Latest Redbook comment suggests that the recent business slowdown has bottomed out and that the economy may now be in a mild, though fragile, recovery. Heavy demands f or capital goods appear to be the main element undergirding the current level of activity. Fuel shortages are reported to have eased substantially, although shortages of industrial materials, most notably steel, remain a serious constraint on production growth. Reports on consumer spending are spotty, with some Districts reporting retail sales as "good" or "holding up well" while others note a softening of demand for big-ticket items and a leveling off in sales of nondurables. The housing sector is uniformly described as weak and, in the light of recent interest rate behavior, as likely to weaken further. All Districts report persisting inflationary expectations, which along with recent sharp price increases and fears of acute materials shortages, are causing large demands for inventory financing. Current comment contains many more references than usual to financial stringencies and liquidity problems, in both the business and banking communities.

The most bullish area of the economy clearly is the capital goods sector. Chicago reports that the capital goods boom in the Seventh District "continues at full throttle" and this theme is echoed in the reports from Cleveland and St. Louis. The New England machine tool industry is also reported as operating at capacity. Materials and other shortages, however, are mentioned as seriously impeding output growth in this sector. Chicago, for example, notes shortages of metals (especially steel), chemicals, packaging materials, components, trained manpower, and transportation as factors limiting output. Output in the Chicago District was also reported to have been hampered by strikes.

As regards the consumer sector, several Districts report an improvement in sales of medium-sized and large automobiles, and Chicago notes that automobile firms "are pressing for delivery of additional steel for large car production which has increased." Atlanta and Chicago also report increased demand for recreational vehicles. While retail sales are in general characterized as good, some Districts note that price increases account for much, if not most, of the reported gains. Boston, Dallas, Richmond, and St. Louis report a leveling of sales, with the last two indicating a softening of demand for big-ticket items.

Reports on inventories suggest efforts in some industries to build stocks of materials as a hedge against both rising prices and future shortages. A Cleveland survey found stocks depleted in some steel, coal, oil, machinery, chemical, and packaging firms, with respondents indicating that they would like to rebuild their inventories. Capital goods producers are said to be unable to build inventories because of heavy demand pressures and shortages of materials and components. Minneapolis reports some involuntary accumulation of goods in process due to materials and component shortages. In some lines, however, reports suggest inventory accumulation may be leveling off. Dallas reports that retail inventories are being held down while Boston and Minneapolis indicate that high interest costs may be discouraging stock building. Also Richmond reports a significant increase in the number of manufacturing respondents indicating general satisfaction with the current level of inventories.

Districts reporting on housing indicate continued weakness in this sector, with prospects that the recent sharp run-up in interest rates will pinch off any recovery that may have been underway. Most Districts report extremely tight mortgage market conditions, with six Reserve Banks reporting a significant amount of disintermediation at either thrift institutions or commercial banks or both. New York characterizes the disintermediation at Second District thrift institutions as severe.

All District reports describe business loan demand as "strong" or "very strong," although Boston and Kansas City indicate some leveling of demand at a high plateau. Inventory financing is generally reported as a major factor behind this demand. Most reports suggest that increases in demands for this purpose are attributable mainly to higher prices of inventoried goods although some Districts indicate that expanded stocks of materials are also a factor. New York and Chicago also report that delays in construction projects and sizable inventories of unsold houses may be contributing to loan demand. Some shifting of capital market borrowing to banks was also reported as a factor behind business loan demand by New York and San Francisco. Several Districts noted increased demand for accounts receivable financing and a substitution of bank credit for commercial paper sales, especially by REIT's, as contributing factors. Chicago, Richmond, and Minneapolis reported strong demand for farm credit because of increasing difficulty being encountered by farmers in arranging trade credit.

Several Districts cite increasing liquidity problems for businesses as well as for thrift institutions and commercial banks. Boston and Kansas City report vigorous complaints against tight money policies in some quarters, with Boston indicating financial stringencies for public utilities and insurance firms. A number of Districts report that banks are becoming increasingly selective in screening loan applicants and some Districts indicate a growing reluctance on the part of the banks to finance loan expansion through high cost CD financing.

The agricultural outlook is reported generally good for crops, but low market prices and high production costs are a problem in the livestock sector. St. Louis reports that resulting production cutbacks could mean higher red meat prices later this year.