WASHINGTON (MNI) – The following is the Beige Book report on
economic activity by the Boston Federal Reserve Bank, published
Wednesday:

FIRST DISTRICT – BOSTON

Most business contacts in the First District continue to report
year-over-year revenue increases, but an uncertain outlook. Responding
retailers cite mixed results and increased optimism about 2012;
manufacturing contacts, by contrast, say they are uncertain about the
outlook even though most current results remain good. Software and IT
services companies continue to see good demand growth, while results are
mixed, though mostly positive, for staffing firms. Real estate markets
remain subdued. With the exception of software and IT services, contacts
say their firms are doing mostly replacement hiring; some cite
difficulty in filling specific skilled jobs. Cost pressures are said to
be modest.

Retail and Tourism

First District retailers contacted in mid-November express less
uncertainty about recent business trends than they did in early October;
their estimates of 2011 annual sales are generally more positive and the
2012 outlook is more optimistic than last time. One large retailer
selling both durable and nondurable goods reports that third quarter
comparable store sales were up 3 percent over 2010:Q3. Another durable
goods retailer reports that sales in recent weeks have been almost 5
percent above what they consider the benchmark for a solid sales week.
Notably, a couple of contacts who last time expected 2011 sales gains of
4 percent or 6.5 percent from 2010 have now revised their estimates
upward to between 7.5 percent and 8 percent. With one exception,
responding consumer-goods retailers expect final 2011 sales to range
from 6 percent to 8 percent over 2010, but one foresees annual 2011
sales to track 1 percent to 9 percent lower than 2010. Respondents say
that consumers are regaining some confidence, although such comments are
still tempered with caution, particularly regarding durable goods
purchases. Budgeted pay increases range from 2 percent to 3.3 percent.
Some contacts report ongoing wholesale price increases, while others say
cost increases have moderated.

The travel and tourism sector continues to see strength in overseas
and business travel, while discretionary domestic leisure spending is
fueled by the affluent consumer. One weak spot is booking for
end-of-the-year holiday parties. Hotel bookings for 2012 remain strong.
The September tourism slowdown noted in the last round of calls seems to
have been temporary. This contact continues to expect 2011 tourism
growth of 5 percent to 8 percent over 2010 and predicts 2012 tourism
revenues to be 10 to 12 percent above 2011.

Manufacturing and Related Services

The First District manufacturing picture remains mixed. On the
whole, contacts report relatively strong performance continuing in
recent months, but ongoing concern about potential weakness in the
global economy is tempering growth forecasts and leading to only limited
capital investment and hiring activity. Of the firms contacted this
month, all but one recorded sales growth year-on-year and many report
double-digit growth. The growth is broad-based geographically; most
firms report strongest growth in Asia, followed by domestic sales, but
even Europe results remain fairly robust, despite the sovereign debt
crisis. One contact making laboratory instruments commented that
wreports of Europes demise are premature but others are less
sanguine about Europe. A major supplier to the auto industry reports a
September year-on-year sales decline in Europe of 7 percent, but a
year-to-date European sales increase of 11 percent, only slightly less
than the almost-13 percent recorded in Asia.

The pricing picture continues to improve. Materials price increases
and shortages that characterized the sector in 2010 are said to have
largely subsided. One contact in the chemical business says that input
costs are “falling like a rock” and attributes the attenuation to
China “wputting the brakes on.” A semiconductor contact says that while
the price escalation and shortages of rare-earth elements endemic at the
beginning of the year are no longer a problem, prices remain high. A
laboratory-instrument maker says that high energy prices are leading
them to shift freight from air to ships. In general, contacts say they
have little trouble passing price increases on to customers. Respondents
who cite falling input prices also report increased downward price
pressures on the output side.

Manufacturers in the First District are hiring in general but not a
lot; most report hiring only selectively to fill vacancies. Only one
firm is laying off workers. A contact supplying the auto industry had
planned to increase headcount 3 percent in 2012 but has now decided to
freeze hiring, approving no new positions and abandoning approved but
unfilled positions. Several firms cite trouble finding qualified staff,
generally for technical positions, with one contact in the industrial
motor business saying that larger firms are wpoaching machinists from
a North Carolina plant. A pharmaceutical firm reports problems finding
technical staff and also accountants and other less specialized skills.

Contacts do not, in general, report any major changes to their
capital spending plans. Several firms mention increased expenditure on
information technology, including two who are installing new ERP
(enterprise resource planning) software systems. One contact in
industrial distribution said that the purpose of the increased
investment is to wgrow the business without increasing headcount.
Several firms report significant capital expenditures overseas,
generally with the goal of supplying overseas markets.

The outlook for 2012 is very cloudy. Virtually all of our
manufacturing contacts express misgivings. Some are concerned about the
crisis in Europe but others express the vague fears that have
characterized our conversations over the last 18 months. A contact in
the semiconductor industry says there is less wvisibility than at any
previous juncture. Most firms have not officially revised their
forecasts for 2012 and continue to plan for growth. A chemical industry
contact says he is “following his head and not his stomach” because,
by the numbers, 2012 looks promising but his experience and intuition
tell him otherwise. A contact in the industrial motor business says that
their “book-to-bill” ratio is 1.07, so backlog is growing, but he
describes himself as “wworried.”

Software and Information Technology Services

New England software and information technology contacts report
continued growth, with year-over-year revenue increases ranging from
mid-single digits to 20 percent in the most recent quarter. Contacts
report upticks in demand across the board, including in the
manufacturing, financial, and medical sectors. Increased activity has
led all contacts to increase their headcounts relative to a year ago,
many by over 5 percent; at the same time, many report continued
difficulty in attracting and retaining qualified software engineers,
programmers, and sales personnel. Respondents report annual wage
increases for most employees between 3 percent and 5 percent, with one
firm increasing the wages of software engineers by more. Many contacts
express renewed concerns regarding the federal budget and the European
debt crisis. Nonetheless, First District software and IT contacts are
generally more optimistic than they were three months ago. With strong
order pipelines, most are expecting revenue in early 2012 to be 10
percent to 20 percent higher than in early 2011.

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

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