WASHINGTON (MNI) – The following is the first part of the latest
Beige Book survey of economic conditions in the Federal Reserve’s
Eleventh District, published Wednesday:

ELEVENTH DISTRICT-DALLAS

The Eleventh District economy expanded at a moderate pace over the
past six weeks. Manufacturing activity was flat to up, demand for
business services rose and transportation services activity was mixed.
Energy activity remained strong, and the housing sector continued to
improve. Retail sales rose moderately, and auto sales were strong. Loan
demand picked up since the last report. Drought conditions improved.
Most firms reported no change in selling prices. Employment levels were
steady to slightly higher, and wage pressures remained minimal. Most
firms’ outlooks are optimistic, although many respondents expressed
concern about U.S. political uncertainty and the European debt
situation. Prices Most responding firms said prices were unchanged,
although some noted that input prices ticked up slightly. Retailers said
selling prices were stable, although food prices increased. Auto dealers
said prices were unchanged. Transportation service firms expect lower
energy surcharges by July due to recently reduced prices for jet and
diesel fuel. In contrast, airlines expect a slight upward trend due to
higher fuel costs compared to last year at this time. Agricultural
producers noted lower commodity prices and input costs.

The price of WTI fell from near $100 per barrel to the low $90
range over the reporting period. Natural gas prices rose to $2.70 MMBtu
after falling under $2 in early April. Respondents said the substitution
of natural gas for coal in power generation reduced inventories,
although they remain 40 percent above normal. The price of gasoline fell
about 20 cents per gallon, and diesel prices fell by 15 cents. Spot
prices for several petrochemical products fell sharply as plants
returned to production following maintenance, and contacts expect
contract prices to follow.

Labor Market

Employment levels were flat to up slightly at most responding
firms. Staffing firms said demand picked up over the past six weeks
after a slight softening during the prior reporting period. Reports of
small employment increases came from some high-tech, transportation,
metals, construction materials and food manufacturers. Contacts in auto
sales, staffing and transportation services also noted slight increases.
Wage pressures remained minimal, although wage increases were noted by
some legal firms.

Manufacturing

Overall demand for construction-related materials improved during
the reporting period. Favorable weather and improved residential and
commercial construction activity provided a boost to stone, clay and
glass producers. Primary and fabricated metals manufacturers reported
steady demand, and producers of lumber and related products noted a
broad-based increase in orders. Construction-related outlooks were
generally positive, but some contacts are concerned about domestic
political uncertainty and unfavorable developments in Europe derailing
the pickup in activity seen so far this year.

High-tech manufacturers said orders continued to grow at a moderate
pace. According to contacts, demand for logic devices was strong, while
orders and prices for memory chips remained weak. One respondent noted
some strengthening in industrial demand and orders for communications
infrastructure equipment, such as cell phone towers. Inventories were
near desired levels. The outlook for the next three to six months is for
mild to moderate growth, although one contact said a recent increase in
new orders has raised the likelihood that production may pick up in the
second half of the year. Aviation equipment manufacturers said demand
was flat during the reporting period. Contacts were more pessimistic in
their outlooks for the year, citing soft demand and negative economic
news as key factors. Recreational vehicle manufacturers reported weak
sales, in part due to economic uncertainty and fuel price shocks. Food
producers said sales activity increased over the past six weeks, and
orders were well above year-ago levels. Reports from paper manufacturers
were mixed, but contacts expect modest sales growth for the year.

Petrochemicals producers reported moderate domestic demand but said
export demand slowed, partly a result of higher U.S. plastics prices,
but also due to weaker growth in Asia and the Middle East. Notably,
contacts said domestic PVC demand rose for the first time in a long time
in response to an increase in housing starts and other construction.
Outlooks for the petrochemical industry were positive, and announcements
for new construction or expansion continue at a rapid pace. Refiners
said margins improved slightly in early May.

Retail Sales

Retail sales grew modestly over the comparable period from a year
ago and performed in line with contacts’ expectations. Strength was seen
in sporting goods and men’s and women’s apparel. Eleventh District sales
growth was stronger than the nation on average, according to a large
national retailer. Contacts noted that consumers still seem a bit
hesitant, but business is improving nonetheless. Inventories are in good
shape and being managed closely. Automobile sales continued to rise over
the reporting period. Car sales were especially strong, but trucks were
selling well too. Contacts’ outlooks remain optimistic and they expect
continued growth in vehicle sales.

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** MNI Washington Bureau: 202-371-2121 **

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