WASHINGTON (MNI) – The following is the text of the Federal
Reserve’s Beige Book survey First District summary, published
Wednesday:

Business activity continues to expand overall in the First
District, but individual firms’ gains show some choppiness. Most
contacted manufacturers and advertising and consulting firms saw
revenues rise in the most recent quarter on a year-over-year basis,
while retail results were more mixed in May and June. Residential real
estate markets continue to show positive effects of the homebuyer tax
credits, but activity slowed after the April deadline. Respondents in
commercial real estate were mostly downbeat based on office job
forecasts, but building sales are picking up, in some cases at distress
prices. A few firms with rising sales are increasing their headcounts,
but most are holding employment steady. Input costs for some metals,
oil- and food-related products have risen, but sales prices are mostly
stable.

Retail

First District retailers report mixed sales results for May and
June; year-over-year same-store sales figures range from down close to 3
percent to increases of about 3 percent. The majority of contacts
express concern over consumer confidence, and even those retailers
reporting sales increases voice a cautious outlook.

Inventory levels are mixed, with some increases due to softening
sales; on the other hand, decreased ocean freight capacity is raising
concerns regarding firms’ ability to restock in a cost-effective and
timely manner. Capital spending is also mixed, with some retailers
spending on new store openings, remodels, and IT systems, while others
remain cautious. Headcounts are growing modestly, with most increases
attributed to opportunistic hiring and new store growth, but a few
contacts indicate that staff cutbacks may occur in the future. Retailers
note cost increases for cotton and food-related commodities.

Manufacturing and Related Services

Many manufacturing firms are still finalizing their second quarter
results, but the vast majority of those contacted report optimism about
demand. The specific sales reports range from “extraordinary demand” at
a semiconductor firm to less-than-anticipated demand at two firms making
life science equipment and medical devices. In particular, the
semiconductor firm reports sales in the second quarter were 17 percent
above their pre-recession peak. Other semiconductor-related firms also
report relatively strong sales. In addition, second quarter results
appear to be somewhat better than expected at a business services
company as well as a company whose sales of outdoor-related products
benefited from the warmer-than-average temperatures. By contrast, among
firms reporting weaker-than-expected sales growth, one speculated that
it was due to a slowdown in European demand and the other to state and
local budgetary cutbacks on medical equipment. In general, nearly all of
the manufacturers surveyed feel that demand will continue to improve
gradually in the second half of the year as well as in 2011.

Most contacted manufacturing firms continue to report limited price
pressure. Input costs remain relatively stable. One manufacturer who
uses many raw metals in the production process says that prices remain
higher than a year ago, but have come down somewhat since the first
quarter. A couple of firms who use oil-related products also report
somewhat higher input prices. Selling prices are generally fairly
stable. One manufacturer that implemented a moderate (3 percent) price
increase in the first quarter says that the increase held. By contrast,
a firm that makes both capital equipment and consumables cites downward
price pressure on the capital goods they sell (as companies remain wary
about the costs of large items), but not on the consumables; this has
been the case for about a year.

Employment continues to be steady at nearly all responding
manufacturing firms, and most say they are unlikely to expand headcount
substantially in the near term. A number of firms plan to hire to
support new product lines or in divisions that are experiencing robust
growth. A semiconductor-related firm, in particular, plans to increase
its engineering workforce by about 150 by year-end; that firm’s
employment is already above its pre-recession peak due to strong demand.

Manufacturers once again report that their planned 2010 capital
expenditures are in line with or somewhat higher than their expenditures
in 2009. Planned increases are primarily for new product releases and/or
infrastructure and IT-related improvements. Credit supply remains
adequate for firm investment, and many manufacturers also report having
adequate cash on hand for investment purposes. Overall, contacted
manufacturers are generally optimistic about the second half of 2010 and
2011. The firms remain cautious, however, as uncertainty continues to
surround the domestic and foreign demand environments.

Selected Business Services

Consulting and advertising contacts in the First District generally
report increased demand for their services in the second quarter of
2010, although a few say demand is flat. Among those seeing increases,
revenue rose 8 percent to 25 percent year-over-year. Contacts cite
healthcare and private equity industries as markets in which activity
increased; a consulting firm also notes a significant increase in demand
from the U.S. government regarding international development and
healthcare issues. One contact reports that the payment cycle from its
clients lengthened in the second quarter, slowing revenue growth.

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

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