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

Business contacts in the First District mostly continue to see
demand growth, but many are toning down their outlooks. Contacted
retailers’ year-over-year percentage sales changes range from low
singledigit declines to high single-digit increases. Responses from
manufacturers are mixed, but most continue to report revenue growth.
Advertising and consulting firms generally cite strong results, but note
a slowdown in the pace. Commercial and residential real estate markets
remain soft. Net hiring remains very limited except for advertising and
consulting; even there, contacts see restrained hiring going forward.
Price pressures continue to ease; some commodity prices are down and
many firms are holding their own prices steady. Contacts in several
sectors cite uncertainty as a key factor restraining demand.

Retail and Tourism
First District retailers contacted in late September and early October provide mixed messages
about sales trends and many note they are having a difficult time gauging their current circumstances. On
a year-over-year basis, sales range from being down 3 percent to up 8 percent, with several in the
“generally flat” middle. One big-ticket retailer saw sales steadily moving up over the last few weeks,
although he cautions that a few weeks do not constitute a trend. Another retailer notes that sales have
been up and down, on both a daily and a weekly basis, and attributes this volatility to consumer sentiment
gyrating with positive and negative news about the domestic and global economy. Furniture sales are
reportedly up a bit in some markets and apparel sales are said to be good. Some retailers still face “high”
vendor prices and say they are passing them on to consumers. Contacts are uncertain about what to expect
for the 2011 holiday sales season. Firms say they are budgeting about 2.5 percent wage increases for
2012, are hiring selectively, and are not planning layoffs.
The travel and tourism sector reports strength despite the generally downbeat global economic
climate. Within the sector, leisure travel is slowing, while domestic and international business travel
remains 5 percent to 7 percent higher than in 2010. September growth slowed to 4 percent from the 5
percent to 7 percent year-over-year gains seen earlier in 2011. Advance hotel bookings for 2012:Q1 are
up. The industry is expecting positive but slower growth in 2012.

Manufacturing and Related Services

Business conditions at contacted manufactures are mixed. Most
respondents continue to report revenue growth, but the vast majority
also report that they are less optimistic about the next six to eighteen
months than they were the last time they responded. Demand continues to
be strong for firms in the automotive and aerospace components
industries, as well as for a medical device firm, a semiconductor firm,
and companies manufacturing industrial-related products. In comparison,
sales growth remains positive but slow at an instruments manufacturer, a
business services firm, and a company that makes entertainment products.
Reasons contacts give for this sluggish demand include continued tepid
sales to government-related institutions and financial services firms
being very cautious about their expenditures. Demand was noticeably
lower than in previous quarters-beyond the typical slowdown during the
summer months-at a food products manufacturer. In addition, a business
products firm and a manufacturer whose sales are dependent on the
residential investment sector report even weaker demand than in the
previous quarter.

Hiring at contacted manufacturers is limited to replacing workers
who depart through retirement and/or attrition. A semiconductor firm
says it is implementing a hiring freeze because incoming orders for 2012
have dropped sharply in recent weeks, especially from China. A business
products firm continues to reduce headcount as part of a strategic
restructuring plan and the manufacturer with sales tied heavily to
residential investment is also reducing its workforce for the first time
since 2009. A repeated theme from the majority of contacts is that they
are implementing changes to keep costs low and/or reduce operating
expenses. A couple of firms note that merit increases in 2012 will
likely be lower than in 2011, while another firm plans to restructure
its healthcare benefits to shift more of the costs to employees without
offsetting pay increases.

There are fewer reports of input price pressures from manufacturers
than in recent months, even though prices for some food-related
commodities such as milk remain high. In fact, copper prices have
dropped substantially in the last month or so and other precious metals
prices have also declined; oil prices are also lower. Thus some
manufacturers are facing noticeably lower costs; for the most part, they
say they are waiting to see if commodity prices stay lower before
adjusting their selling prices. More generally, contacted firms say
their selling prices remain stable, although they are raising prices “as
needed,” as indicated in previous reports. Some manufacturers note,
however, that consumers are currently reluctant to spend on
discretionary items, so they are offering promotions to partially offset
price increases and/or promote their products so as not to lose
customers to lower cost competitors. Despite the uncertain economic
environment, contacted manufacturers continue to look for worthwhile
investment opportunities, and some have made recent acquisitions. To the
extent that manufacturers are holding back on investment, they say it is
not because of a lack of credit or insufficient cash holdings. Overall,
firms are less optimistic about business conditions heading into 2012
than they were in the last round. Many firms are shifting any pickup in
demand they previously anticipated for 2012 forward to 2013.

Selected Business Services

Consulting and advertising contacts in the First District report
generally strong business conditions, although weaker than three months
ago. Marketing and advertising contacts report robust growth-between 10
percent and 25 percent year-over-year. The higher end of the growth
figures are driven by demand from financial firms, including private
equity, who need to market new products in the changing financial and
regulatory environment. Strategy and business consulting contacts report
weaker demand in the third quarter than earlier in the year; they say
clients are focusing on services that can be directly tied to the bottom
line such as sales and process efficiency rather than strategy and
management. Economic consulting firms report varying degrees of success,
with firms doing government work experiencing stagnant demand, while
firms focused on litigation see strong growth (close to 20 percent)
reflecting growing caseloads involving large financial firms and the
financial crisis. A healthcare consulting firm cites growth of only 2
percent year-over-year, attributing it to weakness in the pharmaceutical
industry, with most growth coming from developing countries. Contacts
say they are generally raising prices about 3 percent to 5 percent to
cover cost increases and maintain profit margins. Two strategic
consulting contacts, however, made bigger price changes: one firm
dropped prices by 10 percent to compete with cheaper foreign firms,
primarily in India, while the other raised prices 10 percent to keep up
with compensation costs. Hiring activity is mixed, with firms spread
along the spectrum from a 25 percent addition to a 10 percent layoff.
Nearly all contacts, however, say hiring is likely to be restrained or
flat for the foreseeable future.

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

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