The deterioration in District business conditions has become more pronounced during the past month. Retail sales are weak, inventories are high, and retailers are not optimistic with regard to near-term prospects. Manufacturing activity continues to decline, and weaknesses are becoming more widespread among industries. Layoffs have risen sharply, and a number of firms are reducing employment in December. Restoration of coal mining operations will help conditions in some areas, but is expected to dampen order demand in the steel industry. There are scattered signs that business loan demand has spurted recently as businesses are burdened with heavy receivables and excessive inventories. S&Ls continue to show improvement in savings inflows.

Retail sales for the holiday season appear to be off to a slow start, according to executives from three major retail concerns. Short-term prospects are generally considered to be pessimistic. Sales in the Cleveland area have been hindered in part by adverse weather and by a lack of advertising (the area's two daily newspapers have not been published for more than a month). Inventories are reported to be on the high side, especially for appliances, television sets, and home furnishings. Buying commitments have been cut back and the firms are attempting to promote sales through pro-Christmas markdowns. All concerns report that fewer part-time workers than usual have been hired for the holiday season, and some firms are allowing attrition to reduce full-time staffs. A manufacturer of men's clothing notes that their bookings from the retail sector for the spring of next year have fallen below those of last spring. Retailers have become more cautious in their ordering, and cancellations are increasing. The executive mentioned a softening in textile prices and a dramatic price weakening in the past few months in the secondary clothing market (goods canceled and sold at close-out prices).

Purchasing agents in the Cleveland area report a further deterioration in business conditions. Production declined in November for the second consecutive month, while new orders declined for the third consecutive month. The problem of shortages has diminished considerably, and raw materials are becoming more readily available. Price increases continue to slow. Last month there was a significant reduction in buying lead time for capital equipment.

Our own monthly survey of District manufacturers reveals a progressive weakening in the new order picture during recent months, declining backlogs, a slowing in inventory accumulation and price increases, improvement in delivery time, and further reductions in employment and hours. Layoffs have been widespread among auto producers and suppliers, and in the appliance industry. In addition, the coal strike has disrupted economic conditions in those portions of the District heavily dependent on coal production. A number of machinery companies are planning to reduce employment in December. Other employment layoffs are planned this month by firms in printing, paper, housing materials, food processing, aluminum, oil refining, appliances, autos, tires, and auto supplies.

Three major machine tool companies in Cleveland are experiencing declines in new orders, but high levels of backlogs are expected to sustain strong shipments well into 1975, One firm reported that their new orders are just offsetting cancellations, and their backlogs (2-1/2 years) are being reduced. Another said cancellations for machine tools exceeded orders last month (cancellations totaled 18, orders 12). The third company is beginning to reduce employment even though its backlogs are still rising; shortages of certain materials and parts continue to hamper optimum production in that firm.

Steel producers are still allocating steel, although three major steel companies report some increase in cancellations and declines in new orders. Autos, appliances, and some construction users have cut back orders. Steel that has been canceled has been promptly resold to oil and gas producers, railroads, mining, shipbuilding, pipe manufacturers, and other capital goods industries where demand remains strong. Several steel firms were forced to curtail operations because of the coal strike; they plan to step up production as soon as it is apparent that coal deliveries will be resumed. The steel companies also fully expect a wave of cancellations when coal miners return to work and the availability of steel returns to normal. Customer stocks are estimated to be about 10 per cent above normal, but mill stocks are abnormally low and will be rebuilt as customer demand slackens. Steel industry economists note that steel imports have soared recently and foreign steel prices have been cut dramatically to near parity with domestic prices. Accordingly, they expect the U. S. deficit in steel to increase in 1975 because imports will be higher and exports lower than in 1974.

On the financial side, several large banks in Cleveland noted a spurt in business loan demand in recent weeks. Customers are said to be heavy on receivables and inventories and in need of cash. One bank also reported that in recent months they have significantly scaled down the proportion of auto dealer loans accepted because of a deterioration in quality and lengthening in maturities. Thrift institutions continued to experience an improvement in net savings inflows in November. An official with a FHLB expressed the view that if gains in deposits continue, the S&Ls will first pay their debts and rebuild liquidity before seeking mortgage loans more aggressively. An executive for a $150 million S&L noted that their net gain in deposits during November-December has about equalized losses during the summer months. They recently lowered their variable rate mortgage to 9.6 per cent.