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

Selected Business Services

Consulting and advertising contacts in the First District report
strong growth in the fourth quarter after a generally weaker third
quarter. Marketing and advertising contacts indicate that 2011 growth
has averaged 8 percent to 9 percent (annual rate), driven largely by an
increase in large orders from large clients. Strategy and business
consulting contacts report low double-digit annualized growth, driven by
strong private equity business, mergers and acquisitions, and corporate
consulting. Contacts note that many clients have a lot of cash and are
becoming more confident that despite risks the U.S. economy will
“muddle through” and thus are willing to spend. In addition, consulting
firms have seen a shift in demand towards services that can be directly
tied to the bottom line such as sales and process efficiency rather than
strategy and management.

The majority of consulting and advertising contacts reports minimal
increases in the prices they charge, held down by both competitive
pressures and modest cost increases. Compensation increases are
generally in the mid single digits and contacts report steady or growing
profit margins. By exception, two contacts raised prices by 5 percent to
10 percent because of strong demand for their services. Hiring activity
continues to be mixed. Two consulting contacts report strong 2011
employment growth, while three firms kept employment flat and one
continued a year-long downsizing process. The two firms reporting job
growth expect hiring to remain strong (about 10 percent) in 2012, while
a marketing firm plans to increase employment modestly, and the other
firms expect flat 2012 employment. Firms that increased employment did
so to keep up with a growing workload, while firms downsizing in the
third or fourth quarter emphasized cost controls.

All respondents are more optimistic now than when contacted in the
third quarter, with the exception of one firm that has done
exceptionally well all year. The improved outlook is mostly due to the
strong fourth quarter indicating that the third quarter was only a
temporary rough patch.

Commercial Real Estate

Commercial leasing activity across the First District was flat to
down in recent weeks, in line with typical seasonal patterns. In
Hartford, leasing activity saw a modest seasonal slowdown in December
and business sentiment held steady. Activity slowed modestly in
Providence as well, also in line with yearend expectations, but deals in
the works as of the previous report moved forward as expected and
pending deals are set to boost absorption of Class A office space in the
first quarter of 2012. Greater Portland also registered a modest
seasonal leasing slowdown in December, but saw a decline in the office
vacancy rate on a year-over-year basis, to 10.8 percent from 11.2
percent. Bostons leasing market held roughly steady, with modest
positive absorption in suburban corridors as well as in the sought-after
neighborhoods of Back Bay and East Cambridge. Rents remain flat for
downtown office space on lower floors of buildings but are rising for
upper-floor space in prime high-rise structures. Despite positive
absorption in 2011, one contact says Bostons downtown office vacancy
rate remains undesirably high at about 16 percent. Construction activity
remains limited across the region, with the ongoing exception of
multifamily construction in greater Boston. The lack of speculative
office construction is attributed to the fact that building costs
continue to exceed expected rents. The investment sales market remains
active in Boston as prices signal an ongoing willingness of buyers to
accept low rates of return for prime properties. A Portland contact
predicts an increase in sales activity in that market in the coming
months as borrowers seek to take advantage of very low mortgage interest
rates.

The outlook among contacts is unchanged since the last report, with
forecasts calling for modest improvements in office fundamentals in
2012, roughly on par with the experience of 2011. While some see upside
potential in office rents, downside risks are also noted, such as
possible closures in the retail sector and ongoing political gridlock.

Residential Real Estate

Sales figures in the New England single-family home and condominium
market increased in November compared to a year ago, with the growth
largely reflecting lackluster year-earlier sales numbers following the
expiration of the tax credit in mid-2010. Contacts reiterated concerns
about weak demand, citing poor labor market conditions and stricter
lending requirements. A contact from Greater Boston contrasts the local
market with the rest of the New England region, saying that the Greater
Boston area showed possible signs of improvement due to strengthening
employment conditions in the city. Meanwhile, throughout New England,
the median sale price of homes and condos fell in November compared to a
year ago; contacts attribute the declines to a rise in sales of
distressed properties. The price decreases were uneven across the
region, with Maine slipping by less than 1 percent and Connecticut
prices falling by over 10 percent. The median price of condos fell more
sharply than home prices.

The outlook remains largely the same as in previous reports.
Contacts expect sales activity to remain slow in the coming months, but
believe prices will stabilize in the region. They do not expect further
weakening in the market but also do not anticipate significant recovery
in the near term.

(2 of 2)

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

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