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

FIRST DISTRICT BOSTON

Reports from business contacts in the First District indicate the
regions economy is expanding at a modest pace. Most retail and
manufacturing contacts report sales or revenue gains from a year
earlier, although the manufacturers say growth is slower than earlier in
the year and some have seen actual declines. Consulting and advertising
firms are generally upbeat, with results depending on specific client
industries. Residential real estate contacts note increases in sales and
only small changes in median sale prices. Commercial real estate leasing
activity has slowed somewhat, while investment conditions remain
positive. With the exception of a consulting firm that has expanded
recently and a manufacturer citing especially strong growth, responding
firms are doing only modest hiring. While contacts in most industries
mention the upcoming election, so-called fiscal cliff, and Europe as
risk factors increasing uncertainty, it is only in commercial real
estate leasing that respondents say current activity levels are
measurably damped by such concerns. Retail and Tourism First District
retailers contacted for this round indicate that sales through mid to
late September are slightly above 2011. Year-over-year sales increases
in recent months range from low single-digit to high single-digit
percentage gains, although one retailer reports that its 2012 sales to
date are 2 percent to 3 percent below last years. Furniture sales have
picked up after declining during the summer, while spending on apparel
and household items remains strong. Contacts express some concern that
consumer sentiment could be negatively affected by domestic politics and
the fiscal cliff, which increases their uncertainty about how well the
end-of-year 2012 holiday sales season will turn out. While such concerns
lead retailers to expect the U.S. economy will remain flat over the next
6 to 8 months, respondents are nonetheless cautiously optimistic that
their 2012 revenues will end up slightly ahead of 2011 levels.

The Boston tourism industry continues to benefit from a rebound in
domestic and international business travel, although the leisure sector
has seen a small drop in advance bookings compared to six months ago.
The tourism industry has slightly downgraded its overall forecast for
2012, but this years performance looks to be the industrys best since
19992000. Expectations are that Boston tourism will be strong again in
2013, with revenues rising slightly from 2012.

Manufacturing and Related Services

Discussions with manufacturing contacts in the First District paint
a picture of an economy that is growing slowly but, on net, still
growing. About half the respondents report a substantial slowdown in
growth or outright fall in sales in the most recent period compared with
a year earlier. Three contacts supplying equipment to factories note
weakness in the semiconductor industry, which they say reflects its
idiosyncratic cycle and not the macro economy. A contact in the toy
business reports that orders for Christmas are coming later and later in
the year, partly because lead times have shrunk and firms can order in
September for November delivery.

Not all responding firms report softening. For example, a contact
at a pharmaceutical firm says the companys growth is strong. The firm
plans to hire 1,000 people over the next year, which represents a 20
percent increase in headcount; the hires will be mostly in sales and
marketing. For the most part, firms reporting weakness indicate it has
yet to affect either hiring or investment substantially. Only about
one-quarter of respondents say they are actually cutting staff; for one
firm, the layoffs are in Europe and another firm attributes them at
least partly to increased productivity. Several contacts report that
their firms are re-evaluating their benefits structures as a way to
conserve cash. No contact reports making any adjustments or even
projecting any adjustments to their capital spending plans. Indeed, one
contact at a semiconductor equipment maker says they are maintaining
their long-term investment plans despite quarter-on-quarter sales
declines on the order of 20 percent in the third quarter which are
expected to continue in the fourth.

In general, firms remain somewhat tentative about 2013, although
this is partly because they are currently engaged in their annual
“planning cycles” for 2013. One contact in the industrial distribution
business says he expects they will plan for 1 percent to 2 percent
growth in 2013, in line with Q3 this year; by contrast, their 2011 plan
for 2012 assumed 5 percent to 6 percent sales growth. One contact in the
publishing business says that they will “continue to thrive on low
single-digit organic growth.” Many contacts say that slow growth is the
“new normal.” Selected Business Services Consulting and advertising
contacts in the First District report a generally positive, although not
exuberant, third quarter.

Only one contact cites flat revenues, while the others note varying
levels of growth largely determined by the prospects of their respective
client bases. Marketing and advertising contacts report weaker
conditions than consulting firms. They note a large degree of
uncertainty in the market as well as a shift in demand towards services
focused on social media and e-commerce. Demand for health care
consulting services has skyrocketed due to unprecedented levels of
merger and acquisition activity among health care providers and the need
for improved efficiency as a result of the ACA. At the same time, firms
focused on the pharmaceutical industry have experienced slow growth
because their clients have been hurt by blockbuster drugs losing patent
protection and cost pressures from governments.

Economic consulting remains strong, reflecting high levels of
complex high-stakes litigation; management and strategy consulting
contacts cite a recent upswing in business. Contacts report little to no
cost increases, with the exception of higher travel costs, and are
keeping their prices relatively unchanged. Most contacts record some
hiring, mostly in the low single digits, although one contact in
government policy consulting has increased staff by 25 percent since
last year to address a large backlog and ongoing demand growth. Plans
for future hiring are modest. Most contacts expect a continuation of
current growth trends for the rest of 2012 and are more bullish about
2013. Respondents express concern about factors with the potential to
slow the macro economy, such as political uncertainty, the fiscal cliff,
and Europe. Several firms rely heavily on government spending and are
thus especially concerned with the fiscal situation and upcoming
election.

Nevertheless, no respondent expects another recession and the
overall tone is cautiously optimistic.

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** MNI Washington Bureau: 202-371-2121 **

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