The general theme of the remarks of our directors at meetings of the Cincinnati Branch board on August 9 and of the Cleveland board held on August 12, was that there is strengthening in some areas of the economy, but that the pace of activity in the industrial sector generally remains sluggish. Concern was expressed about the persistent inflationary pressures and about the effect that recent wage settlements can be expected to have on prices. Several directors reported that, in contrast to their domestic experience, demand for their products in international markets has remained extremely strong.

The particular areas of strength cited by the directors were in housing-related glass products and auto-related products. Demand for tires has remained particularly strong for several months. One director noted some recent signs of strength in the firm's consumer-oriented products, and another director reported an increase in sales of glassware and plastic products at the retail level, reflecting the fact that retailers have completed their inventory reductions in recent months and are now buying from the company once again. Another director commented that coal sales, which have been depressed for several months, picked up recently as major coal users began some stockpiling in anticipation of a possible strike in that industry (the union contract terminates on September 30). The consensus of our directors was the demand for almost all kinds of capital goods has remained sluggish, reflecting the lackluster performance of the economy. Particular areas of weakness cited were machine tools, computers, and railway equipment.

The directors remain seriously concerned about inflation and inflationary expectations, and particularly about the effects that the settlement in the steel industry would have on prices, and about the built-in inflationary effect that the cost-of-living escalators will have in the future.

Results of our August 16 survey of District manufacturers corroborate the views of our industrial directors regarding the sluggish pace of manufacturing activity. On balance, firms are experiencing no improvement in new orders, and they are still working down their backlogs. Employment and hours are both being reduced. Inventory reduction is expected to be particularly heavy in August, as the largest percentage of firms since 1967 anticipate a cutback in stocks.

The steel industry, of course, is exerting a major dampening influence on the District's economy. Insured unemployment rose sharply during July with the District's rate up 0.7 of a percentage point between the first and last weeks of the month (compared with a 0.2 point rise in the nation). During the first two weeks of August, the steel industry was continuing to lay off workers. Among the steel industry economists we contacted, one expressed the belief that unemployment in his industry is currently at its peak. But he added that some workers are on vacation, and it is not known how many could be placed on layoff status (thereby raising unemployment) when the vacations run out. Another steel industry economist thought there would be further layoffs, especially among white collar workers in the industry. Estimates of steel production in August call for a seasonally adjusted decline (from the July level) ranging between 36 percent and 46 percent. One economist said August could be the lowest shipping month for the industry, excluding strike years, since 1939.

On the financial side, several banker-directors reported strong loan demand in recent weeks. One director, associated with a large bank, reported that loan commitments were up considerably from a year ago, with part of the increase in real estate and part in the commercial and industrial category. This director also pointed out that the increased cost of funds to the banking system will keep upward pressure on the prime rate for the near term.

A telephone survey of large banks in the District revealed that most banks have observed a more-than-seasonal slowdown in consumer-type time and savings inflows. Bankers expect the rate of growth to slow slightly further. Most banks also expect little near-term improvement from the year old sluggish condition of business loan demand. Large loans to large customers are expected to remain flat, in part because of the expectation that funding of corporate debt will continue. Some banks have had requests for increases in contractual revolving lines of credit, apparently reflecting business attempts to improve liquidity. But the banks did not expect the increased credit lines to be drawn upon.