Reports from the twelve Federal Reserve Districts suggested continued growth in national economic activity during the reporting period of mid-July through the end of August, but with widespread signs of a deceleration compared with preceding periods. Economic growth at a modest pace was the most common characterization of overall conditions, as provided by the five western Districts of St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco. The reports from Boston and Cleveland also pointed to positive developments or net improvements compared with the previous reporting period. However, the remaining Districts of New York, Philadelphia, Richmond, Atlanta, and Chicago all highlighted mixed conditions or deceleration in overall economic activity.

Consumer spending appeared to increase on balance despite continued consumer caution that limited nonessential purchases, while activity in the travel and tourism sector picked up relative to seasonal norms. Activity was largely stable or up slightly for professional and other nonfinancial services. Reports on manufacturing activity pointed to further expansion, although the pace of growth eased according to several Districts. Agricultural producers and extractors of natural resources reported continued gains in demand and sales. Home sales slowed further following an initial drop after the expiration of the homebuyer tax credit at the end of June, prompting a slowdown in construction activity as well. Demand for commercial real estate remained quite weak but showed signs of stabilization in some areas. Reports from financial institutions pointed to generally stable or slightly lower loan demand and noted some modest improvements in credit quality.

Upward price pressures remained quite limited for most categories of final goods and services, despite higher prices for selected commodities such as grains and some industrial materials. Wage pressures also were limited, although a few Districts noted increased upward pressures in a narrow set of sectors experiencing a mismatch between job requirements and applicant skills.

Texas factory activity was unchanged in August, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key measure of state manufacturing conditions, came in at zero, posting a third consecutive month of little to no growth.

Most other indexes for current activity remained negative in August. The new orders index stayed at –9, implying incoming orders continue to fall. The capacity utilization and shipments indexes pushed deeper into negative territory, suggesting further contraction of business.

The general business activity index was negative for the third month in a row, but advanced in August as the share of respondents reporting improved activity rose from 10 to 15 percent. The company outlook index climbed back into positive territory after being negative for two months, as 23 percent of manufacturers said their outlook improved in August, compared with 13 percent in July.

The employment index turned negative for the first time in six months, largely due to the share of firms reporting layoffs rising from 15 percent in July to 23 percent in August, and hours worked contracted again. Wage and benefits costs rose modestly.

The raw materials price index doubled from 12 in July to 24 in August, reflecting a surge in input costs. Twenty-eight percent of manufacturers reported an increase in raw materials prices, while only 4 percent noted a decrease. Finished goods prices fell again in August, although three-fourths of firms reported no change in selling prices. The future indexes for both raw materials prices and finished goods prices were positive and rose.

Most future indexes of manufacturing conditions fell in August, but remained in solid positive territory. The future company outlook index fell from 16 to 9, with 31 percent of respondents expecting an improved outlook six months from now. However, the future general business activity index, a broader measure of economic conditions, dipped into negative territory for the first time in more than a year.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 2.2% in July, to a seasonally adjusted level of 81.4 (2007 = 100). Revised data show the index fell 0.2% in June to 79.6. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 1.1% in July. Regional output in July rose 13.1% from a year earlier, and national output increased 8.1%.

Three of the four regional industry sectors increased in July:
• Regional auto sector production rose 7.2%;
• Regional steel sector output grew 2.2%;
• Regional machinery sector production went up 0.9%; and
• Regional resource sector output edged down 0.1%.

Tenth District manufacturing activity slowed in August, and producers were somewhat less optimistic than in previous months. Price indexes in the survey were mostly unchanged.

The net percentage of firms reporting month-over-month increases in production in August was 0, down from 14 in July and 3 in June. The slowdown in production occurred among both durable and nondurable goods producing plants, with the exception of aircraft and electronic equipment producers, who reported some improvements. Other month-over-month indicators also fell. The shipments, new orders, and employment indexes dropped into negative territory, and the order backlog index slipped from -2 to -16. The new orders for exports index was essentially flat, while supplier delivery times increased modestly. The raw materials inventory index rose from -1 to 6, and the finished goods inventory index also inched higher.

In August, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — declined five points to 11 from July's reading of 16. Among the index's components, shipments declined 11 points to 11, new orders slipped three points to finish at 10, and the jobs index eased three points to 12.

Other indicators varied. The backlogs of orders measure flattened, and the index for capacity utilization was virtually unchanged at 14. The delivery times index picked up four points to end at 8. Our gauges for inventories were mixed in August. The finished goods inventory index edged up three points to 11, and the raw materials inventory index trimmed two points to finish at 9.

Led by improvements in production-related indicators, the Chicago Fed National Activity Index returned to its historical average of zero in July, up from –0.70 in June. Three of the four broad categories of indicators that make up the index improved from June, but only the production and income category made a positive contribution to the index in July.

The index’s three-month moving average, CFNAI-MA3, edged lower to –0.17 in July from –0.12 in June. July’s CFNAI-MA3 suggests that growth in national economic activity was somewhat below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 suggests subdued inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of +0.43 to the index in July, up from –0.16 in June. Total industrial production increased 1.0 percent in July after edging lower 0.1 percent in June. In addition, manufacturing production rose 1.1 percent in July after decreasing 0.4 percent in the previous month, and manufacturing capacity utilization increased to 72.2 percent in July from 71.4 percent in June.

Results from the Business Outlook Survey suggest that regional manufacturing activity weakened in August, after two months of slowing activity. Indexes for general activity, new orders, and shipments all registered negative readings this month. Firms also reported declines in employment and work hours. The survey's broad indicators of future activity continue to suggest that the region's manufacturing executives expect growth in business over the next six months, but optimism has waned notably in recent months.

Indicators Suggest Weakness
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a reading of 5.1 in July to -7.7 in August. The index turned negative, marking a period of declining monthly activity for the first time since July 2009 (see Chart). Indexes for new orders and shipments also suggest a slowing this month; the new orders index fell slightly, to -7.1, while the shipments index turned negative, declining to -4.5. Indicating weakness, indexes for both delivery times and unfilled orders remained negative this month.

The percentage of firms reporting a decline in employment (23 percent) was higher than the percentage (20 percent) reporting an increase. More concerning was the significant drop in the average employee workweek index from 1.7 in July to -17.1 in August.

The Empire State Manufacturing Survey indicates that conditions improved modestly in August for New York manufacturers. The general business conditions index rose 2 points from its July level, to 7.1. The new orders and shipments indexes both dipped below zero for the first time in more than a year, indicating that orders and shipments declined on balance; the unfilled orders index was also negative. The indexes for both prices paid and prices received inched down, while employment indexes were positive and higher than last month. The six-month outlook weakened; though future indexes were generally still positive, many fell in August, with the notable exceptions of the future employment and capital expenditures indexes, which climbed after falling last month.

In a series of supplementary questions, manufacturers were asked about their capital spending plans. Looking ahead to the next six to twelve months, 37 percent of respondents indicated that they expected to increase capital spending relative to its level in the past six to twelve months, while just 13 percent planned reductions. Of those predicting increased capital spending, 27 percent noted that "a considerable fraction" of the increase reflected investment that had been postponed because of the recession; 41 percent of respondents had given this same response in a similar survey back in January.

Another 46 percent of those surveyed this month attributed "some" of the spending increase to the recession. The most commonly cited factors behind increased investment were high expected growth in sales and a need to replace capital goods other than IT (information technology) equipment. The most widely cited factors behind steady or decreased capital investment in the current survey were low expected sales growth, low capacity utilization, and limited need to replace non-IT capital goods.

Information received since the Federal Open Market Committee met in June indicates that the pace of recovery in output and employment has slowed in recent months. Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software is rising; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Bank lending has continued to contract. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be more modest in the near term than had been anticipated.

Measures of underlying inflation have trended lower in recent quarters and, with substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level by reinvesting principal payments from agency debt and agency mortgage-backed securities in longer-term Treasury securities.1 The Committee will continue to roll over the Federal Reserve's holdings of Treasury securities as they mature.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh.

Voting against the policy was Thomas M. Hoenig, who judges that the economy is recovering modestly, as projected. Accordingly, he believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted and limits the Committee's ability to adjust policy when needed. In addition, given economic and financial conditions, Mr. Hoenig did not believe that keeping constant the size of the Federal Reserve's holdings of longer-term securities at their current level was required to support a return to the Committee's policy objectives.

Tenth District manufacturing activity rebounded moderately in July, and expectations for future production remained positive. However, plans for future hiring and capital spending were essentially flat. Price indexes were mostly unchanged.

The net percentage of firms reporting month-over-month increases in production in July was 14, up from 3 in June and 5 in May. The increase in production occurred among both durable and nondurable goods producing plants, with the exception of aircraft producers, who reported a slight downturn. Other month-over-month indicators generally increased as well. The shipments, new orders, and order backlog indexes continued to climb higher, and the employment index moved back into positive territory. In contrast, the new orders for exports index decreased from 3 to 0, and the supplier delivery time index also fell for the second straight month. The raw materials inventory index inched up from -4 to -1, while the finished goods inventory index edged down.

Economic activity has continued to increase, on balance, since the previous survey, although the Cleveland and Kansas City Districts reported that the level of economic activity generally held steady. Among those Districts reporting improvements in economic activity, a number of them noted that the increases were modest, and two Districts, Atlanta and Chicago, said that the pace of economic activity had slowed recently.

Manufacturing activity continued to expand in most Districts, although several Districts reported that activity had slowed or leveled off during the reporting period. Districts also noted improved conditions in the services sector. The five Districts reporting on transportation noted increased activity. Tourism activity also increased across the Districts, although the Atlanta District noted concerns about decreased leisure travel to the Gulf Coast. Retail sales reports generally indicated a continued rise in spending, and several Districts noted that necessities continued to be strong sellers, while big-ticket items moved more slowly. However, most Districts that reported on auto sales noted declines in recent weeks. Activity in residential real estate markets was sluggish in most Districts after the expiration of the April 30 deadline for the homebuyer tax credit. Commercial real estate markets, especially construction, remained weak. Banking conditions varied across the Districts, with some Districts noting soft or decreased overall loan demand; credit standards remained tight in most reporting Districts. Recent rains had mixed effects on crop conditions, while activity in the natural resources sector increased. Overall labor market conditions improved modestly across the Districts, with several reports of temporary hiring. Consumer prices of goods and services held steady in most reporting Districts. Input prices also held largely steady, with only a few reports of cost increases. Wage pressures continued to be contained on the whole.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 0.5% in June, to a seasonally adjusted level of 79.4 (2007 = 100). Revised data show the index rose 1.7% in May to 79.7. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) decreased 0.3% in June. Regional output in June rose 13.2% from a year earlier, and national output increased 8.9%.

Two of the four regional industry sectors increased in June:
• Regional steel sector output grew 0.9%;
• Regional machinery sector production went up 0.6%;
• Regional auto sector production edged down 0.2%; and
• Regional resource sector output declined 1.4%.

In July, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — declined seven points to 16 from June's reading of 23. Among the index's components, shipments lost nine points to 22, new orders dropped 12 points to finish at 13, while the jobs index moved up six points to 15.

Other indicators also suggested somewhat slower activity. The backlog of orders measure moved down two points to 1, and the index for capacity utilization fell eight points to 13. The delivery times index retreated 13 points to end at 4. Our gauges for inventories were somewhat higher in July. The finished goods inventory index edged up one point to 8, and the raw materials inventory index moved up seven points to finish at 11.

Texas factory activity rebounded slightly in July, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of state manufacturing conditions, rose from –2 to 5, suggesting output expanded slightly in July after contracting in June.

Several indexes for factory activity continued to fall in July. The new orders and growth rate of orders indexes pushed deeper into negative territory, indicating a further contraction of demand. The index for capacity utilization dipped to –1, its first negative reading in nine months. The shipments index stabilized in July, rising from –9 to –1, with nearly equal shares of respondents noting an increase or decrease.

The general business activity index fell sharply to –21, its lowest level since July 2009. Thirty-one percent of firms reported a worsening of activity, up from 22 percent in June. The company outlook index also fell to a 12-month low, as only 13 percent of manufacturers said their outlook had improved over the previous month, compared with 24 percent who said it had worsened.

The employment index edged up and was positive for the fifth consecutive month, with 20 percent of firms reporting new hires. The wages and benefits index also rose, but overall wage pressures remained minimal, as 90 percent of respondents noted no change in compensation costs. The hours worked index dipped into negative territory, with 23 percent of manufacturers reporting a decrease in the average employee workweek.

The index for raw materials prices fell from 30 in June to 12 in July, suggesting the upward pressure on raw materials prices continued to moderate. Two-thirds of manufacturers reported no change in input costs, the highest share in six months. Downward pressure on finished goods prices intensified again in July, driving the index further into negative territory. The future raw materials prices index remained positive but slid to its lowest level in a year, while the future finished goods prices index fell to zero.

Optimism regarding firms’ six-month outlook continued to wane in July, although the indexes remained positive. The future production, capacity utilization and shipments indexes fell again this month, while the future indexes for new orders and growth rate of orders inched up but remained below the levels seen earlier this year. The future general business activity index decreased but remained in positive territory. The future company outlook index moved down from 22 to 16, with 32 percent of respondents expecting improved conditions six months from now.

Led by deterioration in production- and employment-related indicators, the Chicago Fed National Activity Index declined to –0.63 in June, down from +0.31 in May. Three of the four broad categories of indicators that make up the index made negative contributions in June, while the sales, orders, and inventories category made the lone positive contribution.

The index’s three-month moving average, CFNAI-MA3, decreased to –0.05 in June from +0.31 in May. The CFNAI-MA3 suggests that growth in national economic activity returned very close to its historical trend in June after reaching its highest level since March 2006 in May. With regard to inflation, it indicates subdued inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of –0.11 to the index in June, down from +0.61 in May. Industrial production edged up 0.1 percent in June after increasing 1.3 percent in May; manufacturing production declined 0.4 percent in June after increasing 1.0 percent in the previous month.

Results from the Business Outlook Survey suggest that regional manufacturing activity continues to expand in July but has slowed over the past two months. Surveyed firms reported a decline in new orders this month compared with June. Employment showed a slight improvement this month. The survey’s broad indicators of future activity continue to suggest that the region’s manufacturing executives expect growth in business over the next six months, but optimism has waned notably in recent months.

Indicators Suggest Slower Growth
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a reading of 8 in June to 5.1 in July. The index, although still positive and suggesting growth, has fallen for two consecutive months (see Chart). Indexes for new orders and shipments also suggest a slowing this month: The new orders index fell 13 points, to its first negative reading in 12 months, and the shipments index decreased 10 points but remained positive. Indicating weakness, indexes for both delivery times and unfilled orders fell and were in negative territory this month.

Firms indicated a slight increase in employment this month. The percentage of firms reporting increases in employment (13 percent) narrowly edged out the percentage of firms reporting decreases (9 percent). Indexes for both employment and average workweek were slightly positive this month after registering negative readings in June.

The Empire State Manufacturing Survey indicates that while conditions for New York manufacturers continued to improve in July, the pace of growth in business activity slowed substantially over the month. The general business conditions index remained positive but fell 15 points, to 5.1. The new orders and shipments indexes were also positive but lower than last month’s levels. Employment indexes dipped as well, with the average workweek index falling below zero for the first time this year. The prices paid index was positive and held steady, while the prices received index declined to a level just below zero. The future general business conditions index was little changed, remaining close to its May and June levels but below the highs seen earlier in the year. The index for future number of employees fell markedly, although it remained above zero. The capital spending and technology spending indexes were also positive, but both were well below the peak levels reached in May.

In a series of supplementary questions, manufacturers were asked to estimate the percentage changes in their sales and employment levels from 2009 to 2010—both year to date and for the calendar year. In this year’s survey, the median respondent reported that sales were up 7 percent for the first half of 2010 and were expected to be up 8 percent for the full calendar year—a stark contrast with the results of last July’s survey, when the median respondent reported 15 percent declines for the corresponding time horizons in 2009. In the current survey, the number of employees was reported to be unchanged in the first half of the year and was expected to remain so over the full year. In the 2009 survey, 10 percent declines were seen for both horizons. Respondents were also queried about the contribution of exports to firm revenues and about firm efforts to market abroad. In general, respondents indicated that exports accounted for a growing share of their revenues; their firms were devoting more resources to marketing abroad—particularly in Asia—and were expecting sales to be higher in the next 12 months than in the past 12 months across all parts of the world.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.7% in May, to a seasonally adjusted level of 86.7 (2002 = 100). Revised data show the index rose 1.3% in April to 85.2. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 0.8% in May. Regional output in May rose 13.2% from a year earlier, and national output increased 8.4%.

All four regional industry sectors increased in May:
• Regional steel sector output grew 3.7%;
• Regional auto sector production rose 3.6%;
• Regional machinery sector production increased 1.1%; and
• Regional resource sector output edged up 0.2%.

Texas factory activity declined slightly in June, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of state manufacturing conditions, fell from 21 in May to –2 in June, abruptly ending a seven-month streak of positive readings.

All remaining indexes for factory activity also fell in June, and many turned negative. The new orders index fell from 16 to –8 as 78 percent of respondents reported that their June orders were either flat or down from May. The shipments index fell from 15 to –9, suggesting shipments contracted in June after three consecutive months of growth.

The general business activity index turned negative also, with 82 percent of respondents noting that June activity worsened or was unchanged from the prior month. The company outlook index fell from 20 to –3, as only 18 percent of manufacturers said their outlook had improved over the previous month, compared with nearly a third in May.

The employment index remained positive for the fourth consecutive month, though it edged down in June as the share of firms reporting layoffs increased. The hours worked and wages and benefits indexes followed a similar pattern, moving lower but staying positive. The weaker labor market indexes are consistent with a slower pace of employment growth.

Upward pressure on raw materials prices moderated in June but remained strong, as more than a third of respondents continued to see increasing costs. Meanwhile, downward pressure on finished goods prices intensified, driving the index into negative territory. Nevertheless, the great majority of firms—82 percent—reported no change in prices received for finished goods. Forty-three percent of respondents anticipate further increases in raw materials prices over the next six months, while about one-quarter expect higher finished goods prices.

Firms were less optimistic about their six-month outlook in June. The indexes for future production, new orders and shipments stayed positive but fell this month. The future general business activity index decreased but remained in positive territory, with the share of firms expecting improved activity exceeded those anticipating worsened conditions by nearly 2 to 1. The future company outlook index edged down but stayed very positive, with 86 percent of respondents expecting either increased or unchanged activity six months from now.

The Chicago Fed National Activity Index edged lower to +0.21 in May from +0.25 in April. Production indicators continued to make strong contributions to the index in May, while weaker contributions from employment- and housing-related indicators accounted for the slight decrease in the index from April.

The index’s three-month moving average, CFNAI-MA3, rose to its highest level since March 2006, increasing to +0.28 in May from +0.05 in April. May’s CFNAI-MA3 suggests that growth in national economic activity was above its historical trend. Moving above +0.20, the index’s three-month moving average in May also reached a level historically associated with a mature economic recovery following a recession. With regard to inflation, the CFNAI-MA3 in May indicates limited inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of +0.51 to the index in May, compared with +0.39 in April. Industrial production rose 1.2 percent in May after increasing 0.7 percent in April, and manufacturing production increased 0.9 percent for the second straight month.

Growth in Tenth District manufacturing activity eased slightly in June, and producers were somewhat less optimistic than in previous months. Price indexes fell from the previous month, with considerable easement in current materials prices and some slowing in finished goods price increases.

The net percentage of firms reporting month-over-month increases in production in June was 3, down from 5 in May and 24 in April. The slowdown in production growth was highest among food, chemicals, and metals producers, while many plants that produce heavy equipment and machinery reported a rise in activity. Other month-over-month indicators were mixed. The shipments and new orders indexes climbed back into positive territory, and the new orders for exports index increased from 0 to 3. In contrast, the employment index dropped from 1 to -1, and the order backlog index recorded its lowest level in almost a year. The supplier delivery time index fell back down after reaching a six-year high last month. Both inventory indexes decreased back into negative territory.

Information received since the Federal Open Market Committee met in April suggests that the economic recovery is proceeding and that the labor market is improving gradually. Household spending is increasing but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures continues to be weak and employers remain reluctant to add to payrolls. Housing starts remain at a depressed level. Financial conditions have become less supportive of economic growth on balance, largely reflecting developments abroad. Bank lending has continued to contract in recent months. Nonetheless, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability, although the pace of economic recovery is likely to be moderate for a time.

Prices of energy and other commodities have declined somewhat in recent months, and underlying inflation has trended lower. With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer-run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

In June, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — declined three points to 23 from May's reading of 26. Among the index's components, shipments eased one point to 31, new orders dropped 11 points to finish at 25, while the jobs index picked up five points to 9.

Other indicators were also mixed. The backlog of orders measure moved down 13 points to 3, and the index for capacity utilization fell six points to 21. The delivery times index recouped three points to end at 17.

Our gauges for inventories were slightly lower in June. The finished goods inventory index fell two points to 7, and the raw materials inventory index slipped two points to finish at 4.

Results from the Business Outlook Survey suggest that regional manufacturing activity continues to expand in June, but at a slower pace than in May. Surveyed firms reported no expansion of overall employment and work hours compared with May. Fewer firms also reported increases in prices of inputs this month. The survey’s broad indicators of future activity continued to suggest that the region’s manufacturing executives still expect growth in business over the next six months.

Some Indicators Suggest Slower Growth
The survey’s broadest measure of manufacturing conditions, the diffusion index of current activity, decreased notably from a reading of 21.4 in May to 8.0 in June. The index, which had edged higher for four consecutive months, fell back to its lowest reading in 10 months (see Chart). Although still positive and suggesting growth, indexes for new orders and shipments showed a mixed pattern this month — the new orders index increased 3 points, while the shipments index decreased 2 points. The current inventory index increased 13 points and moved back from a negative reading into positive territory, suggesting an increase in inventories this month.

Until this month, firms’ responses had been suggesting that labor market conditions were improving, but indexes for current employment and work hours were both slightly negative. For the first time in seven months, more firms reported a decrease in employment (18 percent) than reported an increase (17 percent). The largest percentage (62 percent), however, reported steady employment levels. The workweek index also declined into negative territory, its first negative reading in eight months.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved in June. The general business conditions index edged up from its May level to 19.6, extending its string of positive readings to eleven months. The new orders and shipments indexes were also positive and higher than their May levels. The inventories index remained near zero for a second straight month, indicating that inventory levels were little changed. The prices paid index fell 17½ points to 27.2, while the prices received index held steady at 4.9. The index for number of employees was positive, but fell 10 points, while the average workweek index climbed to 8.6. Future indexes were well above zero, but the readings, like last month's, fell short of the relatively high levels recorded earlier this year.

In a series of supplementary questions, manufacturers were asked about their capital spending plans for 2010 relative to their actual spending for 2009, both overall and for a few broad categories of capital (see Supplemental Reports tab). In the current survey, nearly twice as many responding firms reported increases (46 percent) as reductions (25 percent) in overall capital spending in 2010—a marked contrast with the results of an identical survey conducted last June, which showed far more respondents reporting decreases (56 percent) than increases (20 percent). As for specific categories of investment, respondents, on balance, plan to raise spending on software, computers (hardware), and non-computer equipment, but to cut spending on structures.

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.

Texas factory activity continued to expand in May, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of state manufacturing conditions, rose to its highest level in three years.

May’s improvement in the production index came from a smaller share of respondents reporting declines in activity. The portion reporting no change rose from 39 percent to 45 percent, while the share reporting increased activity fell slightly.

Other indicators of factory activity also expanded again in May, although several posted slower advances than in the prior month. The index for capacity utilization was strongly positive but edged downward, and the growth rate of orders index fell from 20 to 9. The new orders and shipments indexes were positive but largely unchanged after increasing in April.

The business activity index—the broadest indicator in our survey—stayed positive but fell sharply in May, reversing April’s strong increase. The company outlook index fell from 26 to 20, with about a third of manufacturers saying their outlook had improved over the previous month.

The employment index increased for the third consecutive month, with the share of firms hiring additional employees continuing to exceed the share making layoffs. The hours worked and the wages and benefits indexes were positive but nearly unchanged from April.

Strong upward pressure on raw materials prices continued in May. Forty-two percent of respondents saw increasing costs, while only 4 percent noted decreases. In contrast, only 13 percent of respondents noted increased finished goods prices. Half of respondents continued to anticipate further increases in raw materials prices over the next six months, and 29 percent expected higher finished goods prices.

Firms grew more optimistic about their six-month outlook in May, and most indexes for future manufacturing activity moved further into positive territory. The future business activity index jumped up, as the share of firms reporting improved activity exceeded those reporting worsened conditions by more than 3 to 1. The future company outlook also climbed, with 85 percent of respondents expecting either increased or unchanged activity six months from now.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.2% in April, to a seasonally adjusted level of 85.2 (2002 = 100). Revised data show the index rose 1.5% in March to 84.2. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 1.1% in April. Regional output in April edged up 7.5% from a year earlier, and national output increased 6.5%. April marks the first time since February 2008 that the CFMMI’s year-over-year change has exceeded the IPMFG’s.

All four regional industry sectors increased in April:
• Regional steel sector output grew 2.9%;
• Regional machinery sector production rose 1.8%;
• Regional resource sector output moved up 1.0%; and
• Regional auto sector production ticked up

Tenth District manufacturing activity grew at a much slower rate in May than in previous months, but producers were more optimistic about future activity. Price indexes were mixed, with some slowing in the rate of materials price increases and a flattening of finished goods prices. However, a number of firms continued plans to raise finished goods prices in coming months.

The net percentage of firms reporting month-over-month increases in production in May was 5, down from 24 in April and 18 in March. Production growth slowed at both durable and nondurable-goods-producing plants. Most other month-over-month indicators also edged down from April levels. The shipments, new orders, and order backlog indexes all moved into negative territory, and the employment index eased after reaching a two-year high last month. The new orders for exports index dropped from 5 to 0, while the supplier delivery time index climbed higher. Both inventory indexes increased into positive territory.

In May, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — declined four points to 26 from April's reading of 30. Among the index's components, shipments edged up two points to 32, new orders inched down five points to finish at 36, and the jobs index dropped nine points to end at 4.

Other indicators also varied. The backlog of orders measure picked up 11 points to 16, and the index for capacity utilization held steady at 27. The delivery time's index eased three points to end at 14. Our gauges for inventories were slightly lower in May. The finished goods inventory index fell four points to 9, and the raw materials inventory index slipped three points to finish at 6.

Led by continued improvements in production- and employment-related indicators, the Chicago Fed National Activity Index increased to +0.29 in April, up from +0.13 in March. April marked the highest level of the index since December 2006 and the third time in the past four months that the index indicated above-average economic activity. Three of the four broad categories of indicators that make up the index made positive contributions in April, while the consumption and housing category made the lone negative contribution.

The index’s three-month moving average, CFNAI-MA3, increased to –0.03 in April from –0.09 in March, reaching its highest level since February 2007. April’s CFNAI-MA3 suggests that growth in national economic activity was very near its historical trend. With the index still slightly below trend, there remains some economic slack, suggesting subdued inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of +0.41 to the index in April, compared with +0.23 in March. Industrial production increased 0.8 percent in April after increasing 0.2 percent in March. In addition, manufacturing production increased 1.0 percent for the second straight month, and manufacturing capacity utilization rose to 70.8 percent in April from 70.0 percent in the previous month.

According to the firms polled for this month's Business Outlook Survey, regional manufacturing activity continues to expand. Firms reported some expansion of overall employment again this month. The survey's broad indicators of future activity continue to suggest that the region's manufacturing executives expect growth in business over the next six months.

Indicators Suggest Continued Growth
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased slightly from 20.2 in April to 21.4 this month. The index has now edged higher for four consecutive months and has remained positive for the ninth consecutive month (see Chart). Although still positive and suggesting growth, indexes for new orders and shipments showed a mixed pattern this month: The new orders index fell 8 points, while the shipments index increased 10 points. The current inventory index decreased 10 points and fell into negative territory, suggesting declines in inventories. Indexes for unfilled orders and delivery times were both negative this month, suggesting some weakening in activity from April.

Firms' responses continue to suggest that labor market conditions are improving, but indexes for current employment and work hours fell from their readings in April. For the sixth consecutive month, more firms reported an increase in employment (21 percent) than reported a decline (17 percent). The workweek index declined slightly but has now remained positive for seven consecutive months.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve for a tenth consecutive month in May, albeit at a slower pace than in April. The general business conditions index fell 13 points, to 19.1. Similarly, the new orders and shipments indexes also moved lower but remained at positive levels. The inventories index dropped back to a level near zero after rising into positive territory in March and April. The prices paid index continued to climb, reaching its highest level of the year, while the prices received index was little changed and positive. The index for number of employees rose for a fifth consecutive month, reaching its highest level since 2004. Future indexes suggest that activity is expected to expand further in the months ahead, but the level of optimism was noticeably lower in May than in recent months.

Growth in Tenth District manufacturing activity continued at a solid pace, and producers remained moderately optimistic about the future. Price indexes were mixed, with further increases in raw materials prices, but finished goods prices were mostly stable.

The net percentage of firms reporting month-over-month increases in production in April was 24, up from 18 in March and 19 in February (Tables 1 & 2, Chart). Production increased at both durable and nondurable-goods-producing plants. Most other month-over-month indicators climbed higher in April. The shipments, new orders, and order backlog indexes all increased, and the employment index recorded its highest level in over two years. Meanwhile, the new orders for exports index edged up for the second straight month. The raw materials inventory index fell from -3 to -7, and the finished goods inventory index eased from -7 to -9.

Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index increased to –0.07 in March, up from –0.44 in February. Three of the four broad categories of indicators that make up the index made positive contributions in March, while the consumption and housing category made the lone negative contribution.

The index’s three-month moving average, CFNAI-MA3, increased to –0.18 in March from –0.31 in February. March’s CFNAI-MA3 suggests that growth in national economic activity, while still below average, continues to improve. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates subdued inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of +0.18 to the index in March, compared with +0.04 in February. Manufacturing industrial production increased 0.9 percent in March after increasing 0.2 percent in February, and manufacturing capacity utilization rose to 70.0 percent in March from 69.4 percent in the previous month. The manufacturing capacity utilization rate in March reached its highest level since November 2008.

Information received since the Federal Open Market Committee met in March suggests that economic activity has continued to strengthen and that the labor market is beginning to improve. Growth in household spending has picked up recently but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly; however, investment in nonresidential structures is declining and employers remain reluctant to add to payrolls. Housing starts have edged up but remain at a depressed level. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has closed all but one of the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities; it closed on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to a build-up of future imbalances and increase risks to longer run macroeconomic and financial stability, while limiting the Committee’s flexibility to begin raising rates modestly.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.3% in March, to a seasonally adjusted level of 84.1 (2002 = 100). Revised data show the index ticked down 0.1% in February to 83.1. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 0.9% in March. Regional output in March edged up 4.7% from a year earlier, and national output increased 5.1%.

All four regional industry sectors increased in March:
• Regional auto sector production rose 2.2%;
• Regional steel sector output grew 1.7%;
• Regional machinery sector production moved up 1.5%; and
• Regional resource sector output edged up 0.6%.

In April the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — jumped 24 points to 30 from March's reading of 6. Among the index's components, shipments moved up 25 points to 30, new orders leaped 31 points to finish at 41, and the jobs index advanced 13 points to end at 13.

Other indicators also suggest stronger activity. The backlog of orders measure turned positive, picking up 12 points to 5, and the index for capacity utilization increased 24 points to 27. The delivery times index added nine points to end at 17. Our gauges for inventories were slightly higher in April. The finished goods inventory index rose seven points to 13, and the raw materials inventory index edged up two points to finish at 9.

Texas factory activity increased for the sixth month in a row in April, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of state manufacturing conditions, climbed further into positive territory as more producers reported increased activity.

The April production index came in at 18, up from its March level of 9, with 40 percent of respondents noting increased output.

Other indicators of current factory activity also pointed to strong growth. The indexes for capacity utilization, new orders and shipments showed marked increases. The growth rate of orders index jumped to its highest level since June 2006.

The index for capital expenditures, which had been negative for nearly two years, stabilized in April with a slightly positive reading. Still, four of five companies hadn’t made any changes in their capital expenditures over the prior month.

The business activity index increased sharply, with the share of manufacturers reporting improvement rising from 23 percent in March to 34 percent in April. The company outlook index also rose steeply, reaching its highest level in four years.

Labor market conditions in the region’s manufacturing sector continued to improve in April. The employment index signaled further job growth, with the share of firms hiring workers rising to 22 percent. Hours worked climbed again, and the wages and benefits index rose as the share of respondents noting increases doubled from 10 percent to 20 percent.

Upward pressure on raw materials prices persisted, with 44 percent of manufacturers reporting rising input costs. The share of respondents noting higher finished goods prices increased, and the index entered positive territory, although three-fourths of producers reported no change. Expectations of future price increases rose in April after abating in March. More than half of respondents anticipate further increases in raw materials prices over the next six months, while 26 percent expect higher finished goods prices.

Firms remain optimistic about their six-month outlook. The indexes for future production, capacity utilization and new orders stayed strongly positive in April. The future business activity index and six-month company outlook index rose after edging downward in recent months.

The expansion of the region's manufacturing sector is continuing, according to firms polled for this month's Business Outlook Survey. The broadest survey measures remained positive this month, with measures of general activity and new orders showing a slight improvement from March. More firms reported higher input prices this month, but prices for manufactured goods remained nearly steady. The survey's broad indicators of future activity continued to suggest that the region's manufacturing executives expect business activity to increase over the next six months.

Indicators Suggest Continued Growth
The survey's broadest measure of manufacturing conditions, the index of current activity, increased from a reading of 18.9 in March to 20.2 this month. The index has now increased for three consecutive months and remained positive for eight consecutive months. Although still positive and suggesting growth, indexes for new orders and shipments showed a mixed pattern this month. The new orders index increased 5 points, while the shipments index fell 8 points. The current inventory index increased 13 points and has now recorded positive readings in two of the last three months.

Firms' responses continue to suggest that labor market conditions are improving. For the fifth consecutive month, the percentage of firms reporting an increase in employment (24 percent) was higher than the percentage reporting declines (17 percent). The workweek index was essentially unchanged and has now remained positive for six consecutive months.

The Empire State Manufacturing Survey indicates that conditions for New York State manufacturers improved at a rapid pace in April. The general business conditions index rose 9 points, to 31.9. The new orders and shipments indexes advanced as well, and the inventories index climbed to a record high. The prices paid index moved up 12 points to 41.8, its highest level in considerably more than a year, while the prices received index held fairly steady at a level just above zero. Employment indexes rose to high levels, suggesting that employment levels are continuing to improve. Future indexes conveyed an ongoing sense of optimism about the six-month outlook.

In a series of supplementary questions, respondents were asked to assess the extent to which certain business issues posed problems for their firms, whether each of these issues was more or less of a problem now than a year ago, and whether each was expected to become more or less of a problem over the next year. Of the ten issues considered, employee benefit costs, taxes, and government regulation were generally seen as the biggest problems—both in absolute terms and compared with a year ago. Moreover, these same issues were the ones most widely expected to be still more problematic a year from now. At the other end of the spectrum, the cost and terms of credit, credit availability, and depressed real estate values were seen as the least problematic issues.

Overall economic activity increased somewhat since the last report across all Federal Reserve Districts except St. Louis, which reported "softened" economic conditions. Districts generally reported increases in retail sales and vehicle sales. Tourism spending was up in a number of Districts. Reports on the services sector were generally mixed. Manufacturing activity increased in all Districts except St. Louis, and new orders were up. Many Districts reported increased activity in housing markets from low levels. Commercial real estate market activity remained very weak in most Districts. Activity in the banking and finance sector was mixed in a number of Districts, as loan volumes and credit quality decreased. Agricultural conditions were mixed as well, with positive conditions reported in Districts from the central and western parts of the country, while negative conditions were reported in the mid and southern Atlantic Districts. Mining and energy production and exploration increased for metals, oil and wind.

While labor markets generally remained weak, some hiring activity was evident, particularly for temporary staff. Wage pressures were characterized as minimal or contained. Retail prices generally remained level, but some input prices increased.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 0.8% in February, to a seasonally adjusted level of 82.6 (2002 = 100). Revised data show the index increased 2.0% in January to 83.2. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) ticked down 0.2% in February. Regional output in February edged down 0.5% from a year earlier, and national output increased 2.0%.

Three of the four regional industry sectors decreased in February:
• Regional auto sector production declined 2.8%;
• Regional resource sector output decreased 0.5%;
• Regional machinery sector production edged down 0.2%; and
• Regional steel sector output increased 0.9%.

Texas factory activity expanded for the fifth straight month in March, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of state manufacturing conditions, rose to its highest level in two years.

Additional signs of strength came from other indicators of current factory activity. Capacity utilization rebounded, with the index rising to 15 in March after falling to 0 in February. The new orders index also jumped up sharply into positive territory after dipping below zero last month. The indexes for shipments and growth rate of orders also turned positive in March.

The business activity and company outlook indexes rebounded into positive territory after they slid below zero in February.

After several months of growth in production, there are finally signs that manufacturers have begun to replenish their materials inventories. The index turned positive in March after 18 months of negative readings. Finished goods inventories held steady as the index came in at zero, with 78 percent of producers noting no change in inventories over last month.

Labor demand among manufacturers improved in March. Eighteen percent of firms reported increases in employment, pushing the index into positive territory for the first time since July 2008. Hours worked and wages and benefits also increased.

Strong upward pressure on raw materials prices continued in March, and the share of respondents reporting higher input costs remained near 40 percent. Finished goods prices fell for the second month in a row. Expectations of price increases for raw materials and finished goods over the next six months abated.

All indexes for future activity were positive but moved lower in March, suggesting producers have lowered their expectations for the pace of growth in factory activity in coming months. The future business activity index and six-month company outlook index edged downward to 16 and 18, respectively. The indexes for future production, capacity utilization, new orders and shipments remained positive but fell in March.

Tenth District manufacturing activity continued to grow solidly, with production almost back to year-ago levels. Producers’ expectations for future factory activity rebounded after moderating slightly in February. Price indexes were mixed, with some moderation in raw materials price increases, but more producers planned to pass-through cost increases than in previous months.

The net percentage of firms reporting month-over-month increases in production in March was 18, similar to the reading of 19 in February, and up from 13 in January (Tables 1 & 2, Chart). Production growth eased at non-durable goods plants but increased slightly among durable goods producers, particularly for fabricated metals. Most other month-over-month indicators edged higher in March. The shipments, new orders, and order backlog indexes all increased modestly, and the employment index moved into positive territory, recording its highest level in two years. Meanwhile, the new orders for exports index rebounded after falling somewhat last month. The raw materials inventory index rose from -1 to 3, while the finished goods inventory index dropped from 0 to -7.

In March the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — inched up four points to 6 from February's reading of 2. Among the index's components, shipments picked up five points to 5, new orders edged up one point to finish at 10, and the jobs index advanced seven points to end at 0.

Other indicators also varied. The backlog of orders measure lost seven points to −7, while the index for capacity utilization increased six points to 3. The delivery times index added six points to end at 8. Our gauges for inventories were mixed in March. The finished goods inventory index dropped seven points to 6, while the raw materials inventory index rose two points to finish at 7.

Led by declines in production-related indicators, the Chicago Fed National Activity Index decreased to –0.64 in February, down from –0.04 in January. Three of the four broad categories of indicators that make up the index deteriorated, and only the sales, orders, and inventories category made a positive contribution.

The index’s three-month moving average, CFNAI-MA3, decreased to –0.39 in February from –0.13 in January, but for the second consecutive month, it was higher than at any point since December 2007. February’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.

Production-related indicators made a negative contribution to the index for the first time in eight months, contributing –0.08 to the index in February compared with +0.41 in January. Adverse weather conditions played a part in both manufacturing industrial production decreasing 0.2 percent in February and manufacturing capacity utilization decreasing for the first time in eight months.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.9% in January, to a seasonally adjusted level of 83.1 (2002 = 100). Revised data show the index decreased 0.5% in December to 81.5. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) increased 1.0% in January. Regional output in January edged up 0.6% from a year earlier, and national output increased 2.1%.

All four sectors increased in January:
• Regional auto sector production rose 4.5%;
• Regional machinery sector production grew 1.4%;
• Regional steel sector output increased 1.3%; and
• Regional resource sector output also increased 1.3%.

The region's manufacturing sector is continuing to show signs of growth, according to firms polled for this month's Business Outlook Survey. Indexes for general activity, new orders, shipments, and employment all remained positive this month. The survey's broad indicators of future activity continued to suggest that the region's manufacturing executives expect business activity to increase over the next six months.

Indicators Suggest Continued Growth
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of 17.6 in February to 18.9 this month. The index has now remained positive for seven consecutive months. Although still positive and suggesting growth, indexes for current new orders and shipments fell back from their readings in February: The new orders index fell 13 points, and the shipments index fell 6 points. The current inventory index moved back into negative territory after recording its first positive reading since September 2007 last month.

Firms' responses continued to suggest that labor market conditions have been stabilizing in recent months. For the fourth consecutive month, the percentage of firms reporting an increase in employment is greater than the percentage reporting declines. The current employment index edged 1 point higher and is at its highest reading since October 2007, yet only 17 percent of the firms reported an increase in employment this month. The workweek index was 6 points higher and has now remained positive for five consecutive months.

Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.

In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers continued to improve at a steady pace in March. The general business conditions index remained near its February level, at 22.9. The new orders index rose sharply, and the shipments index climbed as well. The inventories index rose above zero for the first time in considerably more than a year. The indexes for both prices paid and prices received were positive and close to last month’s levels. Employment indexes climbed further into positive territory, suggesting that employment levels are on the rise. Future indexes conveyed continued optimism about the six-month outlook, with manufacturers expecting business conditions to improve further in the months ahead.

Reports from the twelve Federal Reserve Districts indicated that economic conditions continued to expand since the last report, although severe snowstorms in early February held back activity in several Districts. Nine Districts reported that economic activity improved, but in most cases the increases were modest. Overall conditions were described as mixed in the Atlanta and St. Louis Districts, though St. Louis noted further signs of improvement in some areas. Richmond reported that economic activity slackened or remained soft across most sectors, due importantly to especially severe February weather in that region.

Consumer spending improved slightly in many Districts since the last survey, but severe snowstorms in early February limited activity in some Districts. Tourist activity was reported as increased or mixed, with some improvement in hotel occupancies. The demand for services was generally positive across Districts, most notably for health-care and information technology firms. Of the five Districts reporting on transportation, three characterized activity as improved over the previous survey. Manufacturing activity strengthened in most regions, particularly in the high-tech equipment, automobile, and metal industries. Residential real estate markets improved in a number of Districts, although several Districts noted that activity softened or remained weak partly due to extreme winter weather. Most Districts characterized commercial real estate and construction activity as weak or having declined further, but some Districts noted slight stabilization and a few signs of modest improvement. Loan demand remained weak, and lending standards remained tight across the country. Harsh weather continued to negatively affect agricultural activity, although some Districts reported favorable crop conditions. Districts reporting on energy activity said it continued to strengthen, particularly drilling for natural gas.

Price pressures were mostly limited, with the exception of some increases in raw materials prices. Even with input costs rising, selling prices remained stable due to competitive pressures and limited pricing power. Although some Districts reported an uptick in hiring or a slowdown in layoffs, labor markets generally remained soft throughout the nation, which resulted in minimal wage pressures.

Tenth District manufacturing activity continued to strengthen in February. Production increased further, and producers’ expectations for future activity, including for hiring, were positive overall. Raw materials price indexes remained elevated, but finished goods prices were generally unchanged, although a rising share of firms plan to raise finished good prices in the future.

The net percentage of firms reporting month-over-month increases in production in February was 19, up from 13 in January and 7 in December. Production growth increased at durable goods plants, but slowed slightly among non-durable goods producers, particularly for food, printing, and plastics and rubber producers. The other month-over-month indicators were mixed in February. The shipments and new orders indexes each climbed, but the order backlog index fell slightly. The employment index slipped back into negative territory after being positive in January. Also, the new orders for exports index fell from 6 in January to 0 in February. The raw materials inventory index continued to increase, reaching an 18 month high, while the finished goods inventory index remained 0.

In February, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — turned positive, moving up to 2 from January's reading of −2. Among the index's components, shipments picked up two points to 0, and new orders gained eight points to finish at 9. However, the jobs index slipped two points to end at −7.

Other indicators also varied. The backlog of orders measure jumped 13 points to 0, while the index for capacity utilization held steady at −3. The delivery times index dropped three points to end at 2. Our gauges for inventories were mixed in February. The finished goods inventory index picked up three points to 13 and the raw materials inventory index slipped back four points to finish at 5.

Texas factory activity continued to expand in February, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of state manufacturing conditions, edged downward from its January reading but remained positive, suggesting slower growth in output.

Several indicators of current factory activity turned negative in February, reversing recent months’ improvements. The new orders index fell from 27 to –6, with the share of respondents reporting decreases more than tripling from January. With new orders falling, indexes for shipments and growth rate of orders also retreated, turning slightly negative. Capacity utilization was unchanged from January as the index came in at zero.

The business activity and company outlook indexes slid below zero due to an increase in the share of manufacturers reporting deteriorating conditions.

The index for employment remained negative but was little changed from January as most respondents held employment levels steady. The wages and benefits index was positive for the third consecutive month.

Upward pressure on raw materials prices continued in February, with 41 percent of producers reporting rising input costs. The finished goods price index remained close to zero, suggesting minimal pressures on selling prices. Expectations of upward price pressures over the next six months moderated in February as both the future raw materials price and the future finished goods price indexes edged downward.

Several future activity indexes weakened in February, but they remained positive, indicating firms are still optimistic about the six-month outlook. Forty-seven percent of executives continued to expect increases in production, capacity utilization and growth rate of orders six months from now, while one-third reported an improved six-month company outlook. The future business activity index was essentially unchanged in February.

Led by improvements in production- and employment-related indicators, the Chicago Fed National Activity Index in January was slightly positive for the second time in the past three months. From June 2007 through October 2009, the index had been consistently negative. The index increased to +0.02 in January from –0.58 in December, with all four categories of indicators having improved.

The index’s three-month moving average, CFNAI-MA3, increased to –0.16 in January from –0.47 in December, reaching its highest level since July 2007. January’s CFNAI-MA3 suggests that, consistent with the early stages of a recovery following a recession, growth in national economic activity is beginning to near its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates subdued inflationary pressure from economic activity over the coming year.

Production-related indicators made a positive contribution to the index for the seventh consecutive month. As a group, they contributed +0.45 in January, up from +0.14 in December. Manufacturing industrial production increased 0.9 percent in January after being unchanged in December; and manufacturing capacity utilization increased to 69.2 percent in January, its highest level since November 2008.

The Federal Reserve Board on Thursday announced that in light of continued improvement in financial market conditions it had unanimously approved several modifications to the terms of its discount window lending programs.

Like the closure of a number of extraordinary credit programs earlier this month, these changes are intended as a further normalization of the Federal Reserve's lending facilities. The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy, which remains about as it was at the January meeting of the Federal Open Market Committee (FOMC). At that meeting, the Committee left its target range for the federal funds rate at 0 to 1/4 percent and said it anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.

The changes to the discount window facilities include Board approval of requests by the boards of directors of the 12 Federal Reserve Banks to increase the primary credit rate (generally referred to as the discount rate) from 1/2 percent to 3/4 percent. This action is effective on February 19.

In addition, the Board announced that, effective on March 18, the typical maximum maturity for primary credit loans will be shortened to overnight. Primary credit is provided by Reserve Banks on a fully secured basis to depository institutions that are in generally sound condition as a backup source of funds. Finally, the Board announced that it had raised the minimum bid rate for the Term Auction Facility (TAF) by 1/4 percentage point to 1/2 percent. The final TAF auction will be on March 8, 2010.

Easing the terms of primary credit was one of the Federal Reserve's first responses to the financial crisis. On August 17, 2007, the Federal Reserve reduced the spread of the primary credit rate over the FOMC's target for the federal funds rate to 1/2 percentage point, from 1 percentage point, and lengthened the typical maximum maturity from overnight to 30 days. On December 12, 2007, the Federal Reserve created the TAF to further improve the access of depository institutions to term funding. On March 16, 2008, the Federal Reserve lowered the spread of the primary credit rate over the target federal funds rate to 1/4 percentage point and extended the maximum maturity of primary credit loans to 90 days.

Subsequently, in response to improving conditions in wholesale funding markets, on June 25, 2009, the Federal Reserve initiated a gradual reduction in TAF auction sizes. As announced on November 17, 2009, and implemented on January 14, 2010, the Federal Reserve began the process of normalizing the terms on primary credit by reducing the typical maximum maturity to 28 days.

The increase in the discount rate announced Thursday widens the spread between the primary credit rate and the top of the FOMC's 0 to 1/4 percent target range for the federal funds rate to 1/2 percentage point. The increase in the spread and reduction in maximum maturity will encourage depository institutions to rely on private funding markets for short-term credit and to use the Federal Reserve's primary credit facility only as a backup source of funds. The Federal Reserve will assess over time whether further increases in the spread are appropriate in view of experience with the 1/2 percentage point spread.

Manufacturing conditions continue to improve in the region, according to firms polled for this month's Business Outlook Survey. Indexes for general activity, new orders, shipments, and employment all remained positive this month and increased from their readings in January. Firms reported a notable pickup in new orders this month. Overall, firms remain generally optimistic about growth for the manufacturing sector over the next six months.

Indicators Suggest Pickup in Demand
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of 15.2 in January to 17.6 this month. The index has now remained positive for six consecutive months (see Chart). There was a notable increase in the current new orders index suggesting an improvement in demand for manufactured goods - the new orders index increased 20 points. The current shipments index increased 9 points. The current inventory index increased 5 points, to its first positive reading since September 2007.

Firms' responses continued to suggest that labor market conditions have been stabilizing in recent months. For the third consecutive month, more firms reported an increase in employment than reported declines. The current employment index edged 1 point higher and remains at its highest reading since October 2007. The workweek index was 2 points lower but remained slightly positive for the fourth consecutive month.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved at a healthy pace in February. The general business conditions index climbed 9 points, to 24.9. The new orders index fell, though it remained positive, and the shipments index inched downward as well. The inventories index rose sharply, to 0.0, its highest reading in considerably more than a year. The prices paid index was little changed from its high level last month, and the prices received index remained just above zero for a second consecutive month. Employment indexes were positive for a second consecutive month, although at relatively low levels. Future indexes continued to show a high level of optimism about the six-month outlook.

Growth in Tenth District manufacturing activity strengthened in January, with production returning nearly back to year-ago levels. Producers’ expectations for future factory activity also rebounded strongly after easing slightly in December. Price indexes moved higher, with twice as many firms reporting a rise in current and expected raw materials prices, but pass-through to finished goods prices remained limited.

The net percentage of firms reporting month-over-month increases in production in January was 13, up from 7 in December, but down slightly from 15 in November (Tables 1 & 2, Chart). Production growth increased at non-durable goods plants but slowed slightly among durable goods producers, particularly for computer and electronic products. Most other month-over-month indicators increased in January. The shipments, new orders, and order backlog indexes all climbed higher. The employment index edged up into positive territory for the first time in 18 months, and the new orders for exports index also rose slightly. The raw materials inventory index increased from -12 to -7, and the finished goods inventory index inched higher.

Led by declines in employment-related indicators, the Chicago Fed National Activity Index decreased to –0.61 in December, down from –0.39 in November. Three of the four broad categories of indicators that make up the index moved lower, although both the production and income category and the sales, orders, and inventories category made positive contributions.

In contrast to the monthly index, the index’s three-month moving average, CFNAI-MA3, increased slightly to –0.61 in December from –0.68 in November. December’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend; but the level of activity remained in a range historically consistent with the early stages of a recovery following a recession. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.

The decline in the monthly index was driven mainly by decreases in employment-related indicators. These indicators as a group made a contribution of –0.27 to the index in December, down from –0.11 in November. Payroll employment declined by 85,000 in December after increasing by 4,000 in November; however, the unemployment rate was unchanged at 10.0%.

Most of the weakness in the index continued to stem from the consumption and housing category. This category’s contribution to the index was –0.50 in December, down slightly from –0.46 in November. Housing starts declined to 557,000 annualized units in December from 580,000 in November. Partially offsetting this was an increase in building permits to 653,000 annualized units in December from 589,000 in the previous month.

Production-related indicators made a positive contribution to the index for the sixth consecutive month. As a group, they contributed +0.13 to the index in December, compared with +0.25 in November. Manufacturing industrial production was unchanged in December after increasing 0.9 percent in November; but total industrial production increased 0.6 percent for the second consecutive month.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 0.3% in December, to a seasonally adjusted level of 84.1 (2002 = 100). Revised data show the index increased 1.0% in November to 84.4. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) was unchanged in December. Regional output in December declined 6.4% from a year earlier, and national output decreased 1.4%.

The regional resource and auto sectors decreased in December, while the machinery and steel sectors increased:
• Regional resource sector output moved down 1.0%;
• Regional auto sector production edged down 0.2%;
• Regional machinery sector output grew 0.6%; and
• Regional steel sector output increased 1.3%.

In January, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — improved slightly, moving up to −2 from December's reading of −4. Among the index's components, shipments picked up four points to −2, and new orders turned positive, gaining five points to finish at 1. However, the jobs index eased three points to end at −5.

Other indicators also varied. The capacity utilization and backlog measures were on par with last month's readings at −3 and −13, respectively, and the delivery times index advanced seven points to end at 5. Our gauges for inventories were slightly lower in January. The finished goods inventory index shed four points to slip back to 10 and the raw materials inventory index trimmed two points to finish at 9.

Texas factory activity expanded in January, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of state manufacturing conditions, climbed further into positive territory as more producers reported either increased or unchanged activity from December.

The production barometer has signaled increases in factory activity in the last three months, suggesting a recovery is under way for an industry that has endured a 14-month decline, from September 2008 through October 2009.

In January, signs of improving manufacturing activity also came from several of the survey’s other indicators. The new orders index posted a large improvement as the share of respondents noting increases in orders rose from 25.6 percent to 34.9 percent. Indexes for shipments and growth rate of orders strengthened, with the share of respondents reporting increases exceeding those reporting declines by nearly 2 to 1. Capacity utilization also increased.

The business activity and company outlook indexes continued to improve in January, reaching their highest levels since mid-2007.

The index for employment remained negative but was little changed from December as 73.1 percent of employers reported no staffing changes. The average workweek index turned positive for the first time since July 2008 as the share of firms reporting declines in work hours fell substantially. The index for wages and benefits rose, but overall wage pressures remained minimal, with 83.3 percent of respondents noting no change in compensation costs.

January’s survey found continued upward pressure on raw materials prices. Thirty-three percent of producers reported rising input costs. The downward price pressures on finished goods that had been present throughout 2009 subsided in January, with the index coming in close to zero. Expectations of future price increases also rose. The future raw materials price index increased again in January, with 57.3 percent of firms foreseeing further increases in prices six months from now and the rest expecting no change. The future finished goods price index was also positive and rose further, suggesting that a sizable share of firms expect higher selling prices in the next six months.

The region's manufacturing sector continues to show improvement, according to firms polled for this month's Business Outlook Survey. Indexes for general activity, new orders, and shipments all remained positive this month, although each fell back somewhat from their revised readings in December. Also indicative of improvement, for the second consecutive month, the percentage of firms reporting increases in employment was higher than the percentage reporting declines. Overall, expectations improved in January, and firms remain generally optimistic about growth over the next six months.

Indicators Suggest Growth
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, decreased from a revised reading of 22.5 in December to 15.2 this month.* The index has now remained positive for five consecutive months (see Chart). Indicators for new orders and shipments suggest continued growth this month, but they also declined somewhat from their December readings. The current new orders index, which has remained positive for six consecutive months, decreased 5 points. The current shipments index fell 4 points. The current inventory index, although still negative, increased 4 points, to its highest reading in 26 months. Indicators for unfilled orders and delivery times edged higher and are both positive, suggesting stronger economic conditions.

Labor market conditions have been stabilizing in recent months, and for the second consecutive month, the percentage of firms reporting an increase in employment was higher than the percentage reporting declines. The current employment index increased 2 points, to its highest reading since February 2008. The workweek index fell back 2 points but has now been positive for three consecutive months.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved for the sixth consecutive month in January. The general business conditions index climbed 11 points, to 15.9. The new orders and shipments indexes posted similar increases, and the unfilled orders index rose above zero. Both the prices paid index and the prices received index rose significantly, with the latter moving above zero for the first time in more than a year. Employment indexes advanced into positive territory. Future indexes were highly optimistic; activity and employment were widely expected to improve over the next six months. Prices, however, were expected to continue to climb in the months ahead.

Reports from the twelve Federal Reserve Districts indicated that while economic activity remains at a low level, conditions have improved modestly further, and those improvements are broader geographically than in the last report. Ten Districts reported some increased activity or improvement in conditions, while the remaining two--Philadelphia and Richmond--reported mixed conditions. The last Beige Book reported eight Districts with increased activity or improving conditions and four Districts showing little change and/or mixed conditions.

Most Districts reported that consumer spending in the recent 2009 holiday season was slightly greater than in 2008, but still far below 2007 levels. Retail inventory levels remain very lean in nearly all Districts. Auto sales held steady or increased slightly since the last Beige Book in most Districts. Reports on tourism were mostly flat or weak, but for two Districts whose ski resorts enjoyed early season snowstorms. Nonfinancial services activity generally improved in Districts that reported on this sector. Of five Districts reporting transportation services, volumes were slightly up or mixed. Manufacturing activity has increased or held steady since the last report in most Districts. Among Districts reporting on near-term expectations, the manufacturing outlook was optimistic, but spending plans remain cautious.

Toward the end of 2009, home sales increased in most Districts, especially for lower-priced homes. Home prices appeared to have changed little since the last Beige Book, and residential construction remained at low levels in most Districts. Commercial real estate was still weak in nearly all Districts with rising vacancy rates and falling rents. Since the last report, loan demand continued to decline or remained weak in most Districts, while credit quality continued to deteriorate. Cold weather at the end of the year adversely affected some late crops and stressed livestock, but above-average yields for early crops were reported by some Districts. Energy-related production has risen moderately since the last Beige Book.

Although some hiring was reported in a few Federal Reserve Districts, labor market conditions remained generally weak with modest wage increases appearing in just a few Districts. Price pressures remained subdued in nearly all Districts, though increases in metals prices were reported and agricultural prices have been mixed.

Growth in Tenth District manufacturing activity moderated somewhat in December, and producers were slightly less optimistic about the months ahead, with few planning major capital expenditures. Price indexes remained mostly stable.

The net percentage of firms reporting month-over-month increases in production in December was 10, down from 17 in November, but up from 6 in October. Production growth slowed at both durable and non-durable goods plants. Most other month-over-month indicators also decreased somewhat. The shipments index dipped from 11 to 6, and the new orders, order backlog, and employment indexes also fell. In contrast, the new orders for exports index rose slightly from 2 to 4. The raw materials inventory index dropped from -1 to -10, while the finished goods inventory index ticked up into positive territory.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.2% in November, to a seasonally adjusted level of 84.2 (2002 = 100). Revised data show the index rose 0.8% in October to 83.2. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) was up by 1.1% in November. Regional output in November declined 10.0% from a year earlier, and national output decreased 4.4%.

All four regional industry sectors increased in November:
• Regional steel sector output rose 2.5%;
• Regional auto sector production increased 1.1%;
• Regional resource sector output grew 0.9%; and
• Regional machinery sector output moved up 0.7%.

Texas factory activity was flat in December, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of state manufacturing conditions, came in close to zero in December, suggesting output held steady after growing in November for the first time since July 2008.

All indexes for future activity strengthened substantially in December, suggesting a more upbeat six-month outlook. The majority of respondents expect increases in production, new orders and shipments in the next six months. The future business activity index climbed to its highest level in nearly three years, and 41 percent of responding executives reported an improved six-month company outlook.

Other broad indicators of current factory activity—including capacity utilization, shipments, new orders and growth rate of orders—remained positive and pointed to continued growth.

The business activity and company outlook indexes were positive for the second consecutive month in December, with manufacturers seeing better business conditions outnumbering those experiencing continued weakness.

The employment index remained negative but posted a big improvement as the share of respondents reporting layoffs fell from 27.3 percent in November to 17.9 percent in December.

Current capital investment continued to decline, but the future capital expenditures index climbed into positive territory. Twenty-three percent of manufacturers—the highest share since September 2008—said they expected increases in capital expenditures six months from now.

Downward pressures on finished goods prices remained, but the number of companies reporting declines in selling prices outpaced those seeing increases by the slimmest margin since October 2008. The raw materials price index was positive and rose, indicating producers were still seeing rising input costs. The future raw materials price index rose to its highest level since July 2008—when energy prices were at their peak.

In December, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — moved down to −4 from November's reading of 1. Among the index's components, shipments dropped 12 points to −6, and new orders lost seven points to finish at −4. However, the jobs index gained seven points to end at −2.

Other indicators also suggested weaker activity. The capacity utilization measure turned negative, losing five points to −3, while the orders backlogs remained unchanged at −12, and the delivery times was virtually unchanged at −2. Our gauges for inventories were slightly higher in December. The finished goods inventory index added two points to 14 and the raw materials inventory index advanced one point to finish at 11.

Led by improvements in production-related and employment-related indicators, the Chicago Fed National Activity Index increased to –0.32 in November, up sharply from –1.02 in October. Two of the four broad categories of indicators that make up the index improved, although only the production and income category made a positive contribution.

The index’s three-month moving average, CFNAI-MA3, increased to –0.77 in November from –0.87 in October. November’s CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. The level of activity, however, remained in a range that has historically been consistent with the early stages of a recovery following a recession. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.

Production-related indicators made a contribution of +0.35 to the index in November, compared with –0.09 in October. This contribution accounted for much of the improvement in the index in November. Industrial production rose 0.8 percent in November after being unchanged in October; and manufacturing production increased 1.1 percent in November after decreasing 0.2 percent in the previous month. Furthermore, manufacturing capacity utilization increased to 68.4 percent in November from 67.6 percent in October.

Activity in the region's manufacturing sector is expanding, according to firms polled for this month's Business Outlook Survey. Indexes for general activity, new orders, and shipments all remained positive this month. Indicative of improvement, the overall level of employment and average work hours among reporting firms increased this month. Overall, expectations moderated somewhat in December, although the forecast for employment improved slightly.

Indicators Suggest Growth
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 16.7 in November to 20.4 this month. The index has now remained positive for five consecutive months (see Chart). Other broad indicators suggest continued growth this month, but they fell somewhat from their November readings. The current new orders index, which has also remained positive for five consecutive months, decreased 8 points. The current shipments index fell less than 1 point. The current inventory index, although still negative, increased 10 points, to its highest reading in four months. Indicators for unfilled orders and delivery times edged higher and reached their highest readings since well before the recession began at the end of 2007.

Labor market conditions have been stabilizing in recent months, and for the first time since late 2007, more firms reported an increase in employment than reported declines. The current employment index increased 7 points, to its highest reading since October 2007. The workweek index edged four points higher, to 6.4, its second consecutive positive reading.

Information received since the Federal Open Market Committee met in November suggests that economic activity has continued to pick up and that the deterioration in the labor market is abating. The housing sector has shown some signs of improvement over recent months. Household spending appears to be expanding at a moderate rate, though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment, though at a slower pace, and remain reluctant to add to payrolls; they continue to make progress in bringing inventory stocks into better alignment with sales. Financial market conditions have become more supportive of economic growth. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will contribute to a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets.

In light of ongoing improvements in the functioning of financial markets, the Committee and the Board of Governors anticipate that most of the Federal Reserve’s special liquidity facilities will expire on February 1, 2010, consistent with the Federal Reserve’s announcement of June 25, 2009. These facilities include the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility, the Commercial Paper Funding Facility, the Primary Dealer Credit Facility, and the Term Securities Lending Facility. The Federal Reserve will also be working with its central bank counterparties to close its temporary liquidity swap arrangements by February 1. The Federal Reserve expects that amounts provided under the Term Auction Facility will continue to be scaled back in early 2010. The anticipated expiration dates for the Term Asset-Backed Securities Loan Facility remain set at June 30, 2010, for loans backed by new-issue commercial mortgage-backed securities and March 31, 2010, for loans backed by all other types of collateral. The Federal Reserve is prepared to modify these plans if necessary to support financial stability and economic growth.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers leveled off in December, following four months of improvement. The general business conditions index fell 21 points, to 2.6. The indexes for new orders and shipments posted somewhat more moderate declines but also moved close to zero. Input prices picked up a bit, as the prices paid index rebounded to roughly its November level; however, the prices received index moved further into negative territory, suggesting that price increases are not being passed along. Current employment indexes slipped back into negative territory. Future indexes remained well above zero but signaled somewhat less widespread optimism than in recent months. Indexes for expected prices paid and received declined moderately but remained well above zero.

Reports from the twelve Federal Reserve Districts indicate that economic conditions have generally improved modestly since the last report. Eight Districts indicated some pickup in activity or improvement in conditions, while the remaining four--Philadelphia, Cleveland, Richmond, and Atlanta--reported that conditions were little changed and/or mixed.

Consumer spending was reported to have picked up moderately since the last report, for both general merchandise and vehicles; a number of Districts noted relatively robust sales of used autos. Most Districts indicated that non-auto retailers were holding lean inventories going into the holiday season. Tourism activity varied across Districts. Manufacturing conditions were said to be, on balance, steady to moderately improving across most of the country, while conditions in the nonfinancial service sector generally strengthened somewhat, though with some variation across Districts and across industries. Residential real estate conditions were somewhat improved from very low levels, on balance, led by the lower end of the market. Most Districts reported some pickup in home sales, though prices were generally said to be flat or declining modestly; residential construction was characterized as weak, but some Districts did note some pickup in activity. Commercial real estate markets and construction activity were depicted as very weak and, in many cases, deteriorating.

Financial institutions generally reported steady to weaker loan demand, continued tight credit standards, and steady or deteriorating loan quality. In the agricultural sector, the fall harvest was delayed in the eastern half of the nation due to excessively wet conditions during October and early November. Most energy-producing Districts noted a slight uptick in activity in the sector since the last report. Labor market conditions remained weak since the last report, though there were signs of stabilization and scattered signs of improvement. While some Districts reported upward pressure on commodity prices, they saw little or no indication of upward wage pressures or of any significant increase in prices of finished goods.

Texas factory activity showed its first signs of growth in more than a year, according to business executives responding to November’s Texas Manufacturing Outlook Survey. The production index, a key indicator of state manufacturing conditions, turned positive for the first time since July 2008. Other key indexes of current factory activity—including capacity utilization, shipments, new orders and growth rate of orders—also moved into positive territory.

The business activity and company outlook indexes also improved. After two years in negative territory, they came in close to zero in November as the number of companies reporting better business conditions and those noting further weakness were nearly equal.

The employment index remained negative, implying more manufacturers are laying off than are hiring. The average workweek index was also negative in November, but posted a big improvement over the prior month as the share of respondents noting increased work hours rose sharply from 6.7 percent to 16.3 percent. Wage pressures were still minimal, with the majority of producers reporting no change in wages and benefits.

Manufacturers continued to draw down inventories. The index for materials inventories fell to its lowest reading in eight months, and 30 percent of manufacturers reported declines in their finished goods inventories.

Price pressures were mixed. The finished goods price index remained negative, although the great majority of respondents reported no change in selling prices. The raw materials price index was positive and rose, indicating that producers continue to see rising input costs. Expectations for raw material price increases over the next six months were elevated as well.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 0.5% in October, to a seasonally adjusted level of 82.9 (2002 = 100). Revised data show the index rose 0.7% in September to 82.5. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) was down by 0.1% in October. Regional output in October declined 13.6% from a year earlier, and national output decreased 7.5%.

All four regional industry sectors increased in October:
• Regional auto sector production increased by 0.8%;
• Regional steel sector output also increased by 0.8%;
• Regional machinery sector output rose 0.7%; and
• Regional resource sector output grew by 0.3%.

In November, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — moved down to 1 from October's reading of 7. Among the index's components, shipments dropped five points to 6, new orders lost four points to finish at 3, and the jobs index fell 11 points to end at −9.

Other indicators were mostly in line with recent readings. The capacity utilization measure edged down two points to 2 and the orders backlogs index eased one point to −12, while the delivery times index was virtually unchanged at −1. Our gauges for inventories were somewhat lower in November. The finished goods and raw materials inventory indexes each trimmed two points to finish at 12 and 10, respectively.

The Chicago Fed National Activity Index was –1.08 in October, down very slightly from –1.01 in September. A decline in the contribution of production and income indicators offset small improvements in the other three broad categories of indicators that make up the index.

The index’s three-month moving average, CFNAI-MA3, decreased to –0.91 in October from –0.67 in September, declining for the first time in 2009. October’s CFNAI-MA3 suggests that growth in national economic activity remained below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.

Production-related indicators—with a contribution of –0.07 in October compared with +0.23 in September—made a negative contribution to the index for the first time since June 2009. Much of the decline in this category’s contribution can be attributed to lower manufacturing production. In particular, durable goods manufacturing declined 0.4 percent in October after rising 1.1 percent in September. Partially offsetting this was an increase in the Institute for Supply Management’s Manufacturing Purchasing Managers’ Production Index. It increased to 63.3 in October from 55.7 in the previous month.

Activity in the region's manufacturing sector is picking up, according to firms polled for this month's Business Outlook Survey. Indexes for general activity, new orders, and shipments all improved this month. The overall level of employment was mostly steady this month, and the average work hours index was positive for the first time in more than two years. The region's manufacturing executives expect increasing activity over the next six months, although expectations have moderated somewhat in the last several months. Low rates of current capacity utilization are suppressing capital spending plans.

Indicators Suggest Activity Is Picking Up
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from a reading of 11.5 in October to 16.7 this month. The index has now remained positive for four consecutive months (see Chart). The percentage of firms reporting increases in activity this month (29 percent) exceeded the percentage reporting decreases (12 percent). Other broad indicators suggest similar improvement this month. The current new orders index also remained positive for the fourth consecutive month and increased nine points. The current shipments index increased 12 points. The current inventory index, although still negative, increased 15 points, from -31.8 in October to -17.3 this month. Indexes for unfilled orders and delivery times remained negative.

Labor market conditions have been stabilizing in recent months. The current employment index increased six points, from -6.8 to near zero. The percentage of firms reporting employment increases and decreases were essentially the same this month (14 percent). The workweek index edged seven points higher in November to its first positive reading in 23 months.

The U.S. economy will grow over each of the next five quarters, according to 41 forecasters surveyed by the Federal Reserve Bank of Philadelphia. The forecasters see real GDP growing at an annual rate of 2.7 percent this quarter. On an annual-average over annual-average basis, forecasters see real GDP falling 2.5 percent in 2009 before rebounding in each of the following three years. Real GDP will grow 2.4 percent in 2010, 3.1 percent in 2011, and 3.3 percent in 2012. As the table below shows, these estimates are a bit higher than those the forecasters projected in last quarter's survey.

The labor market looks weaker now than it did three months ago. Unemployment is now seen at an annual average of 9.3 percent in 2009 and 10 percent in 2010, before falling to 9.2 percent in 2011 and 8.3 percent in 2012. These estimates mark upward revisions from the forecasters' previous projection. Likewise, growth in jobs looks weaker. The forecasters see nonfarm payroll employment falling at a rate of 160,000 jobs per month this quarter and 35,000 jobs per month next quarter. Both estimates mark downward revisions from the previous survey. The forecasters see jobs beginning to grow in the second quarter of 2010. Over the second half of the year, jobs will grow at a rate of 150,000 per month. The forecasters' projections for the annual average level of nonfarm payroll employment suggest job losses at a monthly rate of 427,000 in 2009 and a further loss of 70,000 per month in 2010. (These annual-average estimates are computed as the year-to-year change in the annual-average level of nonfarm payroll employment, converted to a monthly rate.)

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved in November, but at a somewhat slower pace than in October. The general business conditions index fell 11 points, to 23.5. The indexes for new orders and shipments posted similar declines. Pricing pressures eased, with the prices paid index positive but lower than last month and the prices received index rising to a level just below zero. Employment indexes fell from October’s elevated levels, remaining slightly positive. Future indexes conveyed an expectation that activity and employment would improve in the months ahead and that both input and selling prices would increase significantly.

Information received since the Federal Open Market Committee met in September suggests that economic activity has continued to pick up. Conditions in financial markets were roughly unchanged, on balance, over the intermeeting period. Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion, is consistent with the recent path of purchases and reflects the limited availability of agency debt. In order to promote a smooth transition in markets, the Committee will gradually slow the pace of its purchases of both agency debt and agency mortgage-backed securities and anticipates that these transactions will be executed by the end of the first quarter of 2010. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

Growth in Tenth District manufacturing activity moderated somewhat in October, but producers were more optimistic about future activity. Price indexes increased somewhat for raw materials, while finished goods price indexes were generally stable.

The net percentage of firms reporting month-over-month increases in production in October was 6, down from 16 in September but up from -7 in August (Tables 1 & 2, Chart). Production increased at durable goods plants, but fell for most non-durable goods producers, particularly food and chemicals. Other month-over-month indexes were mixed. The shipments index dropped from 12 to 1, and the employment index was slightly lower than last month. The new orders index edged up from 10 to 11, and the order backlog index moved into positive territory for the first time in over a year. The new orders for exports index remained basically unchanged, and both inventory indexes increased markedly.

In October, the seasonally adjusted composite index of manufacturing activity — our broadest measure of manufacturing — moved down to 7 from September's reading of 14. Among the index's components, shipments dropped 11 points to 11, new orders lost six points to finish at 7, and the jobs index eased three points to end at 2.

Other indicators varied. The capacity utilization measure declined 12 points to 4, and the orders backlogs fell six points to −11, while the delivery times was virtually unchanged at −2. Our gauges for inventories were mixed in October. The finished goods inventory index trimmed four points to 14, while the raw materials inventory index held steady at 12.

The Chicago Fed Midwest Manufacturing Index (CFMMI) increased 1.0% in September, to a seasonally adjusted level of 82.3 (2002 = 100). Revised data show the index rose 1.6% in August, to 81.6. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) was also up 1.0% in September. Regional output in September declined 15.7% from a year earlier, and national output decreased 7.2%.

Three of the four regional industry sectors increased in September:
Regional auto sector production moved up 5.5%;
Regional steel sector output increased 1.3%;
Regional resource sector output rose 0.2%; and
Regional machinery sector output declined 1.8%.

Texas factory activity declined in October, according to business executives responding to the Texas Manufacturing Outlook Survey. The production index—a key indicator of current manufacturing activity—edged further into negative territory, suggesting output in October contracted after remaining stable in September.

Current activity indexes for new orders and shipments turned negative, erasing gains seen last month. The company outlook and business activity indexes remained slightly negative, but a growing majority of executives reported no changes from the prior month and only a fifth noted worsening outlooks and decreased business activity.

The employment index remained negative as more respondents are trimming payrolls than hiring. However, nearly 70 percent of manufacturers reported no changes in staff levels or hours worked.

Price pressures remained tame, with about three-fourths of respondents reporting no change from the previous month in input and selling prices. The raw materials price index rose as firms reporting higher input prices continued to outpace those seeing declines by a significant margin. Some companies continued to report net declines in prices for their manufactured goods, keeping the finished goods price index negative.

The Chicago Fed National Activity Index was –0.81 in September, down from –0.65 in August. Three of the four broad categories of indicators made negative contributions to the index in September, but the production and income category made a positive contribution for the third consecutive month.

At –0.63 in September (up from –0.96 in the previous month), the index’s three-month moving average, CFNAI-MA3, suggests that growth in national economic activity was below its historical trend. However, the CFNAI-MA3 in September improved to a level greater than –0.7 for the first time since the early months of this recession. For the four previous recessions, the first month when the CFNAI-MA3 was above –0.7 coincided closely with the end of each recession as eventually determined by the National Bureau of Economic Research. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.

Production-related indicators made a smaller positive contribution of +0.27 to the index in September compared with +0.49 in August. Manufacturing production increased 0.8 percent in September after rising 1.2 percent in August, and manufacturing capacity utilization increased to 67.5 percent in September from 66.8 percent in the previous month.

Reports from the 12 Federal Reserve Districts indicated either stabilization or modest improvements in many sectors since the last report, albeit often from depressed levels. Leading the more positive sector reports among Districts were residential real estate and manufacturing, both of which continued a pattern of improvement that emerged over the summer. Reports on consumer spending and nonfinancial services were mixed. Commercial real estate was reported to be one of the weakest sectors, although reports of weakness or moderate decline were frequently noted in other sectors.

Reports of gains in economic activity generally outnumber declines, but virtually every reference to improvement was qualified as either small or scattered. For example, Dallas cited slight improvements residential real estate and staffing firms, while New York noted gains only in a few sectors (predominantly manufacturing and retail). Retail and manufacturing conditions were mixed in Boston, but some signs of improvement were reported. New York, Philadelphia, Cleveland, and San Francisco cited small pickups in manufacturing activity. In the Kansas City District, an uptick was noted in technology firms, while services firms posted revenue gains in Richmond. However, conditions were referred to as stable or flat for business services and tourism firms in Minneapolis and agriculture in St. Louis and Kansas City.

The weakest sector was commercial real estate, with conditions described as either weak or deteriorating across all Districts. Banking also faltered in several Districts, with Kansas City and San Francisco noting continued erosion in credit quality (often with more expected in the future). One bright spot in the banking sector was lending to new homebuyers, in response to the first-time homebuyer tax credit. Finally, labor markets were typically characterized as weak or mixed, but with occasional pockets of improvement.

Districts generally reported little or no increase to either price or wage pressures, but references to downward pressures were occasionally noted. While upward price pressures were generally subdued in most Districts, materials prices increased in Cleveland (mainly for steel) and Kansas City. Manufactured goods prices were flat to up slightly in Boston. Boston reported that in some market segments "product competition and customer clout are leading to downward pressure on prices." Minimal wage pressures were noted in Cleveland and Minneapolis.

The region's manufacturing sector is continuing to show signs of recovery, according to firms polled for this month's Business Outlook Survey. Indexes for general activity, new orders, and shipments all registered positive readings for the third consecutive month, but they suggest only marginal growth. Indexes for employment and work hours remained negative, but trends suggest that employment losses have moderated in recent months. A growing percentage of firms have indicated higher input prices in recent months, but price increases for their own manufactured goods are not prevalent. The region's manufacturing executives expect business activity to increase over the next six months; however, expectations have moderated somewhat in the last several months.

Indicators Still Suggest Only Modest Growth
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, fell from a reading of 14.1 in September to 11.5 this month. The index has now remained positive for three consecutive months following a nearly continuous string of negative readings since the beginning of the recession in December 2007 (see Chart). The percentage of firms reporting increases in activity this month (28 percent) exceeded the percentage reporting decreases (17 percent). Other broad indicators suggest some growth this month. The current new orders index also remained positive for the third consecutive month and increased three points. The current shipments index decreased five points but remained slightly positive. Firms reported declines in inventories this month: The current inventory index declined 14 points, from -18.1 in September to -31.8 this month. Indicators for unfilled orders and delivery times remained negative, suggesting continued weakness.

Labor market conditions remain weak, although there are signs that widespread declines have moderated considerably. The current employment index, although still negative, increased eight points, from -14.3 to -6.8, its highest reading since September 2008. Twenty-three percent of firms reported employment declines, while 16 percent reported employment increases. The workweek index remained negative, edging one point lower, to -4.7.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved significantly in October. The general business conditions index climbed 16 points to 34.6, its highest level in five years. The new orders index rose 11 points, and the shipments index shot up 30 points, to 35.1. Both employment indexes were positive for the first time in more than a year. Price indexes were little changed, with the prices paid index remaining positive while the prices received index hovered just below zero. Future indexes advanced to relatively high levels, indicating that respondents expect conditions to improve further in the months ahead.

In response to a series of supplementary questions on credit issues, manufacturers reported that credit conditions have tightened over the past year while firms’ borrowing needs have eased (see Supplemental Report tab). Over the past three months, however, there appears to have been little change in borrowing needs and only a modest decline in credit availability, on net. The survey also points to increased borrowing costs over the past three months, but little change in credit limits (ceilings). These findings are fairly close to those obtained in March, when these questions were previously asked.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 0.3% in August, to a seasonally adjusted level of 80.1 (2002 = 100). Revised data show the index rose 3.1% in July, to 80.4. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) was up 0.6% in August. Regional output in August declined 20.8% from a year earlier—lower than the 12.0% decrease in national output. The decline was focused in the regional auto sector, the other three regional sectors moved higher:

Regional auto sector production declined 4.2%;
Regional machinery sector output rose 0.3%;
Regional steel sector output increased 0.6%; and
Regional resource sector output rose 1.3%.

Texas factory activity showed the first signs of bottoming out in September, according to the business executives responding to the Texas Manufacturing Outlook Survey. The production index, a key indicator of current manufacturing activity, came in close to zero as the number of companies seeing increases and decreases was nearly equal.

Most indexes of current activity improved, continuing a trend that began in spring. The shipments index turned positive for the first time in 14 months. The new orders index also moved into positive territory, indicating that manufacturers are seeing growing demand. Indexes for capacity utilization and growth rate of orders improved but remained slightly negative.

The business activity and company outlook indexes also saw further improvement in September, largely because fewer companies are seeing deteriorating conditions. Both remain negative, however.

The Chicago Fed National Activity Index was –0.90 in August, down from –0.56 in July. Three of the four broad categories of indicators made negative contributions to the CFNAI in August; the production and income category made a positive contribution to the index for the second consecutive month.

The three-month moving average, CFNAI-MA3, improved for the seventh consecutive month. At –1.09 in August (up from –1.61 in the previous month), the CFNAI-MA3 suggests that growth in national economic activity was below its historical trend. With regard to inflation, the amount of economic slack reflected in the CFNAI-MA3 indicates low inflationary pressure from economic activity over the coming year.

The production-related indicators made a smaller positive contribution of +0.29 to the index in August compared with +0.45 in July. Industrial production increased 0.8 percent in August, down slightly from 1.0 percent in the previous month; and manufacturing production increased 0.6 percent in August after rising 1.4 percent in July. July and August marked the first consecutive increases in industrial production since November and December 2007.

Tenth District manufacturing activity rebounded in September as firms’ orders picked up slightly, and expectations mostly held steady with last month’s positive outlook. Most price indexes in the survey inched higher, but still remained at fairly low levels.

The net percentage of firms reporting month-over-month increases in production in September was 16, up from -7 in August and 2 in July (Tables 1 & 2, Chart). Production was up at both durable and non-durable goods producing plants, with the notable exception of aircraft manufacturing. All other month-over-month indexes were also higher than in August. The shipments index jumped from -12 to 12, and the new orders, order backlog, and new orders for exports indexes also rose. The employment index moved into positive territory for the first time in over a year, and the employee workweek index also increased considerably. Both inventory indexes edged up slightly, but continued to be in negative territory.

Information received since the Federal Open Market Committee met in August suggests that economic activity has picked up following its severe downturn. Conditions in financial markets have improved further, and activity in the housing sector has increased. Household spending seems to be stabilizing, but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.

In these circumstances, the Federal Reserve will continue to employ a wide range of tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve will purchase a total of $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt. The Committee will gradually slow the pace of these purchases in order to promote a smooth transition in markets and anticipates that they will be executed by the end of the first quarter of 2010. As previously announced, the Federal Reserve’s purchases of $300 billion of Treasury securities will be completed by the end of October 2009. The Committee will continue to evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets. The Federal Reserve is monitoring the size and composition of its balance sheet and will make adjustments to its credit and liquidity programs as warranted.

In September, the seasonally adjusted manufacturing index — our broadest measure of manufacturing activity — was unchanged from August's reading of 14. Among the index's components, shipments edged up one point to 22, new orders lost five points to finish at 13, and the jobs index picked up five points to end at 5.

Other indicators varied. The capacity utilization measure moved down six points to 16, and the orders backlogs and delivery times indexes turned negative, losing nine and five points, respectively, to end at −5 and −3. Our gauges for inventories grew more slowly in September. The finished goods inventory index trimmed four points to 18, while the raw materials inventory index dropped six points to 12.

The region's manufacturing sector is showing signs of growth, according to firms polled for this month's Business Outlook Survey. Indexes for general activity, new orders, and shipments all registered positive readings for the second consecutive month. Indexes for employment, work hours, and the prices received for manufactured goods remained negative, suggesting continued weakness. The survey's broad indicators of future activity continued to suggest that the region's manufacturing executives expect business activity to increase over the next six months.

Current Indicators Suggest Modest Growth
The survey's broadest measure of manufacturing conditions, the diffusion index of current activity, increased from 4.2 in August to 14.1 this month. This is the highest reading since June 2007 and the second consecutive positive reading (see Chart). The percentage of firms reporting increases in activity (33 percent) exceeded the percentage reporting decreases (19 percent). Other broad indicators also suggested some growth this month. The current new orders index also remained positive for the second consecutive month, although it edged one point lower, to 3.3. The current shipments index increased eight points and has now increased 18 points over the last two months. Firms reported declines in inventories this month: The current inventory index declined 18 points, from 0.3 in August to -18.1. Indicators for unfilled orders and delivery times remained negative, suggesting continued weakness.

Labor market conditions remain weak, despite signs of improvement in overall activity. The current employment index decreased slightly, from -12.9 to -14.3. Overall declines, however, are still not as widespread as in the first six months of this year. Twenty-four percent of firms reported declines in employment this month; only 10 percent reported employment increases. Although the workweek index remained negative, the index edged two points higher, to -3.9.

The Empire State Manufacturing Survey indicates that conditions for New York manufacturers improved in September, following the upturn first observed in August. The general business conditions index increased 7 points, to 18.9, its highest level since late 2007. The new orders index was positive and higher than last month, while the shipments index dipped. The prices paid index rose several points to its highest level in many months, and the prices received index, while negative, inched close to zero. The index for number of employees remained in negative territory, while the average workweek index moved above zero for the first time in a year. Future indexes remained relatively high and close to their August levels, suggesting that conditions are expected to improve further in the months ahead. Indeed, the future general business conditions index reached its highest level in several years.