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

ELEVENTH DISTRICT-DALLAS

Continued:

Non-financial Services

Staffing firms reported continued strong demand for their services.
Tempto- hire activity has been a bright spot, with long assignment
lengths and several conversions to permanent hires. Outlooks are
cautiously optimistic, with most respondents expecting continued
strength in demand through year-end. Accounting firms noted a seasonal
slowdown in demand for their services. Legal firms reported mostly
steady demand, with continued growth in transactional services.

Intermodal cargo volumes increased since the last report, but
year-over-year volumes are down due to a sharp decline in Asian demand
for raw materials. Contacts in railroad transportation noted a
broad-based increase in shipments, with particularly strong volume
growth in metallic and nonmetallic ores and grains. Container volumes
declined during the reporting period, although contacts said demand has
strengthened from a year ago, due to energy-related activity. Small
parcel shipments rebounded in June after declining in May. Still,
outlooks are more pessimistic than previously reported, partly due to
high fuel costs dampening consumer spending. Airlines report some
softening in demand in June compared with May, likely due to an increase
in airfares for last-minute travel. However, passenger volumes are up on
a year-over-year basis, and the outlook for the summer is positive.

Financial Services

Financial firms reported relatively flat loan demand. National
banks reported less pickup in corporate loan demand following a very
active first half of the year, while commercial real estate (CRE)
activity has continued its trend of improvement. Regional banks noted
that loan demand has been mixed, while loan pricing remains aggressive
amidst a highly competitive lending landscape. Outlooks are generally
positive in light of better outstanding loan quality and continued
gradual improvement in lending conditions. Optimism has been tempered by
consumer fear regarding economic and fiscal policy uncertainty as well
as the burden and costs associated with the implementation of new
regulations.

Construction and Real Estate

Single-family home sales remain weak, particularly in the lower
priced segment of the market. Contacts say demand is choppy from month
to month, but most expect some improvement in the second half of the
year.

Apartment demand remains strong and rents continue to increase.
Contacts noted the Dallas/Fort Worth area topped the national rankings
in leasing activity in the second quarter.

Office and industrial real estate activity improved since the last
report. Contacts say Texas markets are performing better than the
national average overall. One respondent noted office demand was quite
strong in Texas’ major metros and that rents were starting to rise.
Investment property sales continued to improve from low levels, and
prices rose slightly.

Energy

Domestic drilling activity remained strong since the last report,
according to Eleventh District firms in the energy industry. The rig
count continues to shift towards oil-directed drilling, and contacts
noted horizontal drilling and fracturing activity remain very
profitable. In the Gulf of Mexico, 15 rigs have been re-permitted-with
seven currently working and near completion-although a lack of new
permits this year has led to some concerns about the prospects for Gulf
work later in the year. International activity remains strong, but
profit margins are thin.

Agriculture

Drought conditions worsened, with about three-quarters of the
district now in the most severe drought classification. Most Texas
counties were designated natural disaster areas in June because they
lost at least 30 percent of crops and pasture to drought. President
Obama signed a disaster declaration in July for 45 counties in Texas
that were heavily impacted by wildfires, which allows federal aid to
help with recovery efforts. Crop conditions continued to deteriorate,
causing low yields and complete crop losses in some instances. Farmers
will depend heavily on crop insurance payments this year. Ranchers
continued to cull herds due to very poor grazing conditions, limited hay
supply and costly supplemental feeding.

(2 of 2)

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

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