Some cautious optimism appears to be creeping back into the minds of businessmen in the Third District. Retailers report that Christmas sales turned out better than expected. Manufacturers anticipate an increase in shipments during the next six months. Bankers, however, report that loan demand remains soft. Considerable concern persists about unemployment and inflation.

Philadelphia retailers report that Christmas sales "started off as a disaster and then ended up fairly well." The turning point apparently was Christmas week. One large department store in Philadelphia indicates that sales ran only about 2 per cent ahead of last year for the first three weeks of December. Since then the sales pace picked up dramatically, rising to 6 per cent above a year ago. Items under $100 that were marked down in price sold briskly. Radios, portable stereos, other small appliances, and clothing sold particularly well. Color televisions and other big ticket items are not selling, though, report area retailers.

One large retailer reports substantial price shading at the manufacturing level. Some types of men's suits, for example, were marked down 40 per cent by a manufacturer because of high inventories and excess capacity. These markdowns were passed along to price-conscious consumers who quickly purchased the retailer's entire stock. Most retailers expect that sales will probably slide back to their slow motion pace in the coming months. Nonetheless, they are going to try some aggressive advertising that will spotlight "bargain buying" opportunities for the consumer.

For the first time since late summer, regional manufacturers are bullish about sales and new orders. A large majority now believes that the general level of business activity will rise over the next six months. In part this emerging optimism reflects an end to the General Motors strike, but it also reflects a more basic change in business psychology that "things will get better." One director, who is a manufacturer, is suspicious of this budding optimism, however. He says it is based mostly on expectations for the second half of 1971. He adds that there is more "hopefulness" than "substance" to such expectations.

Bankers on the whole still talk about a weak economy and soggy loan demand. Most say that both the economy and loan demand are recovering a lot more slowly than they had anticipated. Furthermore, one city banker notes that because of the normal pay down of loans in the coming months he does not expect any relief from seasonal factors.

Philadelphia banks are actively seeking quality loans because obtaining funds is no problem. One banker says that a drop in the discount rate would help loan demand by improving business psychology. One bank reports that it has made a sizable number of commitments for construction loans which remain outstanding. The businesses to whom these commitments have been made are still looking around for permanent financing, however. Apparently they are shopping for funds with more favorable terms. This shopping around may mean that some people in the construction industry believe that further declines in interest rates are in the wind.

Although there appears to be less pessimism in general now than a few weeks ago in the Third District, most businessmen still express a deep concern about inflation and unemployment. Nonetheless, a feeling seems to be emerging in the business community that the "worst is behind us and somehow things will work out for the best."