Manufacturing activity in the District appears to have strengthened in May for the second successive month, and bank loan demand showed little change. At a meeting held in this Bank on June 7, thirty economists (primarily from major industrial firms and banks in the District) generally agreed that the economy was beginning to recover and indicated they expected continued strengthening in output during the balance of this year, accompanied by abatement of price increases by the fourth quarter. In the discussions, considerable emphasis was placed on the crosscurrents of strengths and weaknesses in the economy, distortions caused by inflation and price controls, uncertainties regarding the impact of monetary policy, and the response of labor to the past rate of inflation. According to a source in the savings and loan industry, deposits about equaled withdrawals in May, following sizable outflows in deposits during April.

Preliminary returns from our monthly manufacturers' survey suggest further improvement in new orders, shipments, backlogs, and employment in May. Inventory investment shows some sign of abating. The percentage of firms reporting price increases was the highest in the 10 years of this survey.

Major banks in the District report little change in business loan demand in recent weeks. Two Cleveland banks reported what they consider a temporary slackening in demand, with the passing of earlier shifts of borrowers out of commercial paper. Another has experienced some unexpected demand because two large industrial customers postponed capital market financing. Construction loans present problems to four of six large banks contacted. These problems involve requests for maturity extensions and increased loan amounts and reflect cost overruns, materials shortages, and, in some cases, delayed or canceled takeouts of permanent financing by insurance companies.

The business economists project a 1-percent growth rate for real GNP during the second quarter, followed by gains of 2.4 percent and 4.0 percent in the third and fourth quarters. Over the same period, the GNP deflator is projected to rise at annual rates of 8.2 percent, 7.4 percent, and 6.0 percent, respectively. The unemployment rate is expected to drift upward to 5.75 percent by year-end. The projected economic recovery is based largely on improvement in the consumer sector and strength in capital spending. Some economists raised questions as to how much of the recent pickup in retail sales was due to tax refunds and whether real income of consumers would recover in the near term. The sentiment of the group was that there would be an acceleration of nominal wage increases during the second half; moderating inflation would, therefore, result in real income rising enough to sustain a recovery. New car sales, in particular, are expected to remain on an upward course. The median forecast of 10 economists whose firms depend heavily on the auto market places this year's domestic new car sales at 8.1 million units and imports at 1.6 million units. Fleet purchases of new cars, which have been below normal during the last two to three quarters, are expected to bolster sales in the months ahead. Automotive economists also see evidence of a recovery in sales of recreational vehicles.

On the matter of capital spending, there was widespread agreement among the roundtable economists that the secular need for increased capacity overwhelms normal cyclical forces. According to the economists, capital spending ordinarily would be expected to weaken under conditions of tight money and prospects for declining corporate profits. Some economists noted that much business investment is planned on the prediction that long-term interest rates will be lower and demand stronger toward year-end. The prevailing view was that, despite high interest rates, the pressures for capital spending are on the upside. Basic process industries, such as steel, petroleum, and chemicals, are considered to have the best liquidity positions for financing their investments. On the other hand, utilities appear to be reassessing their spending plans in view of the dramatic shift in their cost structure and uncertainties regarding growth prospects. Automotive economists hold the view that sales of heavy trucks will begin to decline later this year, partly because of increased costs associated with antiskid devices. It was reported that capacity limitations and shortages have held down the recent physical volume of capital outlays. A shortage of casting capacity, for example, has contributed to a short supply of engines, which has in turn held down shipments of trucks. Steel shortages also have inhibited shipments of numerous capital goods.

Several steel industry economists said steel shortages will become even worse during the second half. Shipments have been above industry capacity for two years. With mill inventories depleted and the deferment of needed maintenance, the steel industry's ability to ship in the second half will be less than in the first half. Moreover, if there is a coal strike in December, the steel industry will be forced to shut down because coal and coke supplies are very tight. Little relief in the steel situation is expected during 1975. A steel economist expressed the opinion that the economy's potential growth rate next year could be restricted by the limited availability of steel.

According to the roundtable group, sectors of near-term weakness in the economy include housing, the net export balance, and inventory investment. An economist with a Federal Home Loan Bank reported that the savings and loan industry would have sufficient funds to ensure 1.6 million housing starts for 1974 if there is no massive disintermediation. At any rate, housing is projected to begin recovering very slowly beginning in the fourth quarter. The net export balance is expected to decline for the remainder of the year. Inventory investment, following a pickup in the second quarter, is expected to ease slightly in the second half. It was noted that there has been an unknown degree of inventory speculation. As prices of certain raw materials come down, inventory building should subside.

An economist with a major agricultural corporation discussed the outlook for grains and meat. Wheat and feed grain crops are expected to be sufficiently abundant to cause some price declines between now and next fall. Prices of livestock and hogs, however, are expected to rise 10 to 15 percent at wholesale, while broilers could rise by one-third.