In May, as in April, the 12 Redbook reports paint a picture of an overheated economy that retains strong upward momentum. Concern over inflation and the impact that increases in the cost of living will have on union negotiations is reported by several banks. Shortages of materials and manpower are widespread and are growing worse. Agricultural areas in the Midwest and South have been hard hit by heavy rains and floods. Capital expenditure programs are gathering strength in all districts. Some banks reported views of respondents who believe that real GNP will rise at a slower race in the second half because of declines in residential construction and in purchases of consumer durables. The business loan increase has slackened in major centers, but credit growth, overall, continues at a rapid pace.

Most banks found capital expenditures gathering strength. A group of Cleveland economists expects gains in capital outlays to continue in 1974, with the year as a whole up 10 percent from 1973. San Francisco found commercial aircraft orders up sharply. Atlanta listed major new projects in a variety of fields. Philadelphia could find no firm that was reducing capital outlays.

Most banks commented on growing stringency in local labor markets. Only Boston was worried about continued high rates of unemployment. In the Chicago district, employment standards have been lowered and training programs have been reactivated.

Shortages of materials and components were emphasized by Boston, Chicago, Richmond, New York, and Minneapolis. Tight supplies of oil products, steel, nonferrous metals, electricity, lumber, and components and shortages of freight cars were holding down increases in output. Cleveland, Richmond, and St. Louis reported that manufacturers' inventories of finished goods were being reduced to meet customer demands.

Consumer purchases remain at very high levels everywhere, but a number of businessmen in the New York and Cleveland districts believed that consumers were buying in advance to beat price increases. Sales of autos and appliances, at least, were thought to be at unsustainable levels.

Gasoline shortages were emphasized by Atlanta, Chicago, and Minneapolis. Dallas reports output of crude oil to be declining despite the elimination of controls. Persian oil has been brought to the Texas area for the first time.

Most banks appear to accept the view that residential construction will decline significantly in the second half. But a number of banks, including Minneapolis, New York, and Atlanta, found that the residential sector remains very strong currently.

The agricultural situation probably has never before received as much space in the Redbook reports. Heavy rains have slowed plantings in the Kansas City, St. Louis, Chicago, Dallas, and Atlanta districts. (San Francisco reports a drought in the Northwest!) Plantings of corn, soybeans, cotton, rice, and sugarcane all are behind schedule. In addition, beef supplies have been held down by losses of cattle, poor gains in weight, and the recent order to stop use of the DES hormone drug that stimulates growth. But farmers are generally optimistic about income prospects. Purchases of farm equipment are at very high levels, and farmland values in the Corn Belt have increased by a record amount in the past year.

Some banks reported slower growth in business loans, but loan growth, overall, continues at a rapid pace. Upward pressures on short- term interest rates continue. Funds for farm, consumer, and residential mortgage loans remain in good supply. One Boston professor expects continued strength in activity because of rising capital expenditures, while another expects slower growth because of reduced consumer demands. Both professors think the situation calls for an easier monetary policy.