Business sentiment has improved further in the past month. Labor markets are tightening; retail trade is strong; order backlogs are building in many industries and lead times on new orders are lengthening. The upswing in capital goods appears to be gathering steam and is spreading to a broader base. More firms are planning on the general business expansion to continue quarter-by-quarter through 1973, with no significant slowdown in the second half. Soybean and possibly corn harvests will be reduced by adverse weather conditions.

More firms are finding skilled workers in short supply and shortages of suitable trainees are reported. Labor turnover and absenteeism rates have increased, but remain below the high rates of the late 1960s. A larger volume of want ads and a steady reduction in claims for unemployment compensation also suggest a stronger demand for workers. Nevertheless, unions in some sectors, e.g., building trades and trucking, are not pressing for large settlements. They fear further losses of jobs to nonunion operators.

Retailers are pleased with recent sales levels, especially of seasonal merchandise, such as apparel and sporting goods. Color television output schedules have been increased again. Output of some household appliances was reduced in September and October, but sales since then have been somewhat in excess of expectations and inventories have declined.

Trucks continue to lead the general expansion in capital goods. Producers of engines and rear axles for heavy trucks are working three shifts a day, seven days a week. Capacity restraints are limiting sales of most types of trucks. Some orders are being booked for delivery next March and April. Most truck producers are in the midst of programs to expand production.

Auto sales would be appreciably higher if inventories were adequate. Output has been hampered by a series of "quickie" strikes over working conditions. The union treasury is depleted, and strike benefits are not paid for work stoppages that last less than a week. Perhaps more important than strikes in holding down output are the problems producers have been having making body panels of new models fit together properly.

Many firms are reporting slower deliveries from vendors. Half of the Chicago and Milwaukee purchasing agents report higher backlogs, compared to only 25 percent a year ago. Twenty-five percent of the agents report that production supplies must be ordered 90 days in advance, compared to less than 10 percent in the first quarter.

Order backlogs are building for a variety of capital goods. Some producers of components are reporting new orders up 30 or 40 percent from last year, although an improvement was already under way at this time in 1971. Demand for hydraulic excavators, concrete mixers and environmental control systems is especially strong. Recently, orders for overhead cranes, usually associated with major new plants, have increased from a sluggish pace.

Order backlogs of one steel firm are the highest on record, in tonnage terms, except for strike-hedge buildup periods. Lead times are lengthening for steel. The improvement in demand now includes all major product lines. Steel shipments are forecast at 96 million tons for 1973, up from 92 million tons in 1972. Output of some products may be close to capacity.

Significant stretchouts in order lead times are reported for such items as plastic molds, metal fasteners and bearings. Producers of these items do not now have the effective capacity to achieve levels of output reached in the late 1960s. They must expand staff and add facilities.

Crop yields are reported at record levels, but wet fields, especially in Indiana and Illinois, are causing delays in harvesting. Crops of some farmers, especially those raising soybeans, are already damaged. Higher prices associated with a shortfall in the harvest may boost total farm income. Delayed harvests will relieve some of the burden on the transportation industry associated with grain shipments for export. Wholesale prices of cattle have weakened in recent weeks as supplies of red meat have increased. Heavier weight cattle are being marketed. Pork supplies are increasing seasonally.

Business firms are said to be easing restrictions on expense accounts, including first class air travel. Advertising budgets are also being raised. In part, these moves are said to reflect the fact that some firms' profit margins are approaching the guideline ceiling.

Loan demand increased at most large banks in the past month. Nevertheless, bankers are reducing their forecasts of the extent of the probable rise in short-term rates next year. In the long-term markets a large volume of funds are available and most analysts expect level or even declining rates for new corporate bonds in 1973. The volume of funds seeking investment in real estate, especially from S&Ls and insurance companies, is very heavy. Lenders are not able to obtain "equity kickers." Some S&Ls are taking advantage of their new powers to make consumer installment loans, including loans on recreational vehicles and mobile homes, but the movement has not yet gathered great momentum.