Business activity among the Districts continues to weaken in June, with mounting evidence that declines in consumer spending and construction are spreading to the capital goods sector. Consumer spending remains soft, especially for big ticket items. An inventory buildup is widely noted, although swift adjustments in production are generally thought to have kept inventories close to desired levels. There is little indication that capital spending plans have been altered, although scattered reports of cutbacks and delays are cited. Loan demand has not improved from last month's low levels despite easing of restraints and lower interest rates. Substantial declines in mortgage interest rates and improved credit availability has sparked some improvement in mortgage loan inquiries and sales of existing homes.

Manufacturing of durable goods declined further this month, with signs of the recession spreading to the capital goods industry. Production of auto and steel-related products is being cut sharply. A sharp fall in new orders of consumer and producer durables is reported by New York, Richmond and Philadelphia. Some weakening in capital goods orders are reported in Cleveland, and Chicago notes an increase in order cancellations, although not on the scale of 1974- 1975. Manufacturing sales, especially of defense goods, however, are continuing to hold up in Boston, and backlogs of capital goods orders remain large in New York. Despite a decline in manufacturing activity, Minneapolis points out that the District has been able to avoid an employment decline as a result of significant strength in industrial output and nonresidential construction, as well as sustained demand in energy exploration and production. San Francisco notes that a continuing healthy aerospace industry has helped to buoy the retail business in the northwest.

Consumer spending, especially for automobiles, appliances, and furniture, remains weak throughout the nation, with little improvement expected before the end of the year. Real retail sales in nondurable consumer goods generally are holding better than durable goods, although Atlanta and St. Louis note declines in both. There are, however, signs of a pick up in retail sales in the Minneapolis area, and fashion items continue to do well in St. Louis and New York. Sales of new cars and trucks are well below year-ago levels, but improvements over the May level are cited in Dallas and Cleveland. New York notes that discount stores have been benefiting from the growth of price-conscious consumers.

Rising inventory levels at the producer and retail levels are a growing concern to businessmen across the nation, but most still believe that accumulations have not become excessive. Chicago reports that output has dropped faster than consumption as a result of substantial downward adjustments in production schedules. However, trouble spots are noted, especially for major appliance firms, by Cleveland and St. Louis. Energy stocks are reported to be well above year-ago levels in Cleveland, and storage facilities in the Dallas area are full. Further production and employment reduction may be necessary through the summer months to prevent inventory building among manufacturing firms.

Most firms appear to be reluctant to reduce capital spending programs, but there are widespread reports that reassessments are underway. Boston reports a sharp decline from the previous month in the number of firms planning to increase capital spending over the near term. New York and Chicago note that some existing programs are being stretched out rather than being reduced. Cleveland, however, cites announcements of substantial reductions in the steel and rubber industries. Weakening cash flow and declining market demand are the most common reasons given for delays and cutbacks.

Lending activity continues to decline virtually across-the-board, although consumer loans appear to be flattening out. Recent easing of credit restraints and lower interest rates do not appear to have increased consumer borrowing. Atlanta reports that many banks are aggressively seeking new loans, but Cleveland notes that banks have been reluctant to lower interest rates. Some banks report that interest rates have been slow to adjust to weakening demand. Industrial loans have dropped because smaller business firms fail to qualify, while large firms have access to commercial paper markets. A rise in bankruptcies, especially among auto dealers and home builders, is reported by Chicago area bankers as a result of the recession and new bankruptcy laws.

Thrift institutions have been aggressive in lower mortgage rates, but note only a mild pickup in inquiries. Loan commitments have been slow to respond because of a recognition lag and consumer uncertainty about the economy. Thrift institutions across the nation are experiencing sizable increases in deposit flows, which are frequently used to rebuild liquidity positions and repay borrowings. St. Louis and Chicago report some pickup in loans on previously owned houses, and San Francisco expects a turnaround by late summer.

The agricultural sector continues to be adversely affected by rising costs and falling farm income. Chicago expects that real farm income for the year will be at one of its lowest levels since before World War II, although income from livestock will improve in the second half of 1980. Dry weather has been a problem for crops and livestock in Atlanta and Richmond during June while heat in Dallas and cool weather in San Francisco have adversely affected agricultural production. While funds for agricultural loans are available, loans have been very weak.