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

Recent business developments are positive on average across the
First District, but performance continues to vary between and within
sectors. Reports are mostly upbeat among contacts in software and IT.
Manufacturing firms also had mostly positive news, with recent sales at
least steady for most and very strong in some cases. Among staffing
services, positive developments outnumber negative ones. Retailers give
mixed results, including some significant sales declines. In the
commercial real estate market, leasing activity is flat to modest and
downward pressure on rents remains high in Boston. Residential real
estate sales are very weak following the expiration of the home-buyer
tax credit but selling prices are up slightly in many parts of the
region.

Concerning the labor market, some firms are hiring modestly or plan
to hire soon, while others are still reluctant to hire. The number of
job-seekers is perceived as high by some, while others are having
difficulty filling vacancies requiring specific skills. Some software
and IT firms are giving significant pay raises and staffing firms also
note an increased willingness to pay higher wages among some firms.
Constraints in ocean-freight capacity are a concern among manufacturers
and retailers, as are increases in commodity prices. The outlook varies
widely across sectors, from largely positive in manufacturing and
software to cautious in retail and tourism and mixed among commercial
real estate professionals.

Retail and Tourism

First District retailers report mixed sales results for July and
early August. Year-over-year samestore sales range from decreases of 10
percent to increases in the low single-digits, and one contact quips
that “flat is the new up.” Back-to-school sales were modest, with the
consumer focused on buying for immediate needs only. Several retailers
report increases in foot traffic but also smaller average ticket size.
Inventory levels are generally in line with expectations. However,
decreased ocean-freight capacity has firms concerned about their ability
to restock in a cost-effective and timely manner, forcing additional
advanced planning. Capital spending is mixed and headcount is stable.
Retailers note significant cost increases for food commodities,
particularly dairy. Outlooks are cautious or cautiously optimistic.
Travel and tourism are stronger than expected. One contact attributes
the trend to generous travel incentives, supported by an increase in the
number of low-fare air carriers operating out of Boston. Overseas
arrivals are much stronger than forecast. Business travel is also more
robust than anticipated, with travel managers using the downturn to
leverage favorable rates. The respondent reports modest hiring in the
visitor industry, although the outlook remains cautious.

Manufacturing and Related Services

Nearly all manufacturing firms surveyed report favorable results
for the second quarter. Demand is particularly strong at semiconductor
and pharmaceutical firms. One respondent from a long-standing business
describes the second quarter as their best ever. In contrast, a parts
supplier for the aircraft industry says that demand has been slow to
recover from the recession. Sales held steady in recent weeks among many
contacted manufacturers; multiple respondents attribute recent demand to
booming business in northern and western Europe. The same firms describe
domestic sales as flat in comparison. In addition, several diversified
manufacturers and one large domestic industrial manufacturer all note
that sales leveled off in recent weeks relative to the first half of the
year.

Inventory levels at many contacted firms are reportedly low in
comparison with pre-recession levels. One firm remarks that, even if
demand were to slow, it would not be as damaging as in 2008 because most
goods are being produced only as orders arrive. Low inventory levels are
also attributed to supply constraints. A number of firms report that
suppliers are producing at capacity due to cuts in capacity in 2008 and
2009. In addition, inputs for one firm have been slow to arrive because
of cutbacks in global ocean-freight capacity. These constraints have led
at least one contact to stockpile intermediate inputs as a hedge.
Despite supply constraints, almost all respondents report that selling
prices remain relatively steady, although some note continued
fluctuations in raw materials prices. Some firms passed modest price
increases on to their customers.

Hiring remains limited among the manufacturing firms surveyed. The
companies that cut workforces substantially during the recession are
slowly re-hiring workers, although employment at most of these firms
remains below 2008 levels. Some firms expect hiring to pick up next
year, although one firm wants to see sustained growth before making
major hiring plans. A few semiconductor and pharmaceutical firms
continue to have difficulties filling skilled positions. Capital
spending plans at most manufacturers remain moderate, as some firm’s
upgraded IT infrastructure and other equipment. A number of firms
characterize the investment environment as favorable but had not yet
found good opportunities.

Many firms remain optimistic about growth going forward. One
contact notes that demand is much stronger than what news reports
suggest. By contrast, a few firms are not as optimistic as they were
three months ago. Firms again mention being concerned about the
uncertainty of fiscal policy going forward.

Software and Information Technology Services

Software and information technology contacts in the First District
report that business conditions continued to improve. Year-over-year
revenue increases ranged from mid-single digits to 15 percent in the
most recent quarter. Half of contacted firms increased their headcounts
and another was “on the cusp of hiring.” One contact, however, reports a
modest reduction in headcount due to restructuring. Wages are steady or
up notably, with some merit increases in the range of 3 to 5 percent.
Prices held steady and one contact observes less discounting pressure
relative to a year ago. Half of contacted firms say that they have
increased capital and technology spending relative to last year in order
to expand or upgrade equipment; remaining contacts held capital and
technology expenditures steady. The outlook among contacts is moderately
positive. Most expect a continuation or slight acceleration of current
growth rates.

Staffing Services

The majority of First District staffing contacts report that
business continues to strengthen, although a few experienced stagnant or
inconsistent activity over the past three months. Most contacts describe
business since the end of Q2 as “fair to good” or “generally positive,”
with revenue growth in the single digits. Year-over-year revenue changes
vary widely, from down slightly to up by over 40 percent. Labor demand
increased, particularly in the light industrial, information technology,
and health care sectors; however, the consensus among contacts is that
jobs are hard to fill. A few contacts report that the supply of job
seekers is plentiful but that clients are reluctant to hire; others said
that recruiting workers with specific skills has become more difficult.
Bill rates and pay rates are steady or up slightly, as many clients show
increased willingness to pay higher rates for quality workers. The
number of conversions from temporary to permanent staff increased and
permanent placements picked up. Several contacts express concern over
rising costs, particularly workers’ compensation, health insurance, and
state unemployment insurance taxes. Despite these concerns, contacts
predict continued growth in the coming quarter.

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

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