WASHINGTON (MNI) – The following is the first of two parts of the
text of the Federal Reserve’s Beige Book survey from the Boston
district, published Wednesday:

FIRST DISTRICT – BOSTON

Economic conditions continue to improve in the First District in
the waning months of 2010. Most contacted retailers report
year-over-year sales increases, manufacturers generally continue to see
expansion, and advertising and consulting firms cite relatively strong
growth. Respondents in these three sectors indicate employment is stable
to rising, with more of the same planned for 2011. Commercial real
estate markets are said to be stable, while residential real estate
continues in the doldrums. Selected commodities are causing some price
pressures, but contacts report only modest pass-through into sales
prices to date. The outlook for 2011 is generally positive, albeit
moderate.

Retail

The majority of contacted First District retailers report positive
sales results for the months of November and December. Year-over-year
comparable same-store sales are mostly increases ranging from the low
single digits to the low double digits, with the exception of one
contact who reports a drop in same-store sales but notes a recent
positive turn. Several retailers indicate that consumers continue to
react positively to promotions. Sales of apparel, sporting goods,
cameras, and other gift items were strong leading up to Christmas.
Respondents generally are pleased with early holiday shopping results.

Contacts report mixed inventory levels in comparison to plan. As
for prices, retailers note cost increases for commodities, including
cotton, rubber, and nuts. Several respondents observe price pressure in
the industry, but have yet to experience it themselves. Some contacts
have worked to lock in pricing through vendor contracts; a couple say
that vendors may be absorbing price increases or working to cover
increases through product reengineering to keep their selling prices
steady. Retailers say that price increases passed on to consumers, if
any, will be selective. Headcounts continue to increase in line with new
store openings, although a few firms are taking measures to reduce
redundancy and consolidate headcount to gain other efficiencies. One
respondent is concerned that uncertain potential employer costs
associated with healthcare reform may affect hiring. Capital spending is
mixed, with several retailers reducing capital spending now that
one-time expansion projects have been completed. Outlooks are generally
cautiously optimistic, with most contacts forecasting a slow and steady
improvement in 2011.

Manufacturing and Related Services

The majority of manufacturing firms surveyed continue to report
relatively positive business conditions. The exceptions include one firm
with exposure to the residential construction sector, whose business has
been sluggish for an extended period, and a few others whose business
tends to be a-cyclical. On the positive side, a small diversified
manufacturer reports sales growth in the high single digits and notes
that its revenues have returned to pre-recession levels. A company in
the electronics business says that its sales growth in the fourth
quarter was slightly ahead of expectations, but is likely to be somewhat
inconsistent going forward due to uncertainty about future large
contracts. In addition, sales at a semi-conductor firm remain strong
relative to 2009 and are on par with their strong results in third
quarter 2010; a food products manufacturer also reports strong sales.

A number of contacted firms continue to try to reduce or limit
their inventories to maintain lean operations. By contrast, a few other
firms report trying to increase their inventories somewhat either to
meet higher demand or to try to offset continued supply constraints or
disruptions. Plastics are one intermediate input that remains difficult
to obtain, and a semi-conductor manufacturer reports that components
necessary for its production process remain in short supply. These
supply constraints have yet to translate into higher input or output
prices for the affected firms. Increases in commodity prices are the
main source of price pressure amongst responding firms; the prices of
precious metals continue to rise as do the prices of grains and sugars.
The manufacturers affected by these higher input prices have tried to
pass along some or all of their increased costs to consumers in the
fourth quarter or they plan price increases in early 2011, but they are
not certain the increases will stick. Overall, selling prices remain
relatively stable at the majority of contacted manufacturers.

Manufacturers continue to report stable to slightly increasing
employment. The firms that are hiring tend to be increasing their
headcount in skilled positions and/or in production workers to meet
increased demand; none are planning substantial increases. Firms’
capital expenditures are little changed from previous reports. Most
contacted companies anticipate their capital spending in 2011 will be
roughly in line with 2010. Those firms who have increased capital
expenditures or plan to do so are directing the spending toward IT
upgrades or increased plant capacity.

Manufacturing respondents have mixed, but generally positive
outlooks for 2011. One firm reports being “very optimistic” about next
year, while most are “cautiously optimistic.” In comparison, the firm
that has been struggling recently said the outlook for the next three to
six months is “lackluster.” Many contacted firms remain concerned about
their health care costs going forward, and a few expect that the
macroeconomic uncertainty will continue to weigh on their sales growth.

-more-

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

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