WASHINGTON (MNI) – The following is the second and final part of
the text of the First District assessment in Wednesday’s Beige Book
survey of regional economic conditions:

Selected Business Services

Consulting and advertising contacts in the First District report
increasing revenues in the first quarter of 2012 and most say that the
pace of growth, while not rapid, is sustainable. Despite the fact that
recent growth is generally slower than at the end of 2011, contacts are
relatively upbeat, partly because the faster growth of late 2011
represented a recovery from a very weak third quarter, in which several
contacts experienced declining revenues and laid off workers. Revenue
results, while good for marketing and advertising firms, are stronger
for consulting firms, especially economic consulting. A firm that
focuses on marketing and promotional materials saw year-over-year growth
of about 10 percent while another that focuses on advertising cites
stable revenues recently after rapid growth in the latter half of 2011.
Strategy and business consulting contacts report growth around 5
percent, as clients who had previously been sitting on large stockpiles
of cash are beginning to spend them to address pent-up need for
consulting services cut during the recession. Clients have reportedly
begun to focus on increasing sales and positioning themselves within
markets rather than solely on cutting costs. Economic consulting
contacts note that demand is extremely strong for high-end consulting
and revenue growth is limited mostly by their own capacity to respond.
Demand for health care consulting is generally strong, with the
exception of pharmaceuticals, but some business lines have slowed as
firms wait until the uncertainty over health care reform clears up. One
consulting firm has seen rapid growth due to two new large government
contracts, but notes that individual consulting firms’ prospects are
contingent upon the funding status of and uncertainty surrounding the
specific agencies with which they do business.

Contacts report wage increases in the low single digits and expect
this pace to continue. Input costs consist primarily of salaries in this
sector, but other cost growth is generally low. Firms say they are able
to pass on cost increases to clients and thus see either steady or
slightly increasing profit margins. Responding firms say they changed
employment levels very little in the first quarter of 2012, except for
economic consultants who are hiring to meet demand growth, and a
strategic and management consultant with small layoffs. Aside from
economic consulting, contacts do not plan to expand headcounts in the
near future, requiring more rapid increases in demand to reinitiate
hiring.

Most contacts expect moderate growth for the rest of 2012, with
some anticipating an acceleration either late in the year or in 2013.
They note very few downside risks, saying their biggest concerns are the
macro economy in general and uncertainty surrounding partisanship in
Washington and the upcoming election.

Commercial Real Estate

Reports from commercial real estate contacts in the First District
indicate that conditions are largely unchanged since the last report.
Bostonfs commercial property market remains more active than other New
England markets, which are “quiet,” a term one contact used to describe
Portland. Contacts note that investment demand for prime office and
apartment properties continues to be robust in Boston and expect it to
remain so for the foreseeable future. Office and retail demand elsewhere
in New England is moderate. Contacts in these areas do not foresee
increases in vacancy rates, but note that a dearth of interest from
potential entrants to these markets means they are unlikely to fall in
the near future. Retail sector rents remain flat across the region and
all contacts reported retail sector vacancy rates somewhere between flat
and modestly decreasing.

Construction activity continues at moderate levels in Boston and
low levels elsewhere in the District. One contact perceives an increased
interest in new retail and medical office projects in Boston for the
first time in recent history. Another contact expects education sector
construction activity in the Boston area to increase later in the year,
but notes that large health care projects continue to be delayed. Market
appetites for multifamily apartment development remain strong in Boston.
According to contacts, favorable terms but strict standards characterize
financing markets for construction projects in Boston and financing
conditions in Boston remain markedly better than in the regionfs
smaller markets. Respondents throughout the region remain cautiously
optimistic about the coming months, but many acknowledge that commercial
markets will not begin to pick up until macroeconomic conditions improve
substantially.

Residential Real Estate

Residential real estate in New England shows signs of strengthening
as sales continued to increase in February, except in Connecticut where
February sales were close to year-earlier levels. According to most
contacts, activity is improving across all price segments. Contacts cite
low interest rates, falling prices, improving economic conditions, and
milder weather as factors contributing to the observed sales increases.
Nonetheless, contacts remain cautious about the prospect of
housing-market recovery because home prices continued to decline across
the six states. Most contacts attribute falling prices to distressed
properties; however, they also say the role of distressed properties in
the market is diminishing. In the Greater Boston area, by contrast, the
median sale price of homes and condos rose in February compared to a
year ago. Respondents say buyer activity in Boston has intensified and
they are concerned that inventory levels will not provide adequate
selection for homebuyers.

Contacts in states with significant levels of inventory remain
cautiously optimistic about the near future; they say sales growth
observed in recent months appears promising, but declining prices remain
a source of concern. Other contacts maintain a more optimistic outlook
for coming months due to inventory levels coming into balance with buyer
activity. Based on pending sales figures and current market activity,
contacts expect growth in year-over-year sales to continue into spring.

(2 of 2)

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

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