The following is the text of the Federal Reserve Board’s First District-- Boston.

Reports from business contacts in the First District are somewhat mixed. Tourism contacts and some retailers cite strong results, but other merchants are more downbeat. Manufacturers mostly report solid performance, but a couple have seen sales fall compared with a year earlier. Software and IT services firms indicate business is good, but somewhat slower than three months ago, while staffing firms say recent results are below expectations. Commercial real estate conditions are not much changed, with the Boston market said to be stronger than the rest of New England; gradual recovery continues in most residential real estate markets around the region. Business contacts say they are hiring only modestly; prices are generally reported to be stable. Outlooks remain uncertain.

Retail and Tourism

First District retail contacts offer a very mixed take on economic conditions in the region. Demand remains strong for adult clothing, but spending on durable items such as furniture and electronics continues to be lower than earlier in the year. Some companies cite disappointing sales during the last six weeks, while others report some upside surprises. Sales results range from low single-digit declines to high single-digit increases compared with a year earlier. Some contacts say that consumer sentiment has become more negative, while others observe that consumers are “coming back.” Retailers note wholesale prices remain flat so they are holding selling prices steady. Respondents still express uncertainty about the direction of the U.S. economy and say they expect little improvement over the next six to eight months.

The tourism industry continues to see growth. Contacts expect that overall 2012 performance will be strong, but express concern that performance will weaken over the last few months of the year. While a rebound in business travel has fueled 2012 performance to date, weakness in Europe might slow this down. Moreover, rising gas prices could have negative repercussions for leisure travel.

Manufacturing and Related Services

The general manufacturing picture in the First District continues to be mixed, although contacts seem to be slightly more upbeat than earlier this summer. Of 12 contacted firms, only two report lower overall sales than a year earlier: A manufacturer of semiconductors attributes the decline largely to industry-specific cycles and a software company that sells mostly into the defense business says slower sales reflect fears about impending sequestration. All other responding firms report flat or rising sales.

On the employment front, while most contacts say they are hiring, none reports any significant additions. A major defense contractor expects significant layoffs in the coming months but attributes them largely to rationalization of operations in the wake of a merger. A tool manufacturer blames weak demand for a 5 percent headcount reduction but says they will concentrate most of the layoffs in Europe. On the plus side, a luxury goods manufacturer reports that, for the first time since 2008, workers are quitting to take better jobs with other firms. A firm in the chemical industry indicates it is exceptionally profitable but is still hiring only “selectively” to replace outgoing workers and fill specific needs.

Few manufacturers report revising their investment plans in recent months; several note that they have plenty of cash available but don’t yet feel confident or see the need for additional capital spending. Several firms mention that merger and acquisition activity is heating up. Some say they hope to pick up bargains but others say that prices are too high. A contact in the chemical industry says that he has done due diligence on several potential targets and each time he was outbid. A respondent in the semiconductor industry reports that they were the target of acquisition interest and a medical device supplier was recently acquired by Japanese firm. Contacts say the pricing picture is much more benign than it has been in recent years. A dairy business is the only respondent complaining of high input prices, which are specifically related to the drought in the Midwest. A contact in the chemical business reports that pricing of inputs to his processes is exceptionally good, which he attributes to weakness in China, Brazil, and India.

Few manufacturing contacts have significantly revised their outlooks. The main concerns remain the so-called “fiscal cliff” and the situation in Europe. Europe does not seem to be as much of an issue as it has been in recent cycles, however, with only four contacts specifically mentioning it and only one identifying it as a major problem. Two respondents independently note that firms are paying bills on time, which they say is a good sign about the state of the economy.

Software and Information Technology Services

New England software and information technology services contacts report flat to favorable results in the second quarter of 2012, with year-over-year revenue increases generally between 5 percent and 10 percent. Contacts report strong demand in the banking and medical sectors as well as some new activity in the automotive, telecommunications, and manufacturing sectors. However, these upticks in demand are, for many contacts, tempered by the strong dollar and economic uncertainties, particularly in Europe, which are having an increasingly negative effect on revenues. Indeed, one contact reports that revenues from Europe fell more than 50 percent over the four quarters ended in Q2, as many clients delayed execution of big license agreements. Most respondents continue to add to their headcounts, although a few have slowed the rate at which they are hiring. Capital and technology spending and selling prices have gone largely unchanged since February.

The outlook among software and IT services contacts is not appreciably different from that of three months ago. Most are cautiously optimistic and expect current growth rates to continue into 2013.

Staffing Services

New England staffing firms generally report lighter-than-expected volumes through mid-August, with most contacts characterizing business as “slow” or “flat.” The May-to-August dip reportedly reflects a softening of demand for office and clerical assistants and light industrial workers. Nevertheless, year-over-year revenue changes in the second quarter remained largely positive, bolstered by steady demand from the engineering, legal, and IT sectors. The number of permanent and temporary-to-permanent placements continues to grow slowly, with one contact noting that clients are “definitely more willing to commit.” Labor supply has gone largely unchanged since May. Contacts continue to have difficulty finding candidates with high-end skill sets such as mechanical and electrical engineers, software developers, and IT personnel; two contacts report that this shortage of qualified labor is putting upward pressure on pay rates and recruiting costs. Looking forward, staffing contacts are slightly less upbeat than they were 3 months ago. Most expect only modest growth until 2013.

Commercial Real Estate

Commercial real estate fundamentals held roughly steady in recent weeks across the First District. Boston continues to enjoy strong leasing demand in pockets of the city and comparatively slow but steady activity in the Financial District. Leasing activity remains light in Hartford, where the retail sector is seen as a weak point. Activity in Providence is mixed across sectors and year-to-date has fallen short of expectations as a result of vacancy shocks. In Portland, office leasing activity is up from earlier in the year, but rents have stayed roughly flat. Across the District, a few contacts note that traditional downtown tenant types, such as law firms and large financial firms, continue to reduce square footage of office space per worker. These reductions are viewed as structural and suggest that future employment growth in professional services may lead to less absorption than previous norms of office space would imply.

Investor interest in Greater Boston commercial real estate remains high, especially for multifamily rental properties, and interest rate spreads are lower than a year earlier for comparable deals. Apartment construction extended its recent boom in the city and some large build-to-suit office projects have broken ground in recent months. One Boston-based bank lender notes an increase in small-scale (under $10M) loan demand in recent months in the office and retail sectors. Outside of Boston, construction and investment sales activity remain limited. A few contacts remark that political uncertainty is putting a damper on business sentiment. In particular, the threat of tax hikes (at all levels of government) is seen as a possible restraint on economic activity in the coming months. By contrast, no contacts cite significant upside risks to growth in the commercial property sector, although Boston is expected to remain a magnet for investors.

Residential Real Estate

Sales of single-family homes and condominiums continued to grow year-over-year in June and July throughout most of the First District. However, in Connecticut, June sales increased marginally in the single-family home market and declined year-over-year in the condo market, but the latest reports for July suggest more substantial increases in Connecticut home sales. Similar to previous reports, contacts cite low interest rates and prices, in addition to pent-up demand, as significant factors in improving sales activity. According to a contact in Greater Boston, rising residential rents continue to spur interest in home ownership. Reports for July suggest the median sales price of homes rose in five of the six New England states; the exception was Rhode Island, where prices continue to decline. Contacts outside of Rhode Island cite declining inventory as the cause for modest price appreciation. Several contacts in areas with low inventory levels note some potential sellers are waiting for their homes to appreciate in value before listing them. Falling inventories in Greater Boston have prompted concern among local real estate professionals that potential homebuyers will be discouraged by an insufficient variety of homes.

Consecutive months of year-over-year growth in sales have made contacts feel more confident about recovery in the housing market. In areas where inventory levels have been high for the past few years, concerns have been calmed by declining inventory and increasing home prices. Most contacts predict year-over-year growth in sales, albeit at a slower pace than recently, and anticipate modest increases in the median sale price of homes in coming months.

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