The pace of business activity in the District has become noticeably stronger in recent months, and some signs of tightening in resource utilization are apparent. Improvement in the manufacturing sector continues to be robust. Gains in retail sales have been sizable, and banks are experiencing heavy demand for consumer loans, especially for auto financing. Most of the large banks are highly liquid, reflecting large deposit flows, and consumer and mortgage loan demand remains strong. Business loan demand seems to be following a normal seasonal pattern but is short of expectations.

The recent behavior of the insured unemployment rate provides some indication of the increasing tightness in labor markets in the District. The insured unemployment rate has declined to about 2 percent in recent months from a high of more than 4 percent that was reached in late 1971. (The prerecession low was 1 percent.) Gains in nonfarm payroll employment have been sizable since midsummer, and the improvement in manufacturing employment has been more pronounced in the District than in the Nation.

Preliminary results of our latest survey of District manufacturers indicate that the pace of industrial activity in this area is becoming particularly strong. For the month of November, our composite diffusion index of eight key items rose to the highest level since early 1966. (The composite diffusion index conforms closely to the national index of leading indicators before trend adjustment.) Responding firms reported substantial gains in new orders, shipments, and backlogs during November but only limited strength in inventory accumulation. Extensions in delivery times were reported by an increasing percentage of firms in the survey. Employment and the workweek rose sharply last month. The diffusion index for prices paid, which had remained in the 60 percent area between February and October, jumped to 67 percent last month. Firms responding expect a continuation of the strong upward pace in December in all survey items except inventories.

Economists from major steel companies in the District report that shipments will be somewhat stronger than usual in December. Some customers are placing orders now to beat the price increases, effective after the first of January, on selected products. (Bethlehem Steel announced they will not change steel sheet and strip prices until April 1.) Current orders for steel plates and structural steel are showing a seasonal increase, reflecting a pickup in machinery production. Steel orders from consumer goods producers are still very strong. One major area of weakness in the steel industry stems from the railroad industry. Despite the shortage of freight cars, the railroads have been unwilling to make commitments for new freight cars because of the possibility for Government subsidies. (Congress had considered such legislation.) The steel industry economists are projecting 1973 shipments of 96 million tons or better, a gain of 5 percent from this year. (The steel industry's previous record year was 95 million tons in 1969.)

On the financial side, bankers throughout the District emphasized the continuing strength in mortgage loans, with little sign of slackening thus far. A few reports, however, suggest that bankers expect some slackening in residential construction in 1973. One banker said the condominium market in Cleveland seems to be saturated; another noted that apartment overbuilding is a problem in Columbus; and a third banker mentioned overbuilding of HUD units in Pittsburgh. (In addition, he spoke of natural gas shortages limiting homebuilding in that area late next year.)

The observed strength of retail sales is also reflected in heavy demand for consumer credit, according to banks contacted. As yet, none of the banks are experiencing any abnormal delinquency problems, however. According to respondents of some of the largest banks in the District, business loans have been growing about in line with normal seasonal patterns, but somewhat below expectations. Loans for capital spending and inventory accumulation have fallen short of expected paths, in part reflecting the huge cash flow of many businesses. Major banks in Pittsburgh, Cleveland, and Cincinnati reported they are in highly liquid or comfortably liquid positions and that they plan to participate heavily in the forthcoming Treasury financings.

Demand, time, and savings deposit flows have been very strong in major centers. One exception, however, is western Ohio, where deposit flows were described as moderate. Farmers in that area have sustained extensive financial losses because extremely bad weather ruined a significant share of corn and soybean crops.