Economic activity in the District seems to be approaching near-boom proportions, according to the recent performance of key economic indicators and comments from businessmen, directors, and economists. The international currency situation does not appear to have affected business sentiment. Expansion in the manufacturing sector continues at a robust pace; the major sources of strength are the steel, automotive, and machinery industries. Residential construction is at a record high, while nonresidential construction contracts rose in January to the highest level in four years. Recent gains in payroll employment continue to be somewhat stronger in the District than in the nation, and there are widespread reports of shortages of skilled labor. Some of our directors are concerned about the likelihood of further acceleration of inflationary pressures and about the possibility of a slowdown in economic activity during 1974.

Our monthly survey of manufacturers indicated that economic activity in the District's manufacturing sector was increasing in January at the fastest rate in the nine-year history of the survey. Returns received so far this month show that new orders, shipments, backlogs, and inventories all posted substantial additional gains in February. Also, the proportion of firms experiencing increases in delivery time, employment, the workweek, and prices paid reached record highs. (The pervasiveness of recent price increases is substantiated by the latest report of purchasing agents in the Cleveland area—92 percent reported paying higher prices in February than in January, the highest figure since August 1956.)

Comments of our industrial directors emphasized the strength of new orders and backlogs in their firms. Those associated with capital goods and consumer goods areas mentioned that business has been extremely good, both they and their customers are having difficulty in building inventories. Several of the directors reported that they plan to keep a tight rein on their inventory situation, however. Some of the directors were of the opinion that part of the strength in new orders was the result of numerous capital goods customers placing advance orders because they fear shortages later this year. Concern was also expressed about the effect of recent price behavior on the large number of major labor negotiations scheduled through 1973. Some of the directors are also becoming concerned about the prospects for a reduced pace of business activity in 1974. One director whose diversified firm has record orders in all areas of its business, mentioned specifically that he expects a drop off in business next year and is therefore avoiding an overextension of plant capacity.

Economists from major firms in the area are also reporting ebullient business conditions, and they are projecting a sustained high level of operations—at or near capacity—through 1973. One economist with a large machine tool firm in Cleveland said that orders have risen more sharply since September than for any comparable period in the twenty-five years he has been with the firm. Lead times have lengthened significantly. Last September, this firm was quoting six-month deliveries; now they are on a fifteen-to eighteen-month basis. Thus, the management of this firm is extremely optimistic over the prospects for production well into 1974.

Economists in the steel industry report that the recent volume of orders has been close to a record high, and orders are expected to strengthen in the months ahead. Production is likely to continue at the practical limits of capacity through the balance of this year. Steel consumers will have difficulty in stockpiling later this year (anticipating next year's labor negotiations) because of capacity limitations. Industry sources also report that a substantial portion of the planned capital spending for 1973 will represent pollution control equipment, while spending for modernization and additions to capacity is still well below recent years.

Another economist said that output in both basic chemical and plastic products has been at capacity, and will remain so for the foreseeable future. The only problem on the near-term horizon in this area is expected to come from the energy shortage, particularly electric power during the peak power-consuming months in the summer.

Reports from bankers reveal a tightening in loan terms, especially for real estate (higher downpayments and shorter maturities). In addition, finance companies are moving out of commercial paper and back to the banks. The largest banks in Pittsburgh and Cleveland report that their large accounts headquartered in these two cities, and for whom they are the principal bankers, have not yet come in to borrow significant amounts for investment purposes. The bankers still expect such a surge in credit demand and attribute the softness in this area to date to strong corporate cash flows.