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

Manufacturing

Manufacturing activity was reported as continuing to increase since
the last report in all but two districts, although many noted that the
pace of growth had slowed. The Boston, Atlanta, St. Louis, Minneapolis,
and San Francisco, Districts reported that activity expanded, and the
Dallas District reported a pickup in demand; the Philadelphia, Richmond,
Chicago, and Kansas City Districts reported that activity expanded but
at a slower pace, while activity was reported as steady in the New York
District and stable to growing in the Cleveland District. Supply
disruptions related to the earthquake in Japan led to reduced production
of automobiles and auto parts in several Districts. The Cleveland
District noted a sharp drop in auto production, the Atlanta and St.
Louis Districts also saw production fall, and auto deliveries were
reported as having declined in the Richmond District. The Atlanta
District said lost production in its region would be made up later in
the year. Contacts in the Chicago District said that contingency plans
to deal with supply disruptions were helpful in mitigating the effects.
High-tech firms in the Boston and Dallas Districts reported that
shortages of parts, due to disruptions in Japan, had adverse effects on
business; in contrast, there were few supply constraints that affected
technology-related products in the San Francisco District. Growth was
reported as strong for semiconductors in the San Francisco and Boston
Districts. The Cleveland District reported that steel producers were
seeing shipping volumes level off after a strong first quarter
performance, and the Chicago District noted a decline in second quarter
orders for industrial metals, although orders for the third quarter were
coming in at a more positive pace. A contact in the Richmond District
said that demand for industrial metals had leveled off. The Chicago
District reported a decline in activity for construction materials and
household goods. Production remained strong for makers of commercial
aircraft and parts in the San Francisco District.

Looking forward, contacts in most districts were generally
optimistic about the outlook, although less so than the last report. The
Cleveland District said that the majority of manufacturing contacts
maintained a favorable outlook, although some are delaying the start of
capital projects. Contacts were generally cautiously optimistic in the
Boston District, although some expect sales growth to moderate. Contacts
were mostly positive about the outlook in the Philadelphia District,
though the level of optimism was not quite as strong as in the last
report. Chicago District contacts expect conditions to rebound in the
coming months. A majority of contacts in the Atlanta District planned to
increase production.

Real Estate and Construction

Residential real estate sales markets showed continued weakness in
most Districts, while rental markets strengthened. Most Districts
indicate that home prices have declined since the last report: Boston,
Philadelphia, Richmond, Atlanta, Kansas City, and San Francisco all
report some downward drift in selling prices, while reports from the New
York and Cleveland Districts indicate that prices have been steady, on
balance. No district indicates a general increase in home prices. Sales
activity, though widely reported to be at low levels, picked up somewhat
in the Philadelphia, Atlanta, Chicago, and Kansas City Districts. Dallas
indicated that improved traffic has raised prospects of improved sales
in the second half of 2011, and Boston observed signs that the market is
stabilizing. Sales activity was characterized as mostly steady in the
New York, Cleveland, Dallas and San Francisco Districts, but declining
in the St. Louis and Minneapolis Districts. Those Districts reporting on
the residential rental market-specifically, New York, Atlanta, Chicago,
Minneapolis, Dallas, and San Francisco-all indicate that conditions have
strengthened. In terms of residential construction, activity has
remained generally depressed, with a number of Districts reporting a
large overhang of distressed properties. However, a number of
Districts-New York, Cleveland, Atlanta, Chicago, and San
Francisco-report improved prospects for development of multi-family
rental properties.

Commercial and industrial real estate markets have generally been
steady since the last report, though there have been scattered signs of
a pickup. Commercial leasing markets showed modest signs of improvement
in the Richmond and San Francisco Districts. Boston and Dallas noted
some firming in property sales markets, but Kansas City reported
declines in prices for office buildings. Non-residential construction,
though widely reported to be at very low levels, rose modestly in the
Boston, Chicago, Minneapolis, and Dallas Districts, though Chicago noted
that public sector projects are becoming smaller. Cleveland observed a
pickup in industrial and high-end commercial development but a pullback
in healthcarerelated projects. Richmond reported some pockets of
strength in the retail market. More broadly, contacts in a number of
Districts expressed a general sense of optimism about the outlook for
the second half of 2011.

-more- (2 of 3)

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

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