WASHINGTON (MNI) – The following is the first text of the Dallas
section of the Federal Reserve’s Beige Book report on current financial
conditions released Wednesday:

ELEVENTH DISTRICT-DALLAS

The Eleventh District economy expanded at a moderate pace over the
past six weeks. Energy-related activity remained strong. Reports from
manufacturers were mixed but mostly positive, although some
construction-related producers were less optimistic than they were six
weeks ago. Nonfinancial services activity rose, with strong demand for
staffing services. The single-family housing sector remained weak, but
the commercial real estate sector continued to improve. Financial
services respondents said overall loan demand was flat during the
reporting period, and contacts in the agricultural sector noted drought
conditions worsened.

Prices

Selling prices were flat or higher since the last report. Most
manufacturers said selling prices were stable, while several service
sector companies were able to enact some price increases, including
transportation and retail firms. These price increases were in response
to higher input prices. Accounting, legal and staffing firms reported
slight increases in rates charged for their services. Input prices
increased at most responding firms, although several contacts said
upward pressure from higher energy costs eased in recent weeks as oil
prices declined. Transportation firms, including airlines, noted that
the recent price declines for fuel will have a larger impact on input
costs later in July and August. Retailers said cost pressures were
squeezing margins, and food manufacturers said commodity prices were up
significantly from last year.

The price of crude oil fell from over $100 per barrel in early June
to about $95 at the end of the reporting period in early July. Gasoline
prices fell about 15 cents during the reporting period. Natural gas
prices remained in the $4-$5 per Mcf range, but edged up since the last
report because of hot weather. Prices for most petrochemical products
fell since the last report, according to contacts. Labor Market
Employment levels held steady at most responding firms, although there
were several reports of hiring. Staffing firms reported continued strong
demand for their services. In addition, there were some mentions of
moderate employment increases from automobile dealers, transportation
service firms and manufacturers of primary and fabricated metals,
transportation equipment, lumber and food. Legal firms noted solid
demand for talented attorneys, and added that start dates for some new
hires had been moved up from January 2012 to fall 2011. In contrast, one
construction-related manufacturer reported a new round of layoffs, and
one retail firm was considering reducing staff levels next year. Wage
pressures remained minimal, although some contacts noted that they were
giving modest pay raises.

Manufacturing

Reports from construction-related manufacturers were mixed.
Overall, activity levels appeared to be unchanged. Multifamily activity
provided a boost to some firms, although several contacts said public
and government demand had diminished. In particular though, fabricated
metals producers noted a pick-up in growth since the last report due to
infrastructure projects. Construction-related outlooks were generally
flat to slightly up, and contacts believe there will not be much rebound
until residential and commercial construction recover, which may take
longer than previously expected. Respondents in high-tech manufacturing
reported that growth in orders remained at a moderate pace since the
last Beige Book. One respondent with greater-exposure-than-average to
Japanese production said second-quarter sales were well below
pre-earthquake expectations, but that growth in June was strong enough
to finish the quarter slightly above their expectations. Inventories
were at desired levels, although one respondent said that a one-time
reduction in orders from a customer left them with slightly
higher-thandesired levels. Most contacts expect orders and sales growth
to remain moderate or to pick up slightly in the second half of the
year.

Reports from paper manufacturers were mixed. Demand for corrugated
packaging improved, but paper suppliers noted flat to slightly slower
sales. Manufacturers of non-defense transportation equipment reported
strong sales with demand flat to slightly up since the last report and
well above year-ago levels. Food producers said sales continued to rise
at a steady pace.

Petrochemical producers said demand remained strong for most
products. Contacts said domestic demand has improved, and export markets
have re-opened since the last report. Refinery utilization moved up to
near 90 percent, and contacts in the refining industry said margins
narrowed slightly but remained very strong, although demand for oil
products is slightly lower than the same time last year.

Retail Sales

Retailers reported a slight increase in activity over the reporting
period. Compared to a year ago, same store sales are up in the
mid-to-low single digits. Apparel and jewelry are segments that have
performed well recently. Concerns remain regarding the elevated level of
unemployment. Texas sales increased slightly more than the nation on
average, according to one large retailer. The second half of the year
should see modest year-over-year growth. Automobile demand remains
strong, but supply constraints stemming from Japan are limiting sales.
Japanese manufacturers are primarily affected, but inventories of
domestic autos are below desired levels as well. This is expected to
last for another 90 days or less before improving through year-end.

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** Market News International Washington Bureau: 202-371-2121 **

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