Manufacturing activity in the District apparently strengthened in June for the third straight month; supplies of raw materials generally remain tight. Capital spending and steel production are key supports of industrial activity, while weakness in retail sales is contributing to an overhang of inventories. Savings and loan associations in northeast Ohio report large withdrawals of deposits since the third week in June.

Early returns from our monthly survey of District manufacturers indicate that the recovery continued in June for the third consecutive month. All key series posted further gains. Inventory accumulation, however, has shown signs of slowing in recent months. Price increases remain pervasive.

Some of our industrialist directors in capital goods industries report a recent easing in the supply situation for a few materials. As a general matter, however, the availability of raw materials continues to be tight. One director commented that they still have a "lot of people out on the road rounding up raw materials at whatever price they have to pay." Business conditions in the capital goods industries remain good, and backlogs are still rising. A director in the machine tool industry said they are now quoting some machinery for delivery in late 1976. The industrialists mentioned that the high cost of money is beginning to be a major problem for their firms.

Petrochemical products, steel, and coal continue to be commodities in tight supply. An economist for a major petrochemical firm in the District remarked that removal of price controls has done little to improve the supply of basic materials they use. The improvement that has occurred in availability stems from a reduced volume of exports. He anticipates no softening in demand for plastic and chemical products and reports that his firm is allocating orders based on 73-75 percent of 1973 sales.

Casting and steel products remain in tight supply and an official with an automotive supplier reports that his firm has been reallocating materials in critical supply from one plant to another in order to maintain production schedules. Steel economists report that demand for steel continues to exceed supply and that situation could tighten further because of equipment bottlenecks and coal shortages. One major producer reports that a breakdown in equipment sharply curtailed their raw steel output in the Youngstown District during most of June. Lower quality of coal has also held down steel output, and suppliers have not been able to fill long-term contracts for coal. Another steel producer apparently has sufficient supplies of coal to last through July. But company officials are concerned that low coal stocks will curtail operations in the event of a mine strike. The company's economist also asserted that the latest round of steel price increases was aimed at improving profit margins necessary to finance capital expansion programs. Previous increases were to recover higher costs that were not permitted to be fully passed on to steel consumers during wage-price controls. Despite four increases in steel mill products so far this year, domestic prices for steel are still well below average world prices for steel.

Coal supplies are tight. Demand from utilities and steel industries remains strong, and both of these users report unusually low stocks of coal, which would disrupt their operations in the event of a coal strike in November. An economist with a major coal producing firm considers it likely that miners will strike for at least two weeks but not more than four weeks when their contract expires in November. Freight car shortages are a limiting factor in coal output.

Retail sales of two large department store chains in Ohio showed little improvement in June, and officials with these firms were pessimistic about second half sales. The president of a major department store chain in Cleveland stated that consumers' buying interest must be "stirred" by frequent sales promotions, and that collections have slowed while delinquencies have been rising. He reported that his stores' inventories are now excessive and that the usual summer clearance sales dates were advanced this year in order to attract consumer buying. In contrast to his cautiously optimistic tone of two months ago, he sees little basis for improvement in retail sales unless real purchasing power picks up sharply and financial developments take a turn for the better. An economist with another major department store chain also reported that consumer buying remains sluggish. He asserted that consumers have traded down in quality and have not reduced unit purchases as much as suggested in the deflated retail sales data. He feels that retail inventories are now excessive, whereas as recently as April, his sales management complained of inventory shortages. "In less than a few months, we moved from scarcities to excesses of all kinds." He expects unit sales to fall by about 1 percent during the second half of the year.

Some banking directors report they are becoming increasingly selective in accommodating loan demand; more loan applications (business, real estate, consumer installment) are being turned down. An economist with a major bank in Cleveland stated that demand for mortgage loans remains strong despite further tightening of loan terms (down payment of 25 percent for 20 year loans). He reported loan demand from finance companies and commercial loans remain strong. An investment officer with another bank in Cleveland expressed concern that the floating rate note of Citicorp would attract savings deposits from deposit type institutions. It was remarked that the Cleveland office of First Boston Corp. has sold out their $28 million allotment of these notes, the bulk of which, according to a local broker, would be financed by withdrawals of deposits from savings and loan associations. The investment officer was also concerned that major money market banks in the country would be the only institutions able to roll over CD's that will be maturing in the weeks ahead.

Savings deposits in S&Ls in northeast Ohio about equaled withdrawals since the third week in June, according to an official in the savings and loan trade association. S&Ls are making very few new mortgage commitments. Mortgage terms generally range from 9-1/4 percent to 9-1/2 percent (plus one point) based on 20 percent down payment, and applications exceed ability to make loans. S&Ls have stepped up their marketing programs to attract depositors with a variety of gifts. Two S&Ls in Cleveland are now offering services similar to checking accounts, with another advertising no fee checking to depositors with $250 in savings accounts plus an additional monthly deposit of $25 or a $1,000 initial deposit. The chairman of a $150 million S&L in Cleveland reported that customers' response to their variable mortgage rate, which is now about 1/4 percent below the prevailing market rate in Cleveland, has been good but less than expected.