Business activity in the District is generally strong, although rates of increase in key indicators have begun to slow somewhat from the pace registered earlier this year. Shortages of materials and lags in delivery time, which appear to have grown worse during the past month, continue to hamper production in many firms.

In recent months, our survey of manufacturers has reflected a gradual tapering in the proportion of firms reporting increases in new orders, shipments, employment, and the workweek. Gains in backlogs and inventories, on the other hand, have been stronger recently than earlier in the year. Delivery time on orders placed has continued to lengthen for the majority of firms. Purchasing agents in the area report that widespread shortages of materials are adversely affecting production and, in some instances, are causing a reduction in overtime. Lead times on orders placed for all types of materials, supplies, and capital equipment have extended unbelievably. Early returns from our latest survey indicate little slowing in the proportion of companies paying higher prices from May to June. In fact, an economist with a major building materials company in the District candidly remarked, the price freeze is being widely ignored by suppliers.

An economist with one of the area's major machine tool producers indicated that his firm is still experiencing very strong demand, but the rate of increase in new orders has started to taper off. He expects new orders to start declining in about six months. Material shortages have been a problem to his firm in selective areas of production.

Reports from the steel industry indicate no letup in the strength of underlying demand. Although steel companies continue to allocate new orders, the bookings are still running ahead of shipments and productive capacity. Lead times continue to lengthen, and some orders are now being booked for the first quarter of next year. One major steel firm reports a slowdown in output may occur during the near term because of maintenance work that has been postponed due to the recent strong demand for steel. Economists expect steel inventory building by customers to level off during the second half.

An economist with a major auto producer attributed part of the recent strength in new car sales to anticipatory buying. He is concerned over the repercussions in the auto industry and the feedback on the economy if demand for the 1974 models weakens significantly and if unemployment begins to rise. In his opinion, the high sales volume of imported new cars is definitely related to the publicity given to the gasoline shortage and to projections of sharply higher gasoline prices. In addition, the recent sales performance of imported cars partially reflects the fact that domestic subcompact capacity is not great enough to meet the demand. The 1973 model carry-over is expected to be concentrated largely in the standard sized cars, and a strong sales incentive program will be necessary to move them.

An economist with one of the Federal Home Loan Banks in the District reports that savings flows at S&Ls in recent months have averaged only about half of the volume of a comparable period in 1972. Although deposit growth has slowed, there is little evidence of disintermediation so far. But the thrift institutions are concerned, recalling the experiences of 1966 and 1969. Mortgage commitments have started to slow in recent months, both because of reduced savings flows and some decline in multi-family units. Mortgage terms (rates and downpayments) are gradually tightening.