Economic activity in the Third District continues to show that the downward slide of the first quarter has ended. Production activity is stable for the second consecutive month, and manufacturers report that this level of activity is expected to hold steady through the end of the year. Employment too remains stable. Retail sales continue to show surprising strength, as do spending plans for plant and equipment. Inflationary pressure is the sore spot in the regional economy, as area businessmen expect both the prices they receive and the prices they pay for manufacturing goods and raw materials to continue rising during the next two quarters.

Bankers reported that while total loan demand remains at mid-April levels in Philadelphia, business borrowing has advanced slightly. Moreover, disintermediation is not currently a problem with Philadelphia banks, as they continue to post deposit gains.

Manufacturers in the Third District, responding to this month's business outlook survey, report a general leveling in the regional economy, both in June and six months in the future. Currently, almost three-fourths of area manufacturing executives are experiencing no change in their new orders, shipments, and unfilled orders. Last month's extended outlook reported an expected increase in business activity by November. However, it now appears that some manufacturers have revised their expectations, with nearly half reporting no change in these key indicators up through the end of the year.

Employment opportunities also reflect this stabilizing trend in the regional economy. While just one in ten employers expects to decrease the number of his employees or reduce the average workweek in the next two quarters, only one in ten expects to increase the number of employees and one out of twenty-five anticipates lengthening the average workweek. Yet, as the size of the work force continues to grow, we are likely to see some increase in the level of manufacturing unemployment in the Third District in the months ahead.

Manufacturers report little change in inventory stocks this month. And, with raw material prices on the rise, only a third of the executives expect to boost the level of their investment in raw materials by the end of the year. However, though somewhat more cautious than last month, respondents still remain optimistic about their plans for increases in expenditures on plant and equipment in the next six months.

Philadelphia department stores are reporting steady sales in summer apparel. However, fall lines will start coming out in July, and retailers are pessimistic about the effect that higher prices will have on consumer spending. With the garment strike presumably settled, retailers anticipate only short-term problems such as delayed deliveries. However, if the strike is extended over a considerable period, serious shortages would have occurred.

The outlook for prices in manufacturing is also reported gloomy. Respondents are still increasing their own prices on finished goods and are, in turn, paying higher prices for raw materials. Though other indicators in the regional economy appear to be leveled off, manufacturers report expectations of an increased push on prices until at least the end of the year. Over three-fourths expect to receive and to pay higher prices six months out.

Reflecting this leveling in business activity in the region, Philadelphia banks report the growth rate for total loans holding steady since mid-April, although business borrowing has advanced slightly. Surveys of Philadelphia banks indicate some increase in REIT and utility borrowing, as these industries are being pushed out of financial markets. Philadelphia bankers are continuing to realize deposit growth, and reliance on Federal funds has decreased sharply. Regional banks report a continued rise in total loans and a growth rate for deposits at somewhat less than April's levels.