Prepared at the Federal Reserve Bank of Chicago and based on information collected on or before May 28, 2010. This document summarizes comments received from business and other contacts outside the Federal Reserve and is not a commentary on the views of Federal Reserve officials. Economic activity continued to improve since the last report across all twelve Federal Reserve Districts, although many Districts described the pace of growth as "modest." Consumer spending and tourism activity generally increased. Business spending also rose, on net, with employment and capital spending edging up but inventory investment slowing. By sector, nonfinancial services, manufacturing, and transportation continued to gradually improve. Residential real estate activity in many Districts was buoyed by the April deadline for the homebuyer tax credit. Commercial real estate remained weak, although some Districts reported an increase in leasing. Financial activity was little changed on balance, although a few Districts noted a modest increase in lending. Spring planting was generally ahead of the normal pace, while conditions in the natural resource sectors varied across the Districts. Prices of final goods and services were largely stable as higher input costs were not being passed along to customers and wage pressures continued to be minimal. Consumer Spending and Tourism

Consumer spending improved from the previous report. Spending continued to be concentrated in necessities as opposed to discretionary big-ticket items. Retail sales increased in April and May, although several Districts noted that the gains were uneven across months. Sales of spring and summer apparel were strong in the Boston, New York, Philadelphia, St. Louis, Kansas City, and Dallas Districts. Sales of home improvement and lawn and garden equipment were reported to have strengthened in the Richmond, Chicago, and San Francisco Districts. Modest improvement in sales of discretionary home goods was noted by Cleveland, Kansas City, and San Francisco. Vehicle sales also rose, but the rate of increase reportedly slowed in May in the New York, Cleveland, and San Francisco Districts. Tourism activity improved. Dallas reported a continued increase in leisure air travel. Hotel occupancy rates rose in the New York, Atlanta, Chicago, Kansas City, and San Francisco Districts, and convention activity increased in Atlanta and San Francisco. Richmond reported resort bookings for the Memorial Day holiday weekend were stronger than last year, and Atlanta indicated cruise-line bookings were up slightly. Atlanta also reported, however, that the Gulf oil spill and Tennessee floods had already resulted in some vacation lodging cancellations. The potential exists for a much greater impact, although contacts are quite uncertain as to the ultimate effects. Business Spending

Business spending increased moderately from the previous report. Cleveland, Chicago and Dallas noted that growth in manufacturers' inventories was leveling off, while Boston, Atlanta, and St. Louis reported the same for retailers' inventories. In contrast, several Districts reported that auto production was failing to keep up with demand, pressuring already lean auto dealer stocks. Capital spending was slightly higher in a number of Districts, although several indicated that continuing caution on the part of firms and tight credit availability were limiting expenditures. The manufacturing, transportation, and energy industries accounted for most of the increase in spending on plant and equipment. Boston reported that spending on information technology services increased. Nonfinancial Services

Nonfinancial service activity was slightly improved, on balance, from the previous report. Several Districts highlighted some strength in demand for professional technical services, such as software and information technology, engineering, and other scientific trades. In contrast, sluggishness remained in accounting, legal, marketing, media, and construction services. Demand for business support services was more mixed. Philadelphia and Chicago reported slightly higher demand while Boston and St. Louis noted that demand remained weak. St. Louis also indicated that budget cuts had led to reduced government and education services. Manufacturing and Transportation

Manufacturing and transportation activity continued to gradually improve across all twelve Districts. Most Districts reported further increases in factory production, shipments, and new orders, although Philadelphia and Chicago noted that the pace of gains had slowed in May. Steel producers and metals manufacturers reported moderately higher production in Cleveland, Chicago, St. Louis, and Dallas, although Chicago indicated capacity utilization leveled off in May. Auto and parts production increased in the Cleveland, Richmond, and Chicago Districts. Oil refinery capacity utilization was up in the Dallas District. Higher residential construction increased demand for construction equipment and materials in the Philadelphia, Richmond, Chicago, Dallas, and San Francisco Districts. Chicago also noted that demand from Asia and South America for heavy equipment continued to be robust. The output of medical equipment and pharmaceuticals remained strong in Boston and Chicago, as did high-tech manufacturing in Boston, St. Louis, Kansas City, and San Francisco. Food processing increased in Dallas and San Francisco. Trucking and rail activity increased, with freight traffic and raw material shipments on the rise in Cleveland, Atlanta, and Dallas. Real Estate and Construction

Residential real estate activity improved since the last report. Most Districts noted an increase in home sales and construction prior to the April 30th deadline for the homebuyer tax credit, with contacts in many of these Districts also indicating a corresponding slowing in activity in May. Tight credit, the elevated inventory of homes available for sale, and the "shadow inventory" of foreclosed properties on banks' balance sheets held back residential development in the New York, Cleveland, Atlanta, and Chicago Districts. Commercial real estate activity generally remained weak. Office, industrial, and retail vacancy rates continued to drift upward in many Districts putting downward pressure on rents. However, lower rents were said to have led to an increase in leasing activity in New York, Philadelphia, Richmond, Kansas City, Dallas, and San Francisco. The elevated inventory of existing properties for sale or rent continued to weigh on new private nonresidential construction. However, stronger industrial demand was noted in several Districts. Public construction increased in Philadelphia, Cleveland, and Chicago, but slowed in Minneapolis. Banking and Finance

Financial activity was little changed on balance from the previous report. Commercial and industrial lending by banks remained weak in most Districts, although Philadelphia, Chicago, Dallas, and San Francisco noted business loan demand was firming. Philadelphia also indicated an increase in business lending by non-depository financial companies, and New York reported that underwriting and investment banking activity strengthened. Consumer lending weakened in most Districts. In contrast, real estate lending increased even though standards on these loans remained tighter than on other loans, particularly for commercial mortgages. Chicago noted that the secondary market for residential mortgages was beginning to improve, and private equity investment in commercial properties increased in Boston, Chicago, and Dallas. Loan quality was indicated to be stabilizing or gradually improving in most Districts, but remained an issue for banks with large exposures to real estate. Contacts in some Districts cited concerns over the potential impact of the European fiscal crisis on financial and business conditions, and reported a corresponding increase in uncertainty and financial market volatility. Agriculture and Natural Resources

Crop planting was generally ahead of the seasonal norm, particularly in the Chicago, Minneapolis, and Dallas Districts, although soybean planting was lagging in St. Louis and Kansas City. Crop emergence was also ahead of the typical pace. Precipitation conditions were generally positive, with the exception of flooding in Tennessee and dryness in parts of the Richmond and Dallas Districts. Prices for hogs, cattle, and cotton were higher, while prices for grains, soybeans, and milk were roughly unchanged. Mining and energy industry activity varied across Districts. According to contacts in the Atlanta District, the Gulf oil spill had little immediate effect on oil production, although it had damaged fishing operations. Employment, Wages, and Prices

Labor market conditions improved slightly with permanent employment levels edging up in most Districts. In addition, many Districts again noted an increase in temporary hires, with Boston and Dallas also indicating a pick up in temporary-to-permanent transitions. By industry, manufacturing was the most often cited source of employment gains (both temporary and permanent), and Cleveland, Minneapolis, and Dallas noted an increase in the manufacturing workweek. Other sources of increased employment were the biopharmaceutical industry in Boston, retail trade in Chicago, and transportation in Dallas. Wage pressures were limited, although San Francisco noted upward pressure on employee benefit costs. Prices of final goods and services were largely unchanged in most Districts as higher input costs were not being passed along to customers and wage pressures continued to be minimal. Steel prices in many Districts moved higher, as did lumber and food prices, while energy prices generally declined. Several Districts noted tighter commodity supply conditions, with Richmond and Kansas City indicating an increase in supplier lead times and Boston and Atlanta reporting supply chain capacity constraints. Transportation costs moved up in the Philadelphia, Richmond, Atlanta, and San Francisco Districts, but diesel fuel cost pressures eased in New York. Return to top Boston