WASHINGTON (MNI) – The following is the text of the First District
assessment in Wednesday’s Beige Book survey of regional economic
conditions, prepared by the St. Louis Fed through Feb. 17:

FIRST DISTRICT – BOSTON

Economic activity in the First District continues to expand. With
the exception of real estate, business contacts are generally upbeat
about recent results, reporting similar or better growth than in the
last couple of reports. Commercial and residential real estate markets
are not much changed, with respondents citing weak but not disastrous
conditions. While staffing firms note increased demand for labor,
contacts in retail and manufacturing say they are hiring only modestly
and plan limited pay raises. With a few exceptions, price pressures
appear to have abated.

Retail and Tourism

First District retailers responding in this round report that
business conditions in early 2012 have continued the improvement seen in
the fourth quarter. Contacts ending their fiscal year in late December
or early January say that fiscal 2011 sales ranged from down 2 percent
to up 5 percent compared to 2010. These results are generally better
than they expected at the start of 2011 and reflect strong same-store
sales in the last few months of 2011 as compared to earlier in the year;
indeed, December 2011 samestore sales ranged from high single-digit
increases year-over-year to mid-teen increases. The range of results was
wider in January 2012: One retailer reports same-store sales were down 8
percent to 9 percent year-over-year, which he attributes to mild weather
depressing demand for winter hardware items as compared to a
particularly snowy January 2011. Another saw January comparable-store
sales up 7 percent compared to a year ago, and a third respondent
enjoyed a 17 percent jump, which he credits in part to the mild winter
not keeping customers at home. All contacts note that store traffic is
up.

Responding retailers report that furniture is selling very well, as
is paint. As noted above, the mild winter has depressed sales of some
seasonal items, and one retailer has steeply discounted winter clothing
to get rid of inventory. Prices on furniture are generally flat, but
retailers expect the cost of items made with copper or titanium oxide
(paint) to reflect price increases in these commodities. Stores are
doing light hiring for some full-time and part-time positions; they are
budgeting 2012 merit pay increases between 2 and 3 percent. Retail
respondents expect the U.S. economy to improve further in 2012. While
remaining a bit cautious, they all note that economic conditions seem
more favorable than last fall.

Manufacturing and Related Services

Manufacturing conditions in the First District appear to have
improved since the end of last year. All respondents in this cycle
report sales growth in the fourth quarter from a year earlier. Although
many contacts express serious concerns about the situation in Europe,
only two say that sales to Europe were actually down. In contrast to the
last two rounds, this time few contacts mention weakness in Asia.
Contacts among defense suppliers express concern about the budget. One
had concluded that programs his firm worked on were largely insulated
from cuts but said they are “having trouble convincing our investors of
that.” Another said that budget issues are leading to delays but not to
reductions in sales. Raw material prices have stabilized overall but
remain an issue. On the one hand, a plumbing manufacturer said that
copper is “on the march again.” On the other hand, low natural gas
prices have been a boon to U.S. industry. A contact in the industrial
membrane industry reports that a multimillion dollar project to switch
to natural gas has already led to millions of dollars in savings. A
petrochemical contact points out that the equivalent price of natural
gas in terms of oil is approximately $25 a barrel, making the U.S. a low
cost producer of petrochemicals; as he put it, we are “exporting natural
gas in the form of ethylene and polyethylene.”

All of our manufacturing contacts are increasing investment and
none cites any issues finding financing. Remarkably, almost all of our
contacts say they have acquired at least one company over the last six
months. Almost all responding manufacturers report increased employment
and there are fewer complaints about difficulties finding qualified
workers than in the past; at the same time, an equipment manufacturer is
spending significant sums on training expenses for new hires. A
pharmaceutical firm closed a facility in Philadelphia and offered jobs
in Massachusetts to 20 employees, but reports that only six accepted,
suggesting confidence in the availability of employment. Europe is a
source of considerable concern but has not yet affected our contacts in
a significant way. Two respondents report slower sales in Europe and
one, a plumbing manufacturer, says Europe is “in a recession.” Another
contact revised down their sales growth forecast for 2012 by 2
percentage points to 4 percent to 5 percent-with the subtraction
attributed to weakness in Europe-but at the same time indicated the
risks had shifted to the upside.

Software and Information Technology Services

First District software and information technology services
contacts report that the upward trends of early 2011 continued through
Q4 2011 and into Q1 2012. Year-over-year revenue increases in the fourth
quarter, ranging from 10 percent to over 25 percent, were generally on
par with those seen in the third quarter. Contacts report upticks in
demand across a number of sectors and geographies, with a few noting
that activity in Europe exceeds their expectations. Growing workloads
have led most contacts to continue to add to their headcounts. Indeed,
one contact is on track to expand its workforce by over 20 percent in
2012; another, by contrast, reports a modest decrease, with a number of
management positions being eliminated in an ongoing realignment. Two
contacts say they have increased capital and technology spending
relative to a year ago in order to build office space in Massachusetts.
Prices are holding steady, with contacts reporting little to no downward
pressure. The outlook among software and IT contacts is not appreciably
different from that of three months ago; most are cautiously optimistic
and expect revenue growth in 2012 to be in the range of 10 percent to 20
percent.

Staffing Services

New England staffing firms generally experienced a
better-than-usual holiday season in 2011, with business picking up steam
in early 2012. However, year-over-year revenue changes in the fourth
quarter varied widely, from flat to up more than 25 percent. Labor
demand is higher than three months ago, although a few contacts report
signs of slowing in the light industrial sector. The growth in demand
for permanent and temporary-to-permanent hiring has accelerated in
recent months, with one contact noting that “clients are definitely
ready to hire permanent employees.” Notwithstanding stronger demand, the
hiring cycle remains elongated, and high-end skill sets are still
difficult to find. Bill rates and pay rates have gone largely unchanged
since November but remain above their year-earlier levels. Looking
forward, New England staffing contacts are generally more upbeat than
they were three and six months ago, with many expecting their rate of
growth to pick up through the end of 2012.

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

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