-year holiday events. Advance hotel booking data indicate that the strong trend in business travel will continue, leading to an expectation that occupancy rates will hold level in 2013 compared to the high benchmark established in 2012.

Manufacturing and Related Services
Manufacturing in New England continues to expand at a modest pace according to First District contacts. Of 11 responding firms, seven report higher sales in the fourth quarter than in the same period a year earlier, although in some cases the gains are quite modest. Two contacts in the semiconductor industry continue to report a cyclical downturn in their business. A contact in aerospace says that sales of parts for new airplanes are extremely strong but depressed conditions in the aftermarket have spread from the United States to Europe. A contact in the chemical industry says that while sales in pounds fell, the pricing picture improved so much that sales in dollars are up. Sales of frozen fish continue to be weak. The "fiscal cliff" was an explicit problem for a computer firm that sells almost exclusively to Defense Department customers who are worried about sequestration.

Only five of the 11 respondents report significant hiring. Firms with rapidly growing sales are hiring, but firms in slow-growth industries are not. A biotech firm with 3,500 U.S. employees plans to add another 1,000 over the coming year, about half domestically. The computer supplier with customers dependent on defense spending cut its staffing by 10 percent to 15 percent over the period from June to September. A contact in the chemical industry reports both good and bad news about the labor market. On one hand, he says that for the first time since the crisis began, workers are voluntarily leaving to take new jobs. The bad news is that he is having great difficulty filling low-skill jobs. He says that drug test fails are much more common than in the past; in addition, a large number of workers quit almost immediately after taking the job. The contact speculates that both of these hiring problems may result from behaviors developed during extended periods of unemployment.

As with employment, capital spending is generally slow except for firms in growth industries, with four firms reporting increases and four reporting decreases in spending. One diversified manufacturer of parts for the aerospace and auto industries reports that business units within the firm failed to spend their planned capex allocations in 2012.

The outlook continues to be uncertain for most of our contacts. Only one firm, the defense supplier, cites the fiscal cliff as a serious problem and even they expect some resolution in the new year.

Selected Business Services
Consulting and advertising contacts in the First District report generally positive results for the fourth quarter. Several contacts report modest growth, while two contacts--whose firms have experienced rapid growth over the past two years--experienced a leveling off. Marketing and advertising contacts report a slight uptick during the fourth quarter and are confident that business conditions have finally stabilized after the recession, which hit them with a lag. Two contacts with exposure to health care note robust demand for services related to health-care IT implementation and drug-impacts research. At the same time, firms focused on the pharmaceutical industry have experienced slow growth, although one contact expects that pharmaceuticals will start to emerge from its rough spell in 2013. Economic consulting remains strong because of high levels of complex high-stakes litigation; management and strategy consulting contacts report flat business conditions as clients uncertain about fiscal policy and the macroeconomy remain reluctant to invest in consulting services.

Contacts report little to no cost increases and are keeping their prices relatively unchanged. One exception is an advertising firm where health insurance costs rose 12 percent in 2012. Some contacts report no hiring, consistent with a lack of demand growth, while others report net hiring in the low single digits. Plans for future hiring are modest, with contacts generally expecting zero to low single-digit workforce increases in 2013.

Most contacts expect growth to pick up in 2013, with the exception of a government contractor, who is too uncertain about the future of fiscal policy to offer any forecast. No one expects another recession and overall they express a sense of cautious optimism.

Commercial Real Estate
Across most of the First District, leasing activity in the final weeks of 2012 is described as very light, driven by a combination of seasonal factors and uncertainty stemming from fiscal cliff negotiations. However, a Portland contact notes an uptick in leasing activity in that city in December, especially in the warehouse sector, although office fundamentals remain flat amid slow employment growth. Boston's warehouse market improved as well, while the city's office vacancy rate remains high--also attributed to slow employment growth--and the trend toward office downsizing persists. In Hartford, the fate of large downtown properties that experienced foreclosure in 2012 remains uncertain; a key question is whether current owners will reinvest in the properties or resell them as is. Demand for commercial real estate loans in the region appears to be softening, while the pipeline of new construction projects in Boston has diminished significantly since the last report.

Most contacts in the region are cautiously optimistic that commercial real estate fundamentals will improve in 2013. However, growth expectations remain very modest and some contacts note downside risks to growth from pending fiscal contraction and ongoing political uncertainty, even taking into account the recently-enacted federal tax deal.

Residential Real Estate
Across the First District, contacts report strong year-over-year growth in sales for November in both single-family home and condominium markets. Similar to previous reports, contacts attribute continued growth in sales to low interest rates, affordable prices, and rising rents. Contacts say that buyers have become more confident about purchasing a home as economic conditions continue to improve. As buyer activity increased, inventory levels fell throughout the region. Contacts argue that declining inventory levels have now translated into higher prices in most areas. The median sale price of homes rose year-over-year across the First District, with some states experiencing significant increases.

In terms of outlooks for the coming year, contacts continue to feel positive about improvements in home values and strong sales. Significant year-over-year growth in sales is expected for the most of 2013, although a warm winter last year coupled with a potentially harsher winter this year may soften year-over-year growth in the coming months. In Massachusetts and the Greater Boston area, contacts express concern that dwindling inventory levels will discourage buyers and even potentially deter some sellers who would like to purchase a replacement home before listing their current one; at the same time, they express worry about prices appreciating too quickly, but say they are not concerned with ongoing moderate price appreciation. Notwithstanding these potential concerns, contacts across the region are generally very optimistic about the strength of the housing market in 2013.

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Second District--New York

Economic activity in the Second District has shown signs of rebounding since the last report, as widespread disruptions from Superstorm Sandy largely dissipated. On balance, the labor market firmed, with manufacturers reporting flat employment but non-manufacturing contacts indicating some pickup in hiring. Manufacturers and other firms report more widespread price hikes than in recent months, while retail prices were steady to up moderately. Retailers report that holiday-season sales were steady to somewhat higher than this time last year but slightly below plan. Auto sales in upstate New York were mixed but generally strong in November and December. Tourism activity slumped in November, in the aftermath of Sandy, but rebounded somewhat in New York City in December. Both residential and commercial real estate markets were generally steady since the last report. Finally, bankers report a pickup in demand for commercial mortgages but steady demand on other types of loans; they also report no change in credit standards, narrowing loan spreads, and widespread decreases in delinquency rates.

Consumer Spending
Holiday season sales were up modestly from last year but came in slightly below plan. A trade association survey of retailers across New York State indicates that sales were disappointing in the days leading up to Christmas as well as in the days after. A major retail chain indicates that sales were below plan in November and December but picked up fairly dramatically in early January. Retail contacts in upstate New York report that sales were flat to up compared to a year earlier. Retailers attribute the weaker than expected holiday sales to a combination of online shopping, mild weather, fiscal cliff concerns, and, in some parts of the region, slow insurance payouts to those affected by Sandy. Retail prices were reported to be steady or up moderately.

Buffalo-area auto dealers indicate that vehicle sales picked up in November but were expected to be flat to slightly lower than a year earlier in December. However, Rochester-area dealers report strong sales for both months to end 2012. Tourism activity slumped in the immediate aftermath of Sandy. Even hotels in the Albany area were reportedly affected by the storm, as widespread meeting and conference cancellations pushed down hotel occupancy rates in November. In New York City, Broadway theaters report that attendance and revenues rebounded after a deep post-Sandy slump in the first half of November. Still, December attendance was down 5 to10 percent from a year earlier, while revenues were little changed. Finally, consumer confidence in the region weakened at year end. The Conference Board's survey of residents of the Middle Atlantic states (NY, NJ, Pa) showed confidence falling to its lowest level in more than a year, while Siena College's survey of New York State residents indicated a modest decline.

Construction and Real Estate
Residential real estate markets in the District were generally steady since the last report, with the storm having little discernible effect on the overall market. New York City's rental market appears to have lost some momentum during the final two months of 2012, as rents in Manhattan and Brooklyn retreated and were up only slightly from a year earlier. The inventory of available rental apartments, however, remained low in late 2012. Apartment sales activity in New York City was robust in the fourth quarter--particularly in Manhattan. A major appraisal firm attributes some of the high sales volume to looming tax changes and notes that there has been a flood of appraisal requests for tax-related financial planning. Prices are reported to be flat to up slightly. In contrast, an overhang of inventory has kept prices from rising in northern New Jersey and Long Island. Sandy disrupted construction activity in late 2012, though a contact in the homebuilding industry notes that construction sub-contractors are getting a great deal of work from storm-related repairs and reconstruction during a typically slow season.

Office markets were relatively stable in the final months of 2012. A commercial real estate contact reports that the recovery from Sandy in Lower Manhattan has been slow, as a number of buildings in the flood zone remained out of service at year end. More broadly, leasing and sales activity across Manhattan were sluggish in November but picked up in December. Vacancy rates have been steady, while asking rents have edged up, led by brisk gains in Midtown South. Strong demand from the new media and advertising sectors and some pickup from legal services have offset weak demand from the financial sector. Elsewhere in the region, vacancy rates were little changed in the fourth quarter, though asking rents fell noticeably in northern New Jersey.

Other Business Activity
Contacts in the manufacturing sector continue to report little or no growth in activity though they remain mildly optimistic about the near-term outlook. Non-manufacturing contacts report some improvement in business conditions and have grown increasingly optimistic about prospects for 2013. New York City area firms--both manufacturing firms and non-manufacturing firms--say that Sandy adversely affected revenues in November but that business was seen to be back on track in December.

On balance, labor market conditions firmed in late 2012. While business contacts in the manufacturing sector report little or no change in employment, contacts in other sectors note some pickup in hiring. A major New York City employment agency specializing in office jobs said that while it is difficult to assess the labor market during the holiday season some continued softness in labor market conditions is apparent. In particular, financial sector hiring has remained sluggish, but year-end bonuses are expected to be up moderately from a year ago. Much of the bonus pay typically distributed in January was reportedly paid out in December in advance of higher tax rates.

Financial Developments
Small- to medium-sized banks report no change in demand for all loan types except commercial mortgages, where loan demand increased. Bankers report little change in demand for refinancing. The vast majority of respondents continue to report that credit standards were unchanged across all categories. Respondents indicate a decrease in spreads of loan rates over the costs of funds for all loan categories--particularly in residential mortgages, where nearly three in five bankers report lower spreads. Respondents also indicate a decrease in average deposit rates, on balance. Finally, bankers note declining delinquency rates in all loan categories--most notably in commercial mortgages, where well over half of those surveyed report lower delinquencies.

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Third District--Philadelphia

Aggregate business activity in the Third District has resumed the modest pace of growth that was evident prior to the disruption by Hurricane Sandy during the previous Beige Book period. In particular, general retail sales, general services, and commercial real estate leasing recovered from temporarily mild growth rates to resume their previously modest growth rates. Sales of new and used autos accelerated to a moderate rate of growth, and residential real estate sales maintained a strong year-over-year growth rate (from a relatively low base). Mild rates of growth are once again evident in manufacturing, staffing services, transportation services, and construction after many sectors suffered storm-related disruptions. Lending volumes at Third District banks also continued to experience slight growth, and credit quality has continued to improve. Overall, beach-going tourist areas are experiencing a typical slow season; however, some storm-damaged areas have lost significant business while some areas that escaped the damage are doing well. General price levels, as well as wages and home prices, were reported to have increased slightly overall. This remains similar to the last Beige Book period, except for home prices, which had remained flat overall.

The overall outlook for at least modest growth is considerably more optimistic relative to the views expressed in the last Beige Book. Contacts reported underlying strength in many sectors and expressed relief that part of the fiscal cliff dilemma has been resolved. Contacts from virtually all sectors reported greater expectations of future growth than during our last survey period. Plans for future hiring were also significantly more expansive. Most contacts continued to express concerns over the impact from the recent payroll tax increase and the remaining potential budget cuts that might reduce demand.

Manufacturing
Since the last Beige Book, Third District manufacturers have reported that orders and shipments have recovered to a pace of slight growth. The mild pace can be partially attributed to seasonal trends. Comments from contacts focused primarily on small upticks, new product demand, and emerging markets, rather than on disappointing orders. Makers of food products, lumber and wood products, primary metals, fabricated metal products, and instruments have reported gains since the last Beige Book. Lower activity was reported by makers of industrial machinery and electronic equipment.

Optimism among Third District manufacturers that business conditions will improve during the next six months has rebounded strongly since the last Beige Book and is evident across nearly all sectors. Firms have also significantly raised their overall expectations of future hiring and their plans for capital spending since the last Beige Book.

Retail
Third District retail sales recovered to a modest pace of growth for the holiday shopping season after the disruptions of Hurricane Sandy, according to retail contacts. Sales reports were mixed for mid-market department stores and some home furnishing stores, which reported moderate early holiday sales gains followed by a lull, with slight declines from the prior year. High-end department stores, family apparel stores, and outlet stores reported modest or moderate year-over-year sales throughout the holiday period. Some substantial mall tenants posted strong double-digit sales growth. Until final sales are tallied, retail contacts relied on other early indicators to suggest that the final days of the holiday shopping season had grown modestly, or better. Traditional mall retailers continued to draw shoppers with promotions, while outlet stores used fewer promotions than in prior years. Shopper surveys revealed concern over the consumers' future paychecks from the pending fiscal cliff negotiations.

Auto sales finished the year at a moderate pace of growth--combining the sector's slower pre-storm pace with a bump up for replacement of cars damaged by the storm. In particular, New Jersey dealers reported strong double-digit December sales, capping a third consecutive year of sales growth. The outlook among dealers remains positive; however, prospects for 2013 are not as strong as they were for 2012. "Consumers will feel a pinch" from the payroll tax increase and continued uncertainty about possible budget cuts.

Finance
Overall, loan volumes have continued to grow at a slight pace across Third District financial firms since the previous Beige Book. A flurry of year-end business lending kept banks busy facilitating tax-oriented business decisions involving sales and liquidations, mergers and acquisitions, accelerated depreciation, and dividend payouts. Home mortgage refinancing rates continued to remain high. In describing their competition as very aggressive, lenders expressed awareness of some potential portfolio risk, even while the credit quality of their borrowers continued to improve. Generally, financial institutions are expecting growth to continue, if not improve.

Real Estate and Construction
Residential builders reported one final surge of contract activity in November and then a downswing in December to conclude with slight year-over-year growth for the period. Despite facing erratic swings in demand through the year, our contacts reported very strong year-over-year growth for the entire year, which is more indicative of their own gains in market share than of the sector overall. Residential brokers reported robust year-over-year sales growth in November, with steady year-end momentum. As with new home construction, existing home sales are growing from a low base. Builders and, to a greater extent, brokers are optimistic that recent growth will be sustained in 2013. As with other sectors, contacts expressed concern that the fiscal cliff negotiations had been extended into their important first quarter.

Nonresidential real estate contacts reported renewed modest growth in overall leasing activity and continued slight growth in construction. Leasing activity finished the year with sustained double-digit growth. Notably, in the fourth quarter, contacts began "to see a re-emergence of leasing demand in lagging submarkets" (in the Greater Philadelphia metro area), including southern New Jersey. Stronger employment growth of professional services is credited with much of the demand; however, that demand is partially offset, as existing firms are consolidating and adjusting to more efficient overall office spaces with smaller square footage per person. New construction of large industrial/warehouse space is planned in 2013 in the Harrisburg–Lehigh Valley corridor on the heels of similar spaces built this year; no such construction is anticipated in the southern New Jersey market area. New apartment/condominium projects continue to emerge throughout the Greater Philadelphia region, especially in Center City. Nonresidential real estate contacts retain an outlook of slow, steady growth.

Services
Third District service-sector firms have resumed a more modest pace of growth since the last Beige Book, according to contacts in various sectors. Tourist areas along the Delaware and New Jersey shores are in various stages of recovery from Hurricane Sandy. Atlantic City casinos reported significantly lower revenues in November (as much as $55 million) compared with 2011. Businesses and rental housing that serve the central and northern Jersey Shore communities continued to lose some of the money they would have earned in the low season. Southern New Jersey and Delaware beach communities are largely intact and operating normally. A Delaware beach hotel owner reported a strong December finish to the year, which was partly due to an extra holiday weekend. District staffing firms reported a mild pace of growth at year's end – an improvement after the storm disruptions. Staffing contacts expect moderate growth in 2013 but are watching their clients' reactions to the serial fiscal cliff decisions. Defense-related firms received no relief from the uncertainty of budget cuts that has held their business plans in stasis for the past year. Overall, service-sector firms expressed more confidence in their expectations for growth in the near future.

Prices and Wages
Overall, price levels continued to increase slightly, similar to the previous Beige Book. Cost factors among manufacturing firms held steady, while the prices they received rose a little. Tighter auto inventories generate a price environment that favors auto dealers over their customers. Homebuilders noted that rising commodity prices had added about 3 percent to the cost of a new home in the past 90 days. In addition, roofing and siding contractors have lost crews to the Jersey Shore repairs. Real estate contacts continued to report that house prices are firming up and that houses in some markets are receiving multiple offers. Rents are rising in most segments of the Philadelphia central business district market and for industrial space along the corridor from Carlisle, PA, to the Lehigh Valley. In other segments and geographies, rents are flat or still falling. Contacts from all sectors continued to report that wages rose only a little, if at all. After a good year, two homebuilders reported issuing the first pay raises to their staffs in several years. Contacts did report strong growth in unemployment compensation and workers' compensation costs.

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Fourth District--Cleveland

Business activity in the Fourth District expanded at a modest pace during the past six weeks. Many of our contacts reported that their outlook for the new year is uncertain due to unresolved fiscal policy matters. Manufacturing orders and production were mainly flat or down slightly. Residential and nonresidential construction activity rose, with particular strength noted in the multi-family segment. On balance, retailers described the holiday shopping season as solid. Sales of new and used motor vehicles increased on a year-over-year basis. Shale gas activity continued at a robust pace, though coal production trended lower. The slowdown in freight transport volume seen in September and October has abated. Demand for business credit flattened out, whereas credit use by consumers picked up.

Hiring was sluggish across industry sectors. Staffing-firm representatives saw little change in the number of job openings and placements during the past six weeks. Vacancies were found primarily in manufacturing and healthcare. Wage pressures are contained. Input prices were stable, apart from increases in construction materials.

Manufacturing
Reports from District factories indicated that new orders and production were flat or down slightly during the past six weeks. Companies seeing increases were largely suppliers to the motor vehicle and energy industries. Compared to a year ago, production activity was mixed. Steel producers and service centers described shipping volume as lower relative to levels seen in the third quarter. Many of our contacts expect a slight weakening in business activity during the next few months due to seasonal factors and uncertainty surrounding the outcome of fiscal policy issues. Auto production at District plants showed a moderate decline during November on a month-over-month basis. Relative to prior year levels, production was largely higher, especially for foreign nameplates.

Inventories are being reduced to become more aligned with demand. Manufacturers noted that capacity utilization has fallen in recent weeks; however, rates were within or slightly below their normal range. Capital spending was largely on track for 2012. About one-third of our contacts plan on cutting back capital outlays during this year, and few producers anticipate expanding capacity. Raw material prices were either flat or trended lower, while finished goods prices held steady. On balance, manufacturing payrolls were little changed. Less than half of our contacts expect to hire new workers during 2013. Wage pressures are contained, and rising health insurance premiums remain a challenge.

Real Estate
Home builders reported that the upturn in sales of new single-family homes continued into December. Although a seasonal slowdown is expected, builders expressed confidence that sales will pick up again in the spring. Contracts were found mainly in the mid- to higher-price-point categories. The number of single and multi-family housing starts in December was significantly above year-ago levels. List prices of new homes are increasing, which was attributed to shrinking inventories and rising construction costs. Builders have cut back on discounting. Tight lending standards are still seen as restraining the effect of low interest rates for builders and home buyers. Multi-family developments are expected to be the driving force behind new housing construction during the next one to two years.

Nonresidential contractors reported that business activity grew across market segments and was better than a year ago. Nonetheless, margins are still tight. Although inquiries are down, which is typical for this time of year, builders are satisfied with their backlogs going into 2013. Project financing is available, but it is very time consuming to close a deal. As a result, some developers are turning away from banks and looking more to private lenders. Our contacts are optimistic about near-term activity due to customers wanting to complete must-do projects, such as maintenance or production consolidation. However, there is a heightened level of uncertainly about the medium to long term. A general contractor reported that his customers are postponing the design phase of some of their projects. Other builders expect a slowing in health care construction, as providers evaluate the implementation of recently enacted laws.

Residential and nonresidential builders reported higher prices for drywall and lumber, due to rising demand and a declining supply base. Contractors anticipate widespread price increases for building materials during the first quarter of 2013. General contractors and subcontractors expect to increase their payrolls at a modest pace this year. There is concern about the availability of highly skilled trade workers and back-office personnel, and the potential impact a shortage of either could have on wage pressures.

Consumer Spending
Reports on the holiday shopping season were generally solid. Most retailers were encouraged by results during the Thanksgiving weekend, and a majority said that sales during this holiday season were above those of a year ago. However, some contacts reported that sales figures fell below expectations for the entire season. Increased volume was seen particularly in electronics and apparel. Sales for the first quarter of the new year are expected to trend higher relative to prior-year levels. Vendor and shelf prices held steady. Capital spending remains on target. A majority of our contacts reported that they plan to increase outlays slightly during 2013, particularly for warehousing, store improvements, and e-commerce. Little new hiring is anticipated, except for staffing new stores.

Year-to-date sales of new motor vehicles showed a moderate increase during November compared to the same time period a year ago. Dealers reported that purchases of fuel-efficient cars, including hybrids and compact SUVs, are doing well. New-vehicle inventories were described as adequate to strong. A seasonal slowdown in sales is expected during January and February. Several dealers cited uncertainty over the resolution of fiscal policy issues as a factor that may affect auto sales in upcoming months. Year-to-date sales of used vehicles increased slightly during November, though inventories are still tight. Leasing continued to trend slightly higher, which should help to replenish the used-vehicle inventory by mid-2013. One dealer noted that the balance between leasing and traditional financing has returned to normal. Some of our contacts reported that their employment level is lower than prior to the recession, and most do not expect to increase payrolls during the next 6 to 12 months.

Banking
Demand for business credit was steady or down slightly since our last report. Some contacts cited a rise in the number of applications for commercial real estate loans and refinancings, but on balance, demand was little changed across sectors and product categories. Several bankers noted that their loan-to-deposit ratio was much lower than desired. On the consumer side, reports indicated an increase in drawdowns on home equity lines of credit and rising credit card receivables, which were attributed to holiday shopping. A few bankers saw an increase in auto loans. Activity was strong in the residential mortgage market, with a large majority of applicants looking to refinance. Delinquency rates held steady or declined across consumer and commercial loan categories. Core deposits grew, with an ongoing transition from time-deposit to transaction accounts. Little change in banking payrolls is expected in the near term.

Energy
Conventional oil and natural gas production was stable during the past couple of months. Shale gas activity continued at a robust pace: in West Virginia, well output at the end of 2011 was up 138 percent from the prior year, and during the first six months of 2012, well output across Pennsylvania rose by 42 percent compared to the previous 6 months. In eastern Ohio, 187 wells have been drilled in the Utica shale in the past year, with 44 currently producing. Coal production for 2013 is expected to be flat relative to 2012 levels. Demand for thermal coal increased slightly due to colder weather and a slowdown in switching from coal to gas by electric utilities. Demand for metallurgical coal in the U.S. held steady, but declined from offshore customers, particularly those in Europe. Falling prices for metallurgical coal have leveled off, while steam-coal prices were mixed. Capital expenditures by conventional drillers and coal producers are expected to decline during the first six months of 2013. Production equipment and material prices were flat across most categories. Apart from shale gas companies, little hiring is anticipated during the next 6 to 12 months.

Freight Transportation
Reports on freight transport indicate that shipping volume has improved since the start of November after an unexpected drop-off during the prior two months. Some contacts attributed the boost to rising demand coming from the retail sector and areas affected by Hurricane Sandy. Freight executives were fairly positive in their outlook for 2013, with the caveat that a resolution is reached on issues involving fiscal policy. Costs associated with truck maintenance held steady, while diesel fuel prices fell. Reports on capital spending were mixed. Some freight haulers said that 2012 expenditures reached targeted levels. Others reported a postponement in purchasing equipment for replacement and expansion due to a sluggish economy and supply issues related to Class 8 trucks. Spending in 2013 is expected to be similar to 2012 levels, and it will be mainly for replacement. Due to uncertainty about the economy, hiring plans for 2013 are tentative. Wage pressures were contained.

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Fifth District--Richmond

District economic activity generally grew at a modest pace in recent weeks. District manufacturing growth slowed, and retail sales flattened, with the exception of food and vehicle sales. Non-retail services providers reported stable to stronger demand, and tourism activity was at normal winter levels. Commercial and consumer lending varied by location, while the environment remained competitive. Residential real estate activity continued to improve; reports on commercial real estate activity, however, were mixed. Agricultural conditions remained favorable. Oil and natural gas production held steady at high levels during the past six weeks, but coal production fell. Labor market conditions weakened somewhat since our last report. Manufacturers' input prices were little changed, while finished goods prices rose at a slower rate, and the pace of wage growth remained moderate. Services providers' prices rose slightly faster and non-retail wage growth edged up. Retail price increases slowed, and wages fell.

Manufacturing
District manufacturing continued to expand, but at a more modest pace since our last report. A furniture manufacturer said that his business had improved through gains in market share and new product introductions, and that the improvement should continue in 2013. A spokesperson for the technology industry reported that 2012 was expected to be flat, but instead grew by ten to twelve percent. Another contact stated that, "Manufacturing is hanging in there," noting that niche markets were doing best, but only if they were not dependent on international demand. A producer of lumber products commented that sales volumes and orders dropped, in part because of Hurricane Sandy's impact on their customer base in the northeast. An electrical components manufacturer reported that business was "terrible," adding that his only sales were to replace ruined equipment from Hurricane Sandy, and that export orders to Europe had dropped off. According to our latest survey, raw materials prices were relatively flat, while finished goods prices rose at a slightly slower pace.

Ports
The typical seasonal surge in import volumes shifted as a result of two major events. The first was the threat of an East Coast port strike that has loomed since the September 2012 expiration of the master contract between the International Longshoremen's Association and the U.S. Maritime Alliance. A number of shippers used alternative West Coast and Canadian ports ahead of the peak season to minimize disruptions to their businesses. Secondly, Hurricane Sandy caused diversions to Fifth District ports, boosting an already solid peak season. In addition, bulk fuel shipments that were diverted to the Northeast created "a pinch in supply" for companies located further south. Exports of resins for plastics, grains, forestry products and metal scrap were especially strong, with imports being led by beverages and retail goods. Both exports and imports of auto-related products were robust.

Retail
Retail sales flattened, with the exception of food and vehicle sales, according to most merchants contacted since our last report. Several blamed the lackluster sales on the federal government's failure to resolve its fiscal issues. Most retailers responding to a special poll indicated that they planned an equal amount of holiday discounting as a year ago. A West Virginia department store manager reported that sales were a little soft ahead of Christmas, while other retailers noted little change. In contrast, many grocers noted an uptick in revenues. Although big-ticket sales were weak overall, car sales rose by double-digit percentages in recent weeks. Federal fiscal indecision also pushed sales of heavy trucks, construction equipment, and buses at the end of 2012, ahead of the possible expiration of bonus depreciation. According to survey respondents, retail price growth slowed during the past month.

Services
Services firms reported stable to stronger demand since our last report. An executive at a national freight trucking firm indicated that revenues flattened in the District, while another trucking company reported that demand slowed slightly, although that company was able to improve its margins. Demand strengthened at telecommunications and engineering firms, and a contact in Washington, D.C. remarked that law firms see regulatory practice as a growth industry. During the week of Christmas and New Year's Day, the CDC reported that the flu had become widespread across the District. An executive at a North Carolina healthcare facility commented that the "flu season hit early and hard," more than doubling the average number of cases for that time of year. Non-retail services prices rose slightly faster in recent weeks, according to survey respondents.

Tourism activity was at normal winter levels in recent weeks, and rate changes were modest. In addition, a D.C. contact commented that restaurant bookings were brisk for holiday meals and events. An executive at a Virginia resort area said that his rentals were filled up for the week from Christmas through New Year's Day. A source on the outer banks of North Carolina reported somewhat less tourism activity, compared to a year ago because of lingering road problems caused by Hurricane Sandy.

Finance
Demand for both consumer and commercial loans varied across the District. A North Carolina lender noted that mortgages for new purchases of homes declined, in part because of economic uncertainty. However, a second North Carolina lender said new financing is outpacing refinancing at his bank. According to another North Carolina banker, the home mortgage business is improving and he indicated that refinancing has strengthened in his region; in addition, a number of lenders stated that the competition among lenders for refinancing business has been aggressive. Finally, a banking contact with several locations in the District reported that demand for consumer loans and mortgages had not changed much. Bankers in Maryland and West Virginia reported that foreclosures have slowed. A West Virginia banker said that while overall credit quality has been very good, residential mortgage delinquencies have crept up slightly, and that demand for commercial credit had been steady at a relative high rate in recent weeks. Another West Virginia banker remarked that his region's commercial and industrial loan demand had slowed because economic progress has been "lumpy." A banker in North Carolina reported that loan demand from businesses had remained weak despite lower borrowing rates, owing in part to economic uncertainty.

Real Estate
Residential real estate activity continued to improve since our last report. A contact in South Carolina said that the real estate market was dynamic in the Charleston area and that demand and pricing were stronger than they had been in a long time. A Realtor in the Washington, D.C. area expects a strong market through early 2013, as the combination of record low inventory and low interest rates encourages new listings. A contact in West Virginia told us that home sales in his area have improved considerably and that prices were flat for the first time since the drop in values two years ago. Another source saw improvement in the "move up" market but little to no activity in the speculative market. He also remarked that the start-up market for housing remained flat and that the effect of student loans on credit scores was a cloud over the mortgage market.

Reports were mixed on commercial real estate and construction markets in the District. While a few contacts reported modest improvement in activity since our last report, others noted flat activity or modest declines. A developer in the Carolinas said that absorption rates in the office sector tightened in the downtown Charlotte area, but vacancies in suburban areas remained elevated. In contrast, a real estate representative in Virginia indicated that office park absorption rates in the Roanoke suburbs were good, with ninety percent occupancy rates, which he attributed to new medical facilities. However, he noted that vacancies in the downtown area were considerably higher. Most sources also mentioned tightening of available office space, especially among Class A properties, due to lack of new construction. A Charlotte Realtor stated that leasing rates in the industrial sector continued to decline this year and noted little new development in the retail sector. Moreover, several realtors reported that rental rates were soft, noting that it was a "tenant's market." However, all contacts were in agreement that concessions were decreasing.

Agriculture and Natural Resources
Agricultural conditions remained favorable. Oil and natural gas production remained at high levels during the past six weeks. December was relatively mild across most of the District, with warmer than normal temperatures and significant precipitation. Small grain conditions improved with the added moisture, as did pastures and hayfields.

Although conventional oil and natural gas production held steady at high levels, the rig count fell in West Virginia. Cushioning the fall, many companies continued to drill in order to get wells in place before permits expired. In contrast, coal production fell last year due to lower demand from domestic utilities and offshore customers, idling many mines. One coal producer attributed the depressed coal market to stricter regulations coupled with lower natural gas prices, as well as a weaker economy both in the United States and in Europe.

Labor Markets
Conditions in labor markets weakened since our last report. There were several reports of soft demand for workers in part because businesses were reluctant to hire in the politically uncertain climate. Retail employment dropped sharply in recent weeks, and several service sector contacts indicated that hiring decisions were in a holding pattern. Exceptions were to fill vacated positions and to ease nursing shortages, and a Washington contact remarked that restaurants were paying bonuses to attract managers. Sources continued to report difficulty finding qualified workers to fill vacancies, particularly in advanced manufacturing. Two Virginia temporary employment agencies noted increased demand for high tech and highly skilled workers. According to an ad hoc poll, less than half of the retailers who made seasonal hires expected to offer those employees a permanent position after the holidays. Wage growth in manufacturing remained moderate, even among skilled workers, while average retail wages declined. In contrast, non-retail service sector wages continued to rise at a moderate pace.

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Sixth District--Atlanta

Reports from Sixth District business contacts indicated that economic activity expanded moderately in late November and December, with most expecting continued modest growth in early 2013.

District merchants cited mildly positive holiday sales, while tourism contacts noted continued strength in both business and leisure travel. Residential real estate contacts experienced ongoing modest sales growth for both new and existing homes on a year-over-year basis, while commercial contacts described demand conditions as improving, especially in the multifamily segment of the market. Manufacturers, on the other hand, noted a decline in orders and production. Reports from bankers indicated that loan demand had strengthened, driven in large part by an increase in mortgage lending. Employment levels across the District expanded at a modest pace, while pricing pressures remained subdued.

Consumer Spending and Tourism
District contacts reported cautious optimism following a robust start to the holiday season. While sales were better than expected over the Thanksgiving weekend, reports covering the entire holiday season showed that total sales, although above year-ago results, did not appear to meet expectations. Deep discounting was prevalent throughout the holiday season. Auto sales remained robust and truck sales were somewhat positive with sales of replacement vehicles driving the growth for that segment.

Travel and tourism contacts continued to report strong activity. Hospitality contacts noted increases in visitation and spending in the final quarter of 2012. Lower gasoline prices boosted leisure travel. Business travel and attendance at major conventions also increased. International visitors continued to lift tourism activity and advance reservations of international travel have exceeded expectations. The outlook for 2013 remained positive with hospitality contacts projecting increases in occupancy rates and revenue per available room.

Real Estate and Construction
The majority of District residential brokers reported that recent existing home sales were ahead of year earlier levels. Sales growth was strongest in Florida. Most brokers in the region again noted declining inventories and rising home prices. Buyer traffic remained ahead of the year-ago level by most accounts. For 2013, most anticipate home sales growth will continue to improve slowly.

Reports from District homebuilders were a bit more positive than in our last report. Builders reported that recent new home sales and construction activity were slightly ahead of year-earlier levels. The majority of builders continued to report that new home inventories were below the year-ago level and prices were up slightly. Buyer interest remained strong but several builders continued to note difficulty securing development and construction financing. Despite the challenges, the outlook for construction activity remained positive and builders anticipate new home sales in 2013 to exceed 2012 levels across many parts of the District.

Reports from District commercial contractors indicated that the pace of construction activity improved modestly from the third to fourth quarter and was ahead of the previous year's performance. Apartment development was particularly strong. The pipeline for commercial construction at the end of the fourth quarter was greater than the year-ago level by most accounts. Most said that commercial construction development financing remained scarce. However, the outlook for 2013 remained positive as most contacts expect commercial construction activity to be slightly ahead of 2012 levels. Commercial brokers indicated that most office, industrial, and retail markets in the District experienced modestly positive absorption rates. Overall, contacts continued to anticipate steady, but slow improvements in District commercial real estate markets during 2013.

Manufacturing and Transportation
Manufacturing contacts in the region reported that new orders and production contracted in December. Finished inventory levels also declined from the previous month. However, nearly half of manufacturing contacts expect production to be higher than current levels over the next three-to-six months, up from just under one-third in November.

Trucking contacts reported a notable increase in tonnage in November, representing the first gain since July 2012, and offsetting a drop in October's readings. Reports suggested that Hurricane Sandy affected both months' readings. A large truck dealer reported it is expanding sales to include flatbed trailers in response to anticipated increased movement of construction materials as a result of improvements in the housing sector. Railroad contacts reported an increase in total carloads in November over year-ago levels with the largest increases occurring in chemicals and agricultural products while declines were noted in coal, metallic ores, and metals. Concerns grew over low river levels that have led to delays in Mississippi River barge traffic.

Banking and Finance
Many banking contacts indicated loan demand had increased and they've added lending specialists to deal with current and anticipated demand. Competition for quality borrowers remained fierce and there was some indication that banks were more willing to increase their tolerance for risk. Auto lending remained active and some depository institutions noted more loan growth in November and December. Low rates encouraged mortgage activity, and purchases accounted for a larger share of mortgage loans than in the recent past. Community banks reported spending a larger portion of their income on compliance and remained concerned about increasing regulatory pressures.

Employment and Prices
Since the last report, payroll growth increased mildly across the District, though contacts said that uncertainty over fiscal policy and healthcare costs tempered hiring decisions. Aggregate gains in job growth across the District were fueled largely by strong job growth in Florida and Louisiana. Contacts in Florida's leisure and hospitality industry reported moderately improved hiring expectations, while the construction, retail, and energy sectors in Louisiana saw relatively healthy increases in employment in November and December.

Pricing pressures remained subdued, according to results from our December Business Inflation Expectations survey which indicated that unit costs were up 1.5 percent over the past 12 months, which is down from 1.7 percent in November. Margins improved somewhat in December, especially for retail contacts who reported being able to pass on slightly higher markups compared to the holiday season in 2011. Looking forward, year-ahead unit cost expectations of businesses were 1.9 percent in December, moderating from 2.1 percent the month before. Businesses continued to cite costs relating to tax policy, regulation, and healthcare as sources of uncertainty going into 2013.

Natural Resources and Agriculture
Planned investments, ranging from reserve development to increased refining and petrochemical operations to new pipeline infrastructure, continued to take place in the energy sector. For example, preparation for development of a large gas-to-liquids (GTL) and ethane cracker complex in Louisiana was announced, which is expected to increase the region's production capacity for GTL diesel and ethylene. Separately, industry contacts maintained that higher margins for natural gas liquids and other associated products continued to warrant ongoing drilling in natural gas wells, despite low prices for natural gas. In the midst of an apparent surge in investment activity in the energy industry, District contacts continued to cite a shortage of specialized skilled labor as a significant hurdle facing expansion plans going forward.

Prices for corn, soybeans, beef, and poultry remained above year-ago levels, while the price for cotton was lower than this time last year. Dry conditions persisted in much of the District, although late December rains helped many areas in the region.

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Seventh District--Chicago

Economic activity in the Seventh District continued to expand at a slow pace in late November and December. Many contacts expected that growth in 2013 would match or outperform 2012, but some remained more cautious than others, citing the impact of continued uncertainty over federal fiscal policy on the near-term economic outlook. Consumer spending increased somewhat, while growth in business spending remained tepid. Growth in manufacturing production was again moderate. Residential construction continued to increase at a slow but steady pace, but nonresidential construction remained weak. Credit conditions continued to improve gradually. Cost pressures eased some, and wage pressures remained moderate. Cattle and hog prices moved higher; while corn, soybean, and milk prices moved lower.

Consumer Spending
Consumer spending increased somewhat from the previous reporting period. Retailers noted that holiday sales were slightly below expectations. Multiple retailers reported that store traffic volumes fluctuated more throughout the holiday season than in recent years. Apparel and jewelry sales were strong, while sales of toys and electronics were more in line with expectations, and general merchandise sales were weaker. Auto sales in the District lagged the national pace, with several dealers indicating that lower consumer confidence hurt year-end sales. Some auto dealers also noted that inventory levels were slightly high. However, dealers expected new car sales to be stronger in 2013 due to pent-up consumer demand, easing credit conditions, and rising used vehicle prices.

Business Spending
Growth in business spending remained tepid in late November and December. Inventory investment was little changed while spending on equipment and structures continued to slowly increase. Some contacts again noted a reluctance to spend given heightened uncertainty related to federal fiscal policy. Labor market conditions were unchanged. Hiring plans for the coming year were limited. Retail employment increased with some seasonal hiring, but few significant full-time post-holiday additions were expected. A recruiting firm noted that customers that are heavily dependent upon government spending were very cautious about increasing headcount amidst the fiscal cliff negotiations. Companies with exposures to Europe were likewise being more conservative in their hiring plans. However, contacts indicated that there is still strong demand for talent in technology, engineering, accounting and finance, energy, and skilled manufacturing jobs. Manufacturers indicated a reluctance to reduce headcount despite the recent slowdown in activity, choosing to cut overtime hours instead in expectation of a rebound in production in the first quarter. In addition, some contacts are also beginning to limit hours for part-time workers to less than 30 hours in order to avoid the 30-hour (full-time employee status) rule related to the Affordable Care Act.

Construction and Real Estate
Construction and real estate activity was mixed in late November and December. Residential construction continued to rise. However, homebuilders noted that new construction would stay moderate in many regional markets as long as existing home prices remained well below new home prices. Existing home prices did edge up in some areas of the District, and rental rates continued to rise. In addition, contacts reported that in many cases credit for homebuyers remained tight, slowing the pace of home sales. Demand for nonresidential construction remained weak, but some improvement was noted in the light industrial and office markets. Several commercial real estate contacts observed that uncertainty surrounding federal fiscal policy continues to weigh on structures spending in a number of market segments. However, commercial real estate conditions improved slightly. Vacancy rates continued to decrease; and while the pace of leasing and acquisition deals remained slow, it picked up slightly as financing became easier to obtain.

Manufacturing
Growth in manufacturing production continued to be moderate over the reporting period. Capacity utilization in the steel industry increased slightly and service center inventories were noted to be at desirable levels. Specialty metal manufacturers reported a decline in quoting and new orders as customers continued to delay purchases until the last minute. In contrast, a contact in the defense industry noted a substantial rebound in orders due to the two-month delay in sequestration. Contacts noted a slight pick-up in demand for construction equipment due to improvement in the housing market, although demand from the public sector remained weak. The auto industry remained a source of strength for manufacturing. Auto suppliers reported strong orders through the end of the year, and many expected vehicle production to expand in 2013. Activity in the energy industry appeared to slow. The lower price of natural gas, in part due to abundant supply, has negatively affected coal mining. In addition, one contact noted the lower prices had also led to a pause in shale gas production. However, contacts expected activity in the energy industry to rebound in early 2013.

Banking and Finance
Credit conditions continued to gradually ease over the reporting period. Credit spreads and financial market volatility remained low, and asset quality continued to improve. Credit line utilization rose substantially, with contacts citing end-of-year factors such as tax planning and special dividends as reasons for the increase. Banking contacts also reported moderate growth in demand for small business loans, particularly from manufacturing industries such as machining and packaging. Pricing for business loans changed little, while contacts cited some loosening of loan standards. Consumer loan demand, particularly for mortgage and auto loans, continued to increase. Contacts indicated, however, that less home refinancing activity was being processed than in the previous reporting period.

Prices and Costs
Cost pressures eased in late November and December. Most raw material prices moved lower, although there was some pressure on lumber and drywall prices and concerns remained around potential food and energy price increases. In contrast, manufacturers supplying the defense industry said their customers were attempting to negotiate large price decreases; these contacts thought they could instead secure multi-year price agreements in exchange for more moderate price reductions. A contact in the grocery industry indicated that they have been unable to fully pass on recent meat and milk cost increases. More generally, retailers reported that discounting and promotions increased over the holiday shopping season. Wage pressures remained moderate, but nonwage costs increased. Contacts again cited higher healthcare costs; however, a few noted that increases this year were less pronounced than a year ago. Several contacts also reported increasing 401(k) payouts and year-end bonuses.

Agriculture
Although drought conditions eased, depleted soil moisture remained a concern in much of the District. The low levels of the Mississippi River hampered barge traffic moving both crops to market and inputs to farms. Crop operations tended to come out ahead for the year if they had adequate insurance coverage, and most crop farmers saw their net worth grow. Uncertainty regarding the tax treatment of capital expenditures led farmers to move up purchases of equipment and other capital improvements into 2012. Corn and soybean prices slid during the reporting period. Milk prices decreased, while cattle and hog prices increased. Of these agricultural products, only hog prices were below the levels of a year ago. Farmland values trended higher, with an extra spurt of farm sales at the end of 2012 in anticipation of tax code changes. Cash rents for cropland increased as well for the upcoming season.

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Eighth District--St. Louis

The economy of the Eighth District has grown at a modest pace since our previous report. Recent reports of planned activity from service firms have been positive. In contrast, reports of planned activity from manufacturing firms have been negative on net. Residential real estate market conditions have continued to improve, and commercial and industrial real estate conditions have also improved in some areas. Total lending at a sample of small and mid-sized District banks decreased slightly from early September to mid-December. Agricultural conditions in the District have been mixed since our previous report.

Manufacturing and Other Business Activity
Reports of plans for manufacturing activity have been negative on net since our previous report. Several manufacturing firms reported plans to lay off workers and close plants in the Eighth District, while fewer manufacturing firms reported plans to hire new workers or expand operations. Firms in HVAC equipment, electric components, food, and automobile parts manufacturing reported plans to lay off workers. In contrast, firms that manufacture small arms and medical devices reported plans to hire new workers and expand operations.

Reports of planned activity in the District's service sector have been positive since our previous report. Firms in electric power generation, food services, business support services, and information services announced plans to hire new employees and construct new facilities. In contrast, firms in medical services and in financial services reported plans to lay off workers. Retail contacts in Louisville reported the opening of several new facilities, and an auto dealer group is expanding operations in the Memphis area. Retailers in Memphis reported increased sales on an annual basis, and auto dealers in Little Rock and Louisville also reported increased sales for the year.

Real Estate and Construction
Home sales increased throughout most of the Eighth District on a year-over-year basis. Compared with the same period in 2011, November 2012 year-to-date home sales were up 16 percent in Louisville, 5 percent in Little Rock, 13 percent in Memphis, and 19 percent in St. Louis. Residential construction increased in the majority of the District. November 2012 year-to-date single-family housing permits increased in the majority of the District's metropolitan areas compared with the same period in 2011. Permits increased 40 percent in Louisville, 26 percent in Little Rock, 30 percent in Memphis, and 25 percent in St. Louis.

Commercial and industrial real estate market conditions have improved in some areas of the District. Contacts in the Memphis metropolitan area noted that commercial and industrial real estate activity remained stable. A contact in St. Louis noted that office space leasing activity improved in the downtown area, while a contact in Louisville noted strong suburban office space leasing activity. Commercial and industrial construction activity continued to improve throughout most of the District. Contacts in Louisville noted plans for speculative industrial construction in Jefferson County, Indiana, and several industrial construction projects in southern Indiana and in Bullitt County, Kentucky. A contact in Little Rock reported new commercial construction projects in southwest Little Rock. Contacts in Memphis reported a number of ongoing health care construction projects in the downtown area. A contact in St. Louis reported commercial construction plans in the Dogtown neighborhood and that an automobile assembly plant expansion is under construction in Wentzville.

Banking and Finance
Total loans outstanding at a sample of small and mid-sized District banks decreased 0.6 percent from early September to mid-December. Real estate lending, accounting for 72.4 percent of total loans, was little changed. Commercial and industrial loans, accounting for 15.7 percent of total loans, decreased 4.4 percent. Loans to individuals, accounting for 4.7 percent of total loans, were essentially unchanged. All other loans, accounting for 7.1 percent of total loans, increased 1.7 percent. During this period, total deposits at these banks decreased 0.6 percent.

Agriculture and Natural Resources
November year-to-date commercial red meat production across the District's states was 4.3 percent higher in 2012 than the same period in 2011. By contrast, November year-to-date poultry production as measured by the number of young chickens slaughtered was down 2.2 percent relative to 2011. The District's states ginned 6.4 percent less cotton from January 1 to December 15, 2012, compared with the same period in 2011. Year-to-date coal production in the District's states (excluding eastern Kentucky) at the end of November 2012 was 9.4 percent higher than the same period in 2011, while coal production for November 2012 was roughly on par with production for November 2011.

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Ninth District--Minneapolis

The Ninth District economy grew moderately since the last report. Increased activity was noted in consumer spending, tourism, professional services, manufacturing and energy. Construction and real estate experienced continued strong recovery. Activity was steady in agriculture and slowed slightly in the mining sector. Labor markets tightened modestly. Wage increases were moderate. Overall price increases were subdued.

Consumer Spending and Tourism
Overall consumer spending was up slightly relative to a year ago. The holiday shopping season was somewhat stronger than last year, with bigger gains in North Dakota and Montana. Same-store sales at a Minnesota-based retailer were flat in December compared with a year ago. A Minneapolis area mall reported that holiday traffic was level from a year ago, but sales were up. Activity at a shopping center in South Dakota was relatively level from a year earlier. A North Dakota mall manager reported that December sales were about 10 percent higher than last year; jewelry sales were particularly strong. Retailers in the Great Falls, Mont., area generally reported a solid holiday season. According to the Minneapolis Fed's business outlook survey, 30 percent of respondents expect increases in consumer spending in their communities during 2013; 25 percent expect decreases. These results were similar to last year's survey.

Recent new car and truck registrations in Minnesota were higher than a year ago. In Montana, vehicle sales remained steady during the past few months, according to a representative of an auto dealers association.

Winter tourism activity was strong in areas with snow, but lackluster in dry areas. A Montana ski resort reported that visits were up and reservations were looking good for the rest of the winter. However, in the Upper Peninsula of Michigan, activity was soft due to marginal snow conditions. The winter tourism season got off to a slow start because of a lack of snow in western South Dakota; recent snowfall should help spur activity, according to an official.

Construction and Real Estate
Commercial construction activity increased at a solid pace since the last report. The permitted value of new commercial construction in December was up 26 percent in Sioux Falls, S.D., and the value of November permits more than doubled in Billings, Mont. A major outlet mall is planned for the Minneapolis-St. Paul area. Residential construction increased considerably from a year ago. The value of November residential building permits in Billings was up 70 percent from last year, and the value of December permits in Sioux Falls was up 39 percent from a year ago. In the Minneapolis-St. Paul area, December residential permits were up 17 percent compared with December 2011.

Commercial real estate markets continued to tighten. A major commercial real estate firm forecast that Minneapolis-St. Paul area office vacancy rates will dip to 17.7 percent at the end of 2012 compared with 19.1 percent at the end of 2011. The same firm forecast industrial vacancy rates to drop to 9.9 percent from 11.2 percent. Residential real estate market activity increased. Home sales in November were up 20 percent from the same period a year ago in the Minneapolis-St. Paul area; the inventory of homes for sale was down 29 percent, and median sale prices rose 17 percent. In the Sioux Falls area, November home sales were up 20 percent, inventory was down 14 percent and the median sale price increased 9 percent relative to a year earlier.

Services
Activity at professional business services firms grew since the last report. Services sector respondents to the business outlook poll expect sales volumes and capital investment at their firms to grow in 2013. An appraisal company noted that demand is increasing for its services, and the backlog continues to increase. Another appraiser noted, "I am turning down more business than I am accepting."

Manufacturing
District manufacturing increased slightly since the last report. According to a December survey of purchasing managers by Creighton University (Omaha, Neb.), manufacturing activity increased in Minnesota and South Dakota after five consecutive months of decreases. Activity also increased in North Dakota, but at a slower pace than in recent months. The Minneapolis Fed's 2012 survey of manufacturers indicated that respondents on average expect orders, production, employment and profits at their operations to increase in the coming year. The outlook for capital investment was flat. A company announced that it is opening a 40,000-square-foot cereal ingredient processing facility in South Dakota.

Energy and Mining
Activity in the energy sector continued to grow, while mining slowed. District oil production remained at record levels. An oil refinery in Minnesota announced plans for a $400 million upgrade in order to process more oil. Late-December oil and gas exploration activity decreased slightly in North Dakota and increased in Montana from the previous month. A railroad put on hold its plans to expand a coal-shipping line from Wyoming, citing a weaker outlook for domestic coal. Iron ore production remained strong in northern Minnesota; however, recent months were down from levels earlier in 2012. A large mining company announced that it will idle some of its production at operations in Minnesota and the Upper Peninsula in 2013, citing lower ore prices and reduced global demand. A mining company increased its estimate of deposits at a potential copper, nickel and precious metals mine in northern Minnesota.

Agriculture
Agriculture was steady at high levels. Crop prices came down somewhat recently but remain relatively high, a slight relief to livestock and dairy producers who have been hammered by high feed costs. The selloff of livestock herds continued. Sugarbeet producers in Minnesota and North Dakota saw a record crop in 2012, but prices were down. Prices received by farmers increased in December from a year earlier for corn, wheat, soybeans, chicken, dairy products and cattle. Prices for hogs, turkey, eggs and dry beans decreased. According to the Minneapolis Fed's third-quarter (October) survey of agricultural credit conditions, farmland prices continued their rapid rate of increase.

Employment, Wages, and Prices
Labor markets tightened modestly since the last report.A manufacturer in Minnesota recently announced plans to open a new facility that would employ 400 new workers. Up to 300 employees are expected to eventually work at a call center in Minnesota. However, an iron ore plant idled 125 workers, and a high tech company laid off over 40 employees in Minnesota due to a slowing in demand. According to respondents to the business outlook poll, 28 percent expect to increase hiring during 2013, while 15 percent expect to decrease staff, similar to last year's poll.

Wage increases were moderate. According to the business outlook poll, 93 percent of respondents expect wages in 2013 to increase no more than 3 percent. Business contacts in South Dakota and Montana expected to generally increase wages between 2 percent and 3 percent in 2013 from a year earlier. However, wage increases in the oil-drilling areas of North Dakota and Montana are expected to be higher.

Overall price increases were subdued. Minnesota gasoline prices at the end of December were down about 20 cents per gallon since the end of November and were about 10 cents per gallon less than a year ago. A Minnesota-based food maker said it expects ingredient cost inflation of up to 3 percent. Some metals prices increased since mid-November. According to the survey of manufacturers, 37 percent of respondents expect to increase selling prices in 2013, while 16 percent expect to decrease prices.

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Tenth District--Kansas City

The Tenth District economy expanded modestly in November and December. After a strong start to holiday shopping, retail sales remained solid as the holiday season progressed and vehicle sales remained higher than a year ago. Manufacturing activity, while above year-ago levels, eased further, especially in the non-durable goods sector. Although energy activity remained historically high, both oil and natural gas rig counts dropped and District contacts expected further declines in the coming months. Residential and commercial real estate markets strengthened as prices and sales trended up and inventories declined. Bankers also reported strong demand for both residential and commercial real estate loans. Historically high crop prices supported crop sector incomes, and livestock profits improved with an uptick in livestock prices. Wage pressures remained subdued except for the ongoing need to fill specialized positions in energy, high-tech, transportation, and construction industries. Numerous business contacts noted they were delaying hiring plans due to economic uncertainty associated with the fiscal cliff and potential policy changes.

Consumer Spending
Consumer spending edged up in November and December, and sales expectations softened heading into the new year. Retail sales rose since the last survey period but retailers expected less growth after the holiday season. Several store owners noted that lower-priced items and home furnishings sold particularly well while sales of high-end items remained sluggish. Auto sales slowed but remained higher than a year ago and some dealers noted undesirably high inventory levels. Near-term sales expectations also eased but generally remained positive. Hotel traffic fell sharply and occupancy rates were substantially below last year's levels. Although tourist activity picked up somewhat, visitor counts remained well below a year ago and were not expected to improve in the near-term. Despite slightly better sales and higher selling prices, restaurant owners turned pessimistic about future sales growth as food costs mounted. Numerous contacts pinned their less positive outlook for future growth on uncertainty associated with the fiscal cliff that was inhibiting consumer spending.

Manufacturing and Other Business Activity
Manufacturing activity eased since the last survey period, particularly in the non-durable goods sector. Factory production retreated to year-ago levels after a more pronounced contraction in non-durable goods activity trimmed production over the past month. The relative strength of durable goods activity was supported by the production and sales of electrical equipment, appliances, and components. Manufacturers expected generally stronger activity over the next six months. Factory managers at non-durable goods plants, however, were more optimistic about future activity than their peers at durable goods plants with stronger expectations for production, shipments, and new orders over the next six months. Despite a potential rebound in manufacturing activity, factory employment was not expected to rise, with some manufacturers noting that they were delaying hiring plans because of uncertainty in tax and regulatory policies. High-tech service firms expected robust sales and capital spending over the next three months. With railroad traffic continuing to rise and flat sales expectations at transportation service firms, backlogs and capital spending remained solid.

Real Estate and Construction
Residential and commercial real estate sales accelerated since the last survey period despite some weakness in new residential construction. Persistently strong sales of existing residential homes drove prices higher as home inventories continued to fall. Real estate contacts noted that low- to mid-priced homes continued to sell well. Overall mortgage activity and refinancings remained higher than a year ago although expectations for the coming months edged down. Despite recent strength at construction supply firms, sales deteriorated unexpectedly over the past month due partly to higher selling prices. Builders noted that surging lumber and drywall costs led to fewer housing starts in November and December. Commercial real estate markets also improved substantially since the last survey period. Vacancy rates continued to fall with a notable improvement in sales, absorption, and rents, although some contacts noted that economic uncertainty hindered activity. Rising commercial real estate prices were expected to persist in the coming months, but contacts expected a slower pace of both sales activity and absorptions.

Banking
Bankers, on average, reported stronger loan demand, improved loan quality, and higher deposit levels in the recent survey period. Overall loan demand continued to strengthen, led by demand for residential and commercial real estate loans. Respondents also reported stable loan demand for both commercial and industrial loans and consumer installment loans. Interest rates on commercial and industrial loans continued to edge lower. Most bankers reported improved loan quality compared to a year ago, and they also expected the outlook for loan quality to continue improving over the next six months. Credit standards remained largely unchanged in all major loan categories and respondents also reported generally higher deposit levels since the last survey period.

Agriculture
Drought continued to impact crop conditions and livestock profits improved with higher livestock prices and lower feed costs. District winter wheat conditions remained relatively poor due to persistent drought. The drought also caused water levels on the Mississippi River to fall further, hindering commodity transportation to and from agricultural regions. Still net farm incomes remained high due to historically high crop prices and crop insurance payments. Livestock profit margins also improved over the past six weeks due to a post-harvest decline in crop prices and rising livestock prices. District contacts noted a surge in land sales, sparked by concerns of tax policy changes in the new year.

Energy
District energy activity contracted in November and December and was expected to slow further in the coming months. The number of active oil rigs in the District eased from the previous survey period despite a year-end uptick in crude oil prices. The number of active natural gas rigs declined as high supplies of natural gas in storage kept prices from rising due to winter heating needs. Energy contacts expected steady demand to stabilize oil prices and the current oversupply of natural gas to push prices lower. Wyoming's coal output dropped in December and annual production fell moderately short of year-ago levels. District ethanol production remained steady and profit margins, while still poor, improved slightly with easing corn prices.

Wages and Prices
Although wage pressures remained subdued during the survey period, raw materials prices rose further and more companies expected to raise finished goods prices in the coming months. Many businesses reported delaying hiring due to uncertainty surrounding the fiscal cliff and health care policy. Yet, some firms were offering wage premiums to fill specialized positions, particularly in the energy, high-tech, transportation, and construction industries. Raw material costs at factories climbed higher, and more factories planned to raise finished goods prices over the next six months. Builders expected higher prices for many construction materials, particularly lumber and drywall, to continue climbing due to tight supplies. After rising during the holiday shopping season, retailers expected retail prices to flatten during the coming months. Restaurant owners planned to increase menu prices due to high food costs. In contrast, fewer bookings led hotel operators to reduce average room rates.

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Eleventh District--Dallas

The Eleventh District economy expanded at a modest pace over the past six weeks. Reports on manufacturing activity remained mixed. Real estate and construction activity continued to improve. Retailers said holiday shopping boosted sales, and automobile dealers reported that sales were above year-ago levels. Staffing, accounting and legal services firms noted steady demand, while reports from transportation service firms were mixed, but improved overall. Energy activity remained at high levels despite a decline in the rig count, and financial firms reported modest growth in loan demand. Agricultural conditions remained dry. Prices were mostly stable, and wage pressures remained limited. Employment levels were steady to up. Many responding firms' outlooks reflected fiscal uncertainty during the reporting period.

Prices
Most respondents noted stable prices, although accounting and legal services firms reported a modest rise in billing rates and some transportation service contacts noted an increase in freight charges. Overall, costs were flat to up during the reporting period. Some construction-related manufacturers and transportation service firms noted higher input costs. An aviation manufacturer said they planned to implement price increases this month due to rising input costs. Feed costs for livestock were at record high levels, while prices of other agricultural commodities declined slightly.

The price of WTI rose over $90 per barrel during the reporting period. Natural gas prices remained depressed. On-highway diesel and gasoline prices trended down, and prices of petrochemical products were mixed.

Labor Market
Employment held steady or increased at most responding firms. Reports of employment increases came from legal firms, auto dealers, and a few manufacturers. Retailers said employment was up from a year ago, and one contact reported difficulty in filling IT positions. Accounting firms reported hiring at a slower pace than the last report. Auto dealers noted difficulty finding qualified workers, and there were scattered reports of shortages of skilled workers at energy-related firms. Wage pressures remained largely subdued, although airlines reported upward pressure and some construction-related manufacturers reported plans to give cost of living adjustments in January.

Manufacturing
Construction related manufacturers' reports were mixed. Lumber producers noted stronger sales due to strong single-family construction, but demand for other products remained the same or softened since the last report. Outlooks were uncertain, with some responding firms putting off major decisions until the fiscal cliff was resolved. Demand for fabricated metals also softened over the reporting period, although outlooks for 2013 were optimistic. Primary metals producers noted demand growth was slower than expected.

Respondents in high-tech manufacturing said that production and orders were flat to slightly down. One respondent noted that the weak global economy was slowing demand across a broad array of information technology products. Contacts said customer inventories were lean, while producer inventories had increased slightly but remained near desired levels. Respondents' outlooks for the next three to six months were more uncertain than at the time of the last report. Most said that they are planning for weakness to continue, and that they may reduce employment levels in 2013.

Demand for paper products was strong in the first part of the reporting period but stalled in recent weeks, in line with normal seasonal patterns. Contacts were more pessimistic in their outlooks, however, due to uncertainty regarding fiscal issues. Food demand increased due to a seasonal pickup, and the outlook was positive among contacts.

Overall, transportation manufacturing contacts said demand was mostly flat to up slightly. Automobile manufacturers said business was up, and outlooks were more optimistic. Demand for aviation equipment increased, but remained below year ago-levels.

Petrochemicals producers noted Gulf Coast chemical production was up compared with last year. Gulf Coast refineries were operating at rates above 90 percent, and margins remained healthy. Refiners said that despite sluggish domestic demand for distillates, strong export demand has kept inventories from building.

Retail Sales
Retail sales volumes increased since the last report, mainly due to holiday shopping, and contacts said demand was up year-over-year. According to two national retailers, Texas continued to outperform the nation. Contacts were cautiously optimistic in their outlook for 2013; the largest source of uncertainty among contacts was the fiscal cliff.

Reports on automobile sales were mixed over the past six weeks, but were generally positive. All contacts noted that demand was up from a year ago. Selling prices were unchanged since the last report, but manufacturers were offering many more incentives, making the final price to consumers lower. Uncertainty regarding fiscal issues, future taxes, and health care costs, has moderated firms' outlooks.

Nonfinancial Services
Staffing services firms reported mixed results. Most said that demand held steady, while one said orders had softened slightly. Contacts continued to be very concerned about new health care laws in 2014, and some noted their customers' outlooks were more uncertain due to fiscal concerns. Overall, staffing firms' outlooks were slightly more pessimistic than six weeks ago.

Overall, accounting activity held steady with little growth; strong energy-related activity was the exception. Contacts expect modest growth in 2013. Legal firms reported steady demand. Transactions and wealth planning practices were reportedly the busiest they have ever been, energy-related activity remained strong, and real estate-related activity was better than expected. Responding firms remained optimistic in their outlooks.

Reports from transportation services were mixed. Intermodal cargo volumes edged down seasonally and have slowed from early 2012, but container volumes increased during the reporting period. Railroads said cargo volumes remained steady despite extremely strong growth in energy-related shipments. Grain and coal volumes remained weak spots during the reporting period, but auto shipments increased despite a strike at the Port of Los Angeles that disrupted the flow of containers. Shipping companies said that small parcel volumes posted very strong growth since the last report, particularly due to retail activity. Air cargo volumes were up slightly in preparation for the holiday season. Airline contacts said that passenger demand was soft over the past six weeks. Outlooks from transportation services firms continued to reflect global economic uncertainty, and most firms expect weak growth in the near-term.

Construction and Real Estate
Contacts in the single-family housing sector reported continued improvement in new and existing home sales. Despite increased construction activity housing inventories remain low, pushing overall prices up. Firms remain cautiously optimistic in their outlooks. Apartment demand continued to ease slightly overall, although occupancy rates remain historically high.

Demand for office and industrial space increased since the last report, according to contacts in the commercial real estate sector. Most firms expect to see an increase in nonresidential construction in 2013. Commercial property investment activity picked up slightly near year-end, and most respondents were fairly optimistic in their outlooks for 2013.

Financial Services
Financial institutions reported modest growth in overall lending activity. The increase in corporate loan demand was mostly driven by customers opting to make purchases before year-end due to tax uncertainty, but there was also moderate growth in real estate lending activity. Consumer lending improved, with modest growth in mortgage and new automobile loan demand. Loan pricing remained extremely competitive, and deposits continued to grow despite very low rates. Firms' outlooks remained positive, with fiscal and regulatory concerns posing downside risks.

Energy
Respondents at energy-related service firms said activity remained at high levels, despite a larger-than-expected decline in the domestic rig count driven by low natural gas prices. Although oil prices remain at healthy enough levels to support current activity, price volatility is making some firms nervous about drilling in higher cost fields. Contacts expect overall activity to be flat this year relative to fourth quarter of 2012, with some improvement expected in the second half of 2013.

Agriculture
With little rainfall, most of the District remained in drought conditions since the last report. The drought is negatively impacting the winter wheat crop, and contacts are beginning to express concern for spring planting. Wheat harvest was mostly completed over the last six weeks, and production was up from 2011, mainly because the drought was less severe. Contacts noted that fiscal cliff concerns and the lack of a farm bill are creating a great deal of uncertainty.

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Twelfth District--San Francisco

Twelfth District economic activity expanded at a modest pace during the reporting period of mid-November through December. Upward price pressures were limited overall, and upward wage pressures were quite modest. Sales of retail items this holiday season were similar to or up slightly from last year, and most business and consumer services gained. District manufacturing activity was mixed across sectors but generally appeared to move up. Demand for agricultural products increased, and extraction activity rose for providers of energy resources. Housing demand trended up further, and conditions were largely stable for commercial real estate. Contacts from financial institutions reported that loan demand was unchanged or up somewhat, and credit quality improved.

Wages and Prices
Upward price pressures were limited on balance during the reporting period. Price movements for energy items were mixed: retail gasoline prices fell, and electricity prices rose in some areas. Prices for some intermediate materials used in the construction sector, such as drywall and steel rebar, ticked up, while log and pulp prices remained flat. Prices of grapes and nuts increased, and higher prices for grains and corn due to the drought earlier in the year boosted prices of grocery dairy and meat items. A restaurant chain reported menu price increases in the 2 to 3 percent range.

Contacts in most sectors reported that upward wage pressures were modest. Limited hiring plans and ready worker availability in most sectors and regions have held down increases in wages and compensation. However, wages increased for some information technology workers who possess advanced skills and are in low supply. The market for technically trained workers for the petroleum industry remains tight. A few contacts expect wage hikes in 2013 in response to the expiration of multiyear, company-wide salary freezes. Health-care benefit cost increases are expected to accelerate and outpace wage increases.

Retail Trade and Services
Retail sales were on a par with or up slightly from last year's holiday season, but generally did not meet vendors' expectations. Online retailers experienced more robust sales growth than traditional brick-and-mortar retailers. Inventories generally were at or near desired levels given the pace of sales, although some retailers reported having an excess of winter apparel due to relatively mild weather conditions, while others ran short on certain consumer technology products. Contacts in the information technology sector indicated strong sales of newer hardware and games, but relatively weak sales of established goods as well as some Internet and digital media products. Both sales and margins were soft for grocers. New automobile sales remained solid, running well above levels from 12 months earlier, with year-end gains expected to be sizeable.

Demand for most business and consumer services rose. Contacts pointed to solid sales of various technology services, due mostly to typical year-end business spending increases. Revenues continued to expand for food service providers. Tourism and travel activity in the District was robust, with strong growth of visitor counts and spending reported in both Hawaii and Southern California. However, demand for health-care services remained relatively weak, with some reports of consumers continuing to opt out of elective procedures and health-care providers having excess capacity.

Manufacturing
District manufacturing activity was mixed across sectors but expanded overall during the reporting period of mid-November through December. With healthy demand for fuel efficient planes and a sustained backlog of orders, production activity for commercial aircraft and parts has been running well above levels from last year. Demand continued to grow at a modest pace for pharmaceutical and wood product manufacturers. By contrast, capacity utilization remained relatively low for manufacturers of technology equipment, and defense manufacturers have been trimming payrolls due to expected federal spending reductions. While demand for scrap metal remained somewhat weak by historical standards, that for steel products used in automotive manufacturing and in infrastructure and nonresidential construction improved. Contacts indicated that production activity picked up at petroleum refineries.

Agriculture and Resource-related Industries
Agricultural output gained further, and extraction activity of natural resources used for energy production continued to expand. Demand for most crop and livestock products continued to advance and was met in part through more intensive use of capital equipment. Extraction activity expanded on balance for petroleum and natural gas, and natural gas inventories remained at historically high levels.

Real Estate and Construction
Housing demand in the District strengthened further, while demand for commercial real estate was largely stable. Both prices and sales transactions of homes climbed in most areas, stimulating continued growth in home construction activity. In some regional markets, activity ratcheted up for higher-priced homes. Construction activity for multifamily residential projects grew further, in response to rising rents and tight availability of lower-priced homes. Demand for nonresidential space was largely stable. However, contacts reported that in select geographic areas of the District, substantial growth of technology firms has boosted demand for office space.

Financial Institutions
Contacts from financial institutions reported that loan demand was unchanged or up somewhat. Business loan demand was characterized as moderate. Banking contacts continued to highlight ample liquidity and generally stiff competition among lenders to provide credit to well-qualified business loan applicants, with community banks facing increasing competition from larger national banks for small business lending. Although owner-occupied commercial real estate financing is readily available, banks in most regions remain reluctant to lend to real estate investors outside of the multifamily residential sector. Contacts noted a slight slowdown in IPO, venture capital, and private equity activity in the District's technology, Internet, and digital media subsectors. Consumer lending expanded further, primarily for automobile purchases and new or refinanced home mortgages. Reports indicated that credit quality for both business and consumer loans has continued to improve, albeit at a slow pace.

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RMR Wealth Management - Wednesday, January 16, 2013

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