Business activity in the Eighth Federal Reserve District generally remains strong. Retail sales have continued to increase in recent weeks, but at a somewhat slower pace than earlier. Manufacturing firms generally remain operating at full capacity. There has been no letup in the problem of raw material "shortages" and backlogs of unfilled orders. However, businesses are reluctant to expand plant capacity even though current demands apparently call for further plant expansion. Credit demands at commercial banks have slackened off in recent weeks, but mortgage funds generally remain in short supply. In the agricultural sector, crop harvesting is generally on schedule for this date.

The uptrend in retail sales is continuing in the District, although at a somewhat reduced rate on a seasonally adjusted basis. Some outlets reported difficulties in making a profit at some of their stores, particularly in the central city areas. One remedy contemplated by these firms is to reduce inventories and offer somewhat different types of goods.

"Shortages" and production "bottlenecks" are problems of increasing intensity for business managers in the District. Shortages of basic raw materials were reported in numerous instances, and in the case of some products such as paper, boxboard, fabricated steel, brass, forestry products and gasoline, the shortages may have grown more intense in recent weeks. An increasing number of firms report rationing of a wide variety of raw materials by their suppliers. In the construction industry it is reported that a number of subcontractors are refusing to make bids because of uncertainties stemming from rapid price changes and availability of materials. In a number of instances shortages of raw or semi-finished products have led to production stoppages and the laying-off of workers.

Although most manufacturing firms are operating at or near peak capacity levels, some firms stated a reluctance to enter into long- term projects to increase capacity. These firms expressed a desire to be quite certain of the profitability of such projects before undertaking them. This reluctance apparently reflects many uncertainties including the near-term outlook for the economy and the possibility of profit restricting Government price control policies. Also, a number of firms reported that most of their recent investments were made to meet environmental requirements rather than provide for new capacity. Scheduled capacity increases for 1974 in many cases will not occur because of shortages.

Employment at major businesses in this District continues to inch up, according to the firms interviewed. "Shortages" of skilled labor continue throughout the District, and in recent weeks the problem was apparently more serious in the smaller communities than heretofore. The unemployment rate has remained stable at a relatively low level for several months.

Some large commercial banks in the area report a recent slowing of demand for business loans. The prime rate is generally 9-3/4 percent, although bankers felt that this rate will soon be reduced to 9-1/2 percent. One factor leading to the slackening demand for bank loans is the substitution of commercial paper for bank loans by large business firms. This reflects the more attractive commercial paper rate in recent weeks relative to the prime bank loan rate. Net savings at commercial banks and savings and loan institutions were generally reported to have increased recently, although at substantially reduced rates compared with the early months of 1973. Saving and loan associations, however, reported great difficulty in attracting funds in recent months. This apparently reflects the strong competition from commercial banks and higher yielding market instruments such as Treasury bills, government agency securities, and commercial paper.

Favorable harvesting weather has permitted farmers to get "on schedule" with crop harvesting operations despite the later than normal planting of crops. Crops are generally good and record breaking farm incomes are in prospect.