Market Overview

Full Beige Book Text For January 13th 2016

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Reports from the twelve Federal Reserve Districts indicated that economic activity has expanded in nine of the Districts since the previous Beige Book report and contacts in Boston were described as upbeat. Meanwhile, New York and Kansas City described economic activity in their Districts as essentially flat. Atlanta and San Francisco characterized the growth in their Districts as moderate; Philadelphia, Cleveland, Richmond, Chicago, St. Louis, Minneapolis, and Dallas described their Districts' growth as modest. Contacts' outlooks for future growth remained mostly positive in Boston, Philadelphia, Atlanta, Chicago, Kansas City, and Dallas.

Growth of consumer spending ranged from slight to moderate in most Districts, while auto sales were somewhat mixed, as activity has begun to drop off from previously high levels in some Districts. Reports of tourism activity were also mixed.

Among the Districts that reported, nonfinancial services generally grew at a modest or moderate pace, although reports from staffing services and transportation services were somewhat mixed.

With the exception of motor vehicles and aerospace, most manufacturing sectors displayed a weakening in activity. Also, fewer Districts reported increases in manufacturing activity than decreases during the latest reporting period. Several Districts reported the strong dollar's negative impact on demand, while some noted that low energy prices have had a smaller, mixed effect.

Residential and commercial real estate activity generally improved, according to District reports. Stronger activity tended to be cited for multifamily construction and commercial real estate. House prices and commercial rental rates also rose somewhat in most Districts.

Overall, most Districts reported that loan demand grew, credit quality improved, or loan delinquencies fell, with credit standards changing little.

Districts reported that agricultural sectors weakened overall, and farm incomes were stressed. Flooding and drought in various regions aggravated the effects of already low and falling prices for farm commodities, caused in part by weak global demand and the strong dollar. Unseasonably warm winter weather in much of the nation further depressed energy prices and slowed significant segments of that sector.

Labor markets continued to improve, with employment increases evident in reports from seven Districts. Four Districts mentioned signs of labor market tightening. However, Districts reported little overall change in wage and price pressures, with wage increases running from flat to moderate, while price increases tended to be minimal.

Consumer Spending and Tourism
Most Districts reported some growth in consumer spending through the holiday season, with the pace of growth typically characterized as ranging from slight to moderate, and as strong in Minneapolis. New York, Richmond, and Dallas noted that sales were sluggish or had softened. Unseasonably warm weather was blamed for damping overall sales in Cleveland, Richmond, and Dallas, and for weaker apparel sales in New York. Richmond and Chicago also noted disappointing clothing sales. Similarly, San Francisco reported that apparel sales at brick-and-mortar stores failed to meet expectations. Minneapolis noted record-breaking online sales, while Cleveland described greater optimism among retailers anticipating enhanced opportunities from e-commerce.

Auto sales have continued to be positive in most reporting Districts since the previous Beige Book, with strength reported in Richmond, Atlanta, and Chicago. However, Kansas City reported that sales dropped markedly compared with last year, and New York and St. Louis reported recent slowing in activity. Contacts in roughly half of the Districts cited continued lower gas prices as a contributing factor for auto sales, particularly for increases in SUV and light truck sales.

Tourism activity varied across reporting Districts. Philadelphia, Dallas, and San Francisco reported overall increases in activity, while Minneapolis and Kansas City reported mixed conditions. New York indicated further weakening. Mild weather negatively impacted ski activity in New York, Philadelphia, Richmond, and Minneapolis but had a positive impact on shore and national parks visits in the Philadelphia and Minneapolis Districts. Richmond, Atlanta, and St. Louis reported positive hotel bookings and occupancy, while New York reported that hotel revenues were down.

Nonfinancial Services
Overall, nonfinancial services have grown modestly to moderately since the previous Beige Book. Professional and technical services firms saw moderate growth in the Minneapolis, Kansas City, and Dallas Districts. Consulting firms in the Boston District reported strong demand, and the demand for server and cloud computing services continued to rise in the San Francisco District. Contacts in the New York District reported sluggish business activity. Staffing services were somewhat mixed across reporting Districts. Staffing firms in Philadelphia reported strong growth for temporary and permanent placements across a range of sectors, while staffing demand in the Dallas District varied by location. Contacts in New York were somewhat less optimistic about the near-term outlook, while contacts in Boston, Philadelphia, St. Louis, and Kansas City continued to expect positive growth.

Reports on transportation services varied. Atlanta, Minneapolis, and Dallas contacts noted a surge in e-commerce shipments, and parcel companies in St. Louis reported record holiday-related demand. Richmond District ports reported strong vehicle imports, and Atlanta District ports cited strong retail goods imports year over year; however, both Districts noted softening in exports. Cleveland and Kansas City noted general declines that Cleveland attributed to weakness in the energy and steel sectors, and to the export environment.

Manufacturing
Manufacturing activity has been varied across Districts since the last Beige Book period, with nearly half of the Districts reporting overall declines. New York, Philadelphia, Atlanta, Minneapolis, and Kansas City indicated that manufacturing activity declined; however, Cleveland, Richmond, and Chicago reported that manufacturing activity grew modestly to moderately. Dallas characterized its demand as flat or increased, while San Francisco reported that activity was flat to down, on balance.

Boston, Philadelphia, Cleveland, Dallas, and San Francisco noted the strong dollar's negative impact on manufacturers' exports. Contacts in Philadelphia and San Francisco also cited weak global demand as contributing to declines. Boston, Cleveland, and Dallas manufacturers reported the benefit of low energy prices on their margins, but Cleveland contacts indicated that the low energy prices did not offset the impact of the strong dollar. Furthermore, suppliers to the oil and gas exploration sector reported weak, and sometimes deteriorating, demand in Philadelphia, Cleveland, Richmond, Chicago, St. Louis, and Kansas City. The motor vehicle and motor vehicles parts industry generally experienced strong demand in Cleveland, Richmond, and Chicago, and announced significant expansions in St. Louis. The aerospace industry was a bright spot for metals manufacturers in Cleveland and Chicago; in Minneapolis, an aircraft producer was expanding for the launch of a new product.

Contacts in Boston, Atlanta, Minneapolis, St. Louis, and Kansas City remained optimistic about the near-term outlook for manufacturing growth. Expectations in Philadelphia have weakened significantly since the last Beige Book but have remained positive, while the expectations of manufacturers in Cleveland have been mixed. New York contacts were less optimistic about the near-term outlook.

Real Estate and Construction
Residential real estate activity as measured in sales was generally positive in New York, Cleveland, Chicago, and St. Louis. Richmond experienced steady sales with pockets of strength, and Kansas City reported declines. Prices rose slightly to modestly overall in all reporting Districts, and inventories remained low in Boston, Richmond, and Minneapolis, and some parts of the New York District; however, New York City's rental vacancy rate increased. Though Boston contacts expected the market to perform well in 2016, contacts in Cleveland and Kansas City expressed concerns that higher interest rates may slow activity. Residential construction activity was described as modest or moderate in most Districts but was more subdued in New York, Atlanta, and Dallas overall. Multifamily construction continued to be strong in New York, Richmond, Minneapolis, and San Francisco and showed improvement in Chicago.

Most reporting Districts characterized nonresidential real estate activity as modest to moderate; Boston and New York indicated little change. Rental rates rose in more than half of the reporting Districts, and vacancy rates were mixed. Most Districts reported modest or moderate growth in commercial construction, and the Dallas District noted high levels of industrial construction in Dallas-Fort Worth. Contacts in the Atlanta District expect construction activity to increase slightly, while contacts in the Philadelphia, St. Louis, Minneapolis, and Richmond Districts expect overall commercial real estate activity to continue to strengthen at least modestly.

Banking and Finance
Lending activity appears to have improved on net. Loan demand grew on balance in the Philadelphia, St. Louis, and San Francisco Districts. Cleveland, Richmond, and Kansas City reported stable credit demand, on balance, while Dallas noted some recent softening. Philadelphia reported the strongest loan growth for autos, commercial real estate, and commercial and industrial deals, while residential lending was flat to down. San Francisco noted robust growth of automobile loans and mortgage originations. Atlanta reported an increase in residential mortgage lending and refinancing, while New York reported weaker demand from the household sector, but steady commercial demand. Chicago noted continued strength in auto lending and some slowing of loan demand from small and middle-market businesses, while most other household lending was little changed. The slumping energy sector was cited as a factor for lower loan demand by some contacts in the Cleveland, Richmond, and Atlanta Districts.

Credit conditions generally improved. New York, Philadelphia, Richmond, and San Francisco cited improved credit quality, declining delinquencies, or both, in all or part of their Districts. Cleveland reported no change in delinquencies. Dallas contacts noted increasing delinquencies of loans to oil and gas companies. New York, Cleveland, Richmond, and Kansas City reported little or no change in credit standards. Seven Districts described some competitive conditions, including competition from nonbank, online entities, whereas New York cited some narrowing of spreads in all loan categories. However, Chicago noted signs of slight tightening of credit supply.

Agriculture and Natural Resources
Agricultural reports were generally flat to down. With few exceptions, commodity prices for crops and livestock have remained low or have fallen since the previous reporting period, stressing farm incomes. Chicago, Kansas City, and Dallas reported that conditions were not profitable for some producers, as farm input prices have not fallen as fast. These three Districts also cited large harvests as a factor in keeping commodity prices low, while Kansas City and San Francisco reported that weak global demand and the strong dollar held down livestock exports. Drought remained a problem in parts of the San Francisco District for some producers, while heavy rain and flooding continued to impact harvests in the Richmond, Atlanta, St. Louis, and Dallas Districts.

Most segments of the energy sector struggled further, as oil and gas prices continued to decline. Cleveland and Kansas City reported that warmer-than-normal temperatures throughout much of the nation has further increased already abundant inventories of oil and gas and kept downward pressure on already low energy prices. Cleveland, Atlanta, Minneapolis, Kansas City, and Dallas reported continued declines in oil and gas drilling; several of these Districts noted that affected firms continued to experience serious financial stress and to reduce employment. In contrast, Cleveland, Minneapolis, and Dallas cited positive impacts for oil refineries, and Cleveland reported that investment in pipeline construction continues unabated. Coal production fell in the Richmond and St. Louis Districts, and iron ore mining fell in the Minneapolis District.

Employment, Wages, and Prices
District labor markets continued to improve. Richmond reported moderate employment increases, while Philadelphia, Chicago, and Dallas reported slight to modest job growth, and Cleveland indicated little change. On balance, New York and Atlanta contacts reported more hiring, than layoffs. Boston and Minneapolis offered mixed examples but both reported that firms had plans to add employees. St. Louis also reported positive hiring expectations. Labor markets were described as tight or tightening in the New York, Cleveland, Atlanta, and Minneapolis Districts. Staffing firms in New York, Philadelphia, Richmond, and Minneapolis cited various positive signs of strong labor demand, including demand from specific technical sectors in the Boston District to a broad range of sectors in the Philadelphia District. Hiring metrics were reported as flat or mixed from staffing agencies in Cleveland, Chicago, and Dallas.

Overall, wage pressures remained relatively subdued, as evidenced by reports from Philadelphia, Atlanta, Chicago, and Kansas City. Just two Districts--New York and San Francisco--indicated some acceleration in upward wage pressures. Cleveland, Richmond, and Dallas cited mixed reports, ranging from flat to moderate wage pressures. Seven Districts mentioned greater wage pressures for skilled workers in a variety of industries, including construction, manufacturing, financial, professional, technology, and health-care sectors. However, wage pressures among low-skilled positions were almost as pervasive, with six Districts citing pressure stemming from state minimum wage increases and from labor shortages or turnover among entry-level positions in banking, retail, and hospitality.

Nearly all Districts reported that overall price pressures were minimal. Price increases were noted by service-sector firms in New York, Philadelphia, and San Francisco, and by retail outlets and restaurants in Richmond and Kansas City. Prices of inputs and finished goods for manufacturers tended to be stable or declining, although Richmond's manufacturing contacts reported rising prices for both. Falling energy prices, as cited by Richmond, Kansas City, and Dallas, and lower prices for copper, steel, and other commodities, as cited by Boston, Cleveland, Atlanta, and Chicago, were generally described as contributing to lower input costs for manufacturers. Low oil prices were also credited for reducing home heating costs in Minneapolis and airfares in Dallas. Six Districts reported low or falling prices for most crops and livestock. Chicago and Kansas City contacts indicated that large harvests had contributed to the price declines.

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First District--Boston
Reports from business contacts in the First District are generally upbeat. Holiday schedules reduced the number of responding firms below average this round. Most reporting retailers, manufacturers, and consulting and advertising firms cite year-over-year sales increases compared with the same period in 2014. Residential real estate markets continue to be strong and commercial real estate markets are said to be similar to the mostly positive situation six weeks ago. Contacts say pricing remains steady. Some firms mention increases in the minimum wage as a cost increase; four of the six New England states saw a January 1 rise. Outlooks are positive.
Retail
Retail respondents in this round report 2015:Q4 sales gains from a year earlier in the low to mid single-digit percentages and favorable results for the holiday season. Preliminary 2015 net gains ranged from low single digits to 22 percent, with comparable-store sales increases (for the two contacts reporting this figure) in the 7-percent range. Apparel, electronics, furniture, other home furnishings, and items related to home improvement account for much of these sales. A hardware contact reports sluggish sales for cold-weather items until recently, given the mild weather in most of New England, followed by brisk sales prior to the first significant snowstorm in late December. Some retailers anticipate that the steadily improving sales trend experienced each quarter in 2015 will continue into 2016, although others express more caution about the winter quarter.

Contacts are increasing inventories in anticipation of continuing improvement in sales. Some contacts are experiencing higher wage costs due to increases in the minimum wage in some states or the need to offer higher wages in order to attract retail workers. Merchandise prices largely remain steady. Some larger firms are planning on significant capital expenditures for 2016 related to expanding their business, including online marketing channels, while at least one smaller firm plans to spend only on IT upgrades and normal repair and maintenance. Generally, the outlook for 2016 is upbeat.

Manufacturing and Related Services
Due to seasonal issues, only five manufacturing firms responded this cycle. Four of the five contacts are positive about demand for their products. Our contact at a frozen food manufacturer was the exception, reporting a very competitive environment in that industry with very large retailers demanding and getting price reductions. The good news is varied. A producer and retailer of furniture says sales were higher for the year but weaker than usual in December. An information services producer cites higher sales for the first time in many years, as growth in legal and tax businesses is finally offsetting weakness in financial services. A toy company reports much stronger sales, largely driven by the new Star Wars movie. A maker of laboratory instruments says new orders from India and China are stronger than expected.

There is little news on the pricing front. The strong dollar continues to be a problem for some firms, but lower energy prices are good news. No firms report inflationary pressure although several firms mention successful efforts to raise prices modestly. Inventories are stable.

No contacts mention significant revisions to their capital expenditure plans. The toy manufacturer indicates that capital expenditures in 2015 fell short of plans. Four respondents report that employment is holding steady or increasing modestly. No one cites significant problems hiring workers. The information services provider continues to reduce headcount through attrition.

All respondents report a generally positive outlook. The only major revision is from the information services provider, who anticipates growth for the first time in many years.

Selected Business Services
All consulting and advertising respondents are ending the year with revenue up over 2014, with slight growth at large analysis and advertising materials firms, and strong growth at healthcare and strategy consulting firms. Demand for consulting in the areas of corporate strategy, operations, and private equity is strong. Mortgage-backed securities related litigation continues to dry up, but demand for economic consulting for antitrust, mergers, and business practice litigation remains strong.

Costs are fairly stable for contacts, except a small research consultant, and margins are expanding. Multiple contacts cite increased upward pressure on healthcare costs for employees. Some contacts plan on keeping their prices flat; others will raise prices by as much as 6 percent.

Contacts were not hiring in the most recent quarter, partly because some typically hire in classes during the summer. All contacts plan on hiring in 2016, by amounts ranging from 10 percent to 15 percent. Those that hire in classes will increase class size, and one strategy consultant is adding an additional spring class in 2016. Large research and strategy consultants are seeing increased attrition and decreased yield from offers, due to continued competition from the tech sector. Base compensation is increasing in line with inflation for most of these firms, though incentive-based bonuses are up significantly for strategy and healthcare consulting contacts. Several contacts say they expect difficulty filling tech and high-skilled positions, and one cited restrictions to the H1-B visa lottery as a loss of potential sources of talent.

Predictions for revenue growth for 2016 are in the 5 percent to 15 percent range, except for a large strategy consultant who is skeptical that their run of strong growth will continue. Contacts are generally bullish on macroeconomic conditions, though some raise concerns over the elections.

Commercial Real Estate
Reports from First District commercial real estate contacts are for the most part little changed since last time. Office leasing demand remains robust in Boston and Portland and weak in Hartford. Leasing activity slowed modestly in the past month in Providence, where a contact perceives greater caution among business owners. The investment sales market for commercial real estate in Connecticut is described as somewhat less "frothy" than it was earlier in the fall, with "careful" bids, but demand still reportedly strong, by contrast with the leasing market. In Boston's investment sales market, contacts note that there are fewer bids per property on average than six months ago, but pricing remains robust. In both Boston and Portland, contacts note that the availability of large blocks of contiguous office space has become quite limited, a condition which--coupled with recent rent growth in both markets--is expected to lead to more office construction moving forward. Extending recent trends, new office projects in greater Boston are typically at least partly pre-leased rather than purely speculative.

In Providence, the outlook became more guarded amid expectations that the national election cycle may delay decisions; at the same time, however, for the first time since prior to the recession, developers in Rhode Island are discussing the possibility of new industrial construction. More industrial construction appears likely in Portland as well in 2016, where supply is quite limited and industrial business activity is reportedly strong and growing. The overall outlook for Portland's commercial real estate market for 2016 is very strong, while in Hartford the outlook remains weak in light of risks that more businesses will leave Connecticut or leave Hartford for suburban locations. On the plus side, a Hartford contact sees business and consumer sentiment as being buoyed by low oil and gasoline prices. The outlook remains optimistic for Boston's commercial real estate market, including leasing and investment sales, but contacts also note risks stemming from political and economic uncertainty at both the national and global level.

Residential Real Estate
Residential real estate markets continue to exhibit strong performance across the First District, consistent with the seller's market environment present throughout 2015. For single-family homes, closed sales increased in November on a year-over-year basis in every state. Massachusetts experienced its sixth straight month of year-over-year increases in closed sales. Median sales prices were generally stable, showing modest increases in most states. Pending sales were up in every state with the exception of Maine, indicating a strong outlook going into the end of the year. A contact in New Hampshire says that residential real estate is experiencing its best year since the recession. The market for condominiums showed similar positive sales trends; closed and pending sales increased across the board when compared to last year. Median sales prices for condominiums, however, were mixed. Prices increased in three states, but decreased in the other three. November saw Massachusetts' largest year-over-year increase in condo prices of 2015 to date.

Inventory continues to be an issue throughout the First District. Available homes for sale, available months' supply, and average days on market were consistently decreasing on a year-over-year basis for both single-family homes and condos. Both supply side constraints (limited construction) and healthy demand contribute to this. Contacts cite the improved employment situation as a driver of demand. Many also report that buyers were motivated to purchase in the months leading up to December due to the anticipation of increasing interest rates.

The consensus among industry contacts is that the market is strong and expected to continue to perform well in 2016. A contact in Connecticut cites the mild weather as a contributor to increased activity in the normally slow holiday season. A contact in Boston reports that "sales increases in both markets are encouraging at this time of year which is typically slow." A New Hampshire contact notes that "more of the same is anticipated in 2016, but inventory and affordability challenges coupled with mortgage rate increases will likely keep any sort of monster growth in check." In spite of any potential concerns about increased interest rates, a Massachusetts contact indicates that he feels buyer demand will remain strong in the New Year.

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Second District--New York
Economic activity in the Second District has remained essentially flat since the last report, while labor markets have continued to be tight. Selling prices remain generally stable, while service-sector firms indicate continued upward pressure on input prices and wages. Consumer spending has been sluggish, with tourism activity particularly weak. Manufacturers report that activity has continued to weaken. Residential real estate conditions continued to improve, while commercial real estate markets were little changed. Multi-family residential construction has held steady at a high level, while commercial construction has picked up somewhat. Finally, banks report weaker loan demand from the household sector, but lower delinquency rates, especially on residential mortgages.
Consumer Spending
Retailers report a sluggish holiday season, with spending flat to down moderately from 2014 levels. One major retail chain indicates that December sales in the region came in below plan and below 2014 levels, with particular weakness in New York City attributed to weak tourism spending. Retailers in upstate New York report that sales were roughly unchanged from a year earlier in both November and December. Some of the weakness was attributed to unseasonably mild weather, which held down sales of winter apparel. One contact notes that on-line business has been relatively strong despite the general weakness in sales. Retail inventories were characterized as on the high side, and pricing was more promotional than a year earlier.

New vehicle sales in upstate New York were reported to be strong in November but showed some signs of softening in December. Sales of used vehicles also softened but remain at fairly high levels. Wholesale and retail credit conditions were described as in good shape. Tourism activity, which was fairly sluggish in the prior report, has weakened further. In New York City, revenue at both hotels and Broadway theaters were down noticeably from a year earlier, particularly towards the end of December. Hotel business in the Buffalo and Albany areas appears to have held steady, though occupancy rates have tapered off somewhat due to an increase in the number of hotel rooms. Ski areas in upstate New York have struggled due to unseasonably warm weather. On a more positive note, the Conference Board's December survey shows consumer confidence rebounding sharply in the region.

Construction and Real Estate
The District's housing markets were mixed but, on balance, slightly improved in the final two months of 2015. The home resale market in western New York has shown continued strength, buoyed by strong demand and mild weather, with inventories still on the low side. Realtors across New York State more broadly also report brisk home sales, along with modestly rising prices. In northern New Jersey, prices for existing homes have been essentially flat; the inventory of distressed properties has come down but remains elevated, while the inventory of non-distressed homes remains low. Residential construction in the District has been mixed: single-family activity remains sluggish, with developers reluctant to build inventories, while multi-family construction (mostly rentals) continues to be brisk. New York City's co-op and condo market picked up somewhat toward the end of 2015, with sales activity described as fairly brisk--particularly for new high-end development. Selling prices for existing apartments rose moderately, while prices for newer luxury units have receded somewhat due to high inventories. Overall, nearly half of all transactions in New York City in the fourth quarter were at or above list price, which was less than in Q3 but still high by historical standards. New York City's rental market has shown signs of leveling off, as vacancy rates and concessions have increased; rents are still running 4 to 6 percent ahead of a year ago in Manhattan, but are up only marginally in Brooklyn and Queens.

Commercial real estate markets across the District were mostly steady. Office availability rates were little changed across most of the District, while asking rents rose modestly. Retail leasing remains slack, with vacancy rates steady at high levels in and around New York City, as well as in upstate New York. Commercial construction activity has picked up somewhat but remains at a subdued level.

Other Business Activity
The labor market has remained mostly strong in the closing weeks of 2015. Two major New York City employment agencies and one upstate agency report that hiring activity was more brisk than usual in December, which is typically a slow month. One contact notes that qualified candidates for temp jobs have been almost impossible to find, leading to more hiring of permanent workers. Most business contacts report steady to increasing employment at their firms, with the exception of manufacturing, where more contacts say they are reducing than expanding their workforce. In general, service sector firms, as well as employment agencies, expect further strengthening in the labor market in 2016.

Manufacturers report that both selling and input prices are generally stable. Service firms report stable selling prices but rising input prices, as well as some acceleration in wages. In general, contacts report that business activity was sluggish in late 2015, particularly in the manufacturing sector. Contacts have also grown somewhat less optimistic about the near-term outlook.

Financial Developments
Small to medium-sized banks in the District report weaker demand for consumer loans and residential mortgages, but steady demand for commercial mortgages and C&I loans. Credit standards were unchanged across all loan categories. Banks report some narrowing in spreads of loan rates over cost of funds across all loan categories, with the decrease in spreads most prevalent for commercial mortgages. There was little change seen in the average deposit rate. Finally, bankers report lower delinquency rates across all loan categories, particularly on residential mortgages.

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Third District--Philadelphia
Aggregate business activity in the Third District continued to grow at a modest pace during the current Beige Book period. Overall, firms hired additional employees at a similarly slow, cautious pace; however, service-sector contacts, especially from staffing firms, reported stronger hiring rates. On balance, only slight increases were reported in wages and prices, including home prices. Firms tended to report less ambitious growth expectations than in prior periods--generally stating that the current [modest] trends would continue.
Among Third District business sectors, general (nonauto) retail sales appeared to

 

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