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

FIRST DISTRICT – BOSTON

Most business contacts in the First District report modest revenue
growth from a year earlier. Retailers are somewhat more positive than in
preceding months, with 2011 sales projected to come in higher than 2010.
Manufacturers reports are similar to the last round; most firms cite
somewhat slower sales growth than earlier in the year, while a couple of
semiconductor-related firms saw sales fall off (they believe
temporarily). Commercial and residential real estate markets remain
weak, but are not expected to deteriorate further. Advertising and
consulting firms, by contrast, say business improved noticeably between
the third and the fourth quarters, bringing a strong 2011 to a close.
Some firms are hiring, but modestly; wage increases, if occurring,
remain moderate. Price pressures continue to ease. Most contacts expect
a continuation of current modest growth trends, notwithstanding
uncertainties related to Europe and U.S. budget deliberations.

Retail and Tourism

As in mid-November, retail contacts for this round report a slight
improvement in business conditions from earlier in the year.
Comparable-store sales in the fourth quarter for most contacts range
from flat to up 2 percent from a year earlier; one retailer saw a drop
in in-store foot traffic for December but a tripling in Internet sales.
One is projecting annual sales for 2011 will be down about 5 percent,
but this represents an improvement compared with sales declines of 10
percent in the first half of the year. Contacts with a web-based
presence report sales strength in this area, and some are adding staff
and making investments to better service customers buying online.
Planned salary increases for 2012 range from 2 percent to 3 percent for
merit-related raises; none of the retail contacts is planning to offer a
costof- living adjustment.

The travel and tourism sector continues to project a 5 percent to 8
percent increase for 2011 over 2010. Data from the first week of
December show strong performance. The industry foresees a robust 2012,
taking heart from Q1 projections based on advance bookings. Preliminary
predictions are that 2012 hotel revenue per available room will increase
10 percent to 12 percent over 2011. Restaurant sales, while much harder
to project, are estimated to grow 3 percent in 2012 over 2011, an
improvement over the 1.5 percent estimated for 2011 over 2010.

Manufacturing and Related Services

Not much has changed since our last manufacturing report in
mid-November. Most contacts report growing sales and some are hiring,
albeit in small numbers. Two contacts in the semiconductor industry
report a substantial weakening of business in the summer and fall but
both seem optimistic that the decline is transitory. Overall, the mood
remains cautious.

Of the 13 manufacturing contacts in this cycle, nine report higher
sales, two cite flat sales and two declining sales. The two firms with
falls in sales are in the semiconductor business and both depend heavily
on Asia for demand. Of these two, a manufacturer of analog
semiconductors says orders peaked in the June quarter and bottomed out
in September; since sales follow orders with a lag, sales declined in
the fourth quarter, ending an 11-quarter streak of quarter-on-quarter
sales growth. The two contacts differ on the source of the problem, with
one attributing it to China-specific issues and the other arguing that
the underlying causes are broad-based.

For contacts reporting higher sales, growth recently is moderate
compared to the rapid growth they experienced in the last few years. One
firm said that while sales were likely to be up about 15 percent for the
year, the fourth quarter would clock in at only about 5 percent. Europe
is cited as a problem, although two contacts say that they have yet to
see evidence of a recession in northern Europe. One contact at a medical
equipment supplier says that debt problems in Europe do not appear to
have affected the health care sector; another contact at a large
diversified manufacturing firm argues that there is an incipient credit
crunch in Europe.

On pricing, the complaints about escalating input prices have more
or less stopped; contacts say even food prices have ceased rising. A
year ago, virtually every contact talked about high commodity prices
and, in some cases, shortages, but now the only comments relate to
limited pricing pressure. Five contacts report that they are hiring,
eight report flat to maybe a small decline and none reports any
significant staff reductions. Several contacts mention that they are
having trouble finding qualified staff, but some have come up with more
creative ways to bring in the right people. Firms continue to devote
resources to capital expenditures. None reports any problems raising
money to pay for needed investment and, in fact, many are able to
finance all capital spending with retained earnings. The outlook remains
guarded; general concerns about “macroeconomic uncertainty” remain. The
two firms reporting lower sales are fairly optimistic that the dip is
transitory. In general, firms with greater exposure to Europe are more
concerned than firms focused on the domestic market.

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

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