WASHINGTON -- Demand for commercial, industrial, and consumer loans remained strong as the national economy continued to grow in July, the Federal Reserve reported Wednesday.

"Business activity in most areas is continuing to expand at a solid pace, although a number of districts report scattered indications of some slowing or slight declines," the central bank concluded in its Beige Book, a periodic survey of regional economic activity.

The report stated that virtually all districts report high levels of consumer borrowing, with industrial and commercial lending improving in five districts. The central bank blamed higher rates for the drop in mortgage lending, the only category to shrink.

Busier Factories

The Fed reported increases in the production of motor vehicles, heavy equipment, computers, chemicals, and textiles. It said construction activity remained steady, with an increase in commercial building offsetting a drop in residential work.

Home sales also jumped, and strong competition is stunting price increases. The report noted that retailers expect a strong back-to-school season.

Of more apparent concern to the Fed was a rise in prices for a broad range of business materials, including finished steel, copper, wood, paper, and wool. The Fed also said energy prices increased.

"However, virtually all districts report that competitive pressures are holding prices down at the retail level, and presumably, retail margins are being squeezed," the report stated.

Some Worker Shortages

Labor markets tightened but not enough to spark wage increases, the report said. The central bank found shortages of some workers, such as truck drivers and machinists. It also said businesses continue to use temporary workers and overtime.

Fed watchers said they were most concerned at the employment comments. "That is a little worrisome," said Josh Feinman, a global market economist at Bankers Trust.

Mr. Feinman said scattered labor shortages should not surprise anyone, adding that he doesn't expect the Fed to use them as an excuse to increase interest rates.

First Chicago Corp. chief economist James Annable said the Beige Book shows the economy contradicting itself. Business activity is slowing, but employment levels and prices are rising. "Basically, the Fed has a really difficult job, and the readings from the Beige Book support that," Mr. Annable said.

David L. Littmann, senior economist at Comerica Bank of Detroit, said he believes the Fed will boost rates a half percentage point m response to the higher price and employment numbers.

The Fed's 12 district banks prepare reports for the Beige Book every six weeks in anticipation of the central bank's Federal Open Market Committee meetings, at which interest rate policy is set.

In addition to a national summary, the book publishes reports from each reserve bank. Highlights included:

* Boston: Retail sales jumped, while half of the district's manufacturers reported raising their prices. Residential real estate sales have slowed.

* New York: Growth has slackened, although employment is up slightly despite a drop in June. Retail sales were mixed, with most growth going to discounters and inexpensive chains. One-third of senior loan officers at small or midsize banks saw greater loan demand; 20% noted lower demand.

* San Francisco: California's economy remained sluggish, while the rest of the district saw growth. Employment data were mixed, with aerospace down 10%. Real estate remained uneven; housing values varied from community to community in California.

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