September was a slow month for most businesses in the Third Federal Reserve District. Manufacturing activity was off and employment opportunities also softened. Prices continued their inexorable rise. Area retailers reported weakness in the sales of most lines of merchandise. Most of these businesses have been unable to keep their sales volume ahead of inflation. In the construction industry strength in the public works sector has offset the weakness of residential housing. One of the few industries in the region that shows real strength is commercial banking. Virtually all of the major banks have more loan business than they can handle and, in fact, are discouraging attractive new business in an effort to reduce their reliance on money market sources of funds. The results of a survey of manufacturing executives in the District suggest further weakening of the area economy during the last month. New orders are lower for the first time in three months, and production is catching up with the order backlog. Shipments rose during the month and delivery times on orders in process were cut. For the most part, inventories were steady during the month. These businessmen also report some softening of their need for labor.

This short-term sluggishness is reflected in the outlook these businessmen hold for the months ahead. On balance, they still expect business conditions to improve by March, but the ranks of the pessimists are swelling. Most respondents expect new order activity to be holding steady in the months ahead. Unemployment will probably be up in these industries as manufacturers shrink both their workforce and their average workweeks.

Capital spending during the next six months is not expected to change very much from current levels. Retailers in the Delaware Valley are feeling the slowdown quite keenly. Only one of the four major retail chains surveyed was managing to keep its volume ahead of inflation. The consensus is that consumers are downgrading the quality of their purchases, looking for sales, and avoiding many big ticket purchases that could be deferred. The outlook is for continued weakness through the Christmas season.

Construction activity in the District is mixed but clearly on the plus side. The value of construction contracts awarded so far this year is up 40 percent over the comparable figure from last year. This is well above the national level of activity in this industry. Residential building is down dramatically, but nonresidential construction is ahead of last year's pace. However, the major factor giving the industry its current strength is public works construction. The value of local contract awards in that sector of the industry is up almost 200 percent over last year at this time.

Third District banks report that their business loan growth has slowed, but the reason has been restrictive lending policies rather than lack of demand. Virtually no new business is being accepted, and well established customers are required to show that their loans are intended for "productive" rather than speculative uses. The lending restrictions have not been directed at any one class of business borrowers.

Finally, inflation shows no sign of abating. The glimmers of hope reported last month have all but disappeared from the results of our latest outlook survey. The businessmen anticipating higher prices for both the goods they buy and the ones they sell outnumber those expecting prices to hold steady by more than two to one. Only a handful of respondents expect any reduction in prices by next March. It looks like inflation psychology is well entrenched and will not soon be dislodged.