Economic activity in the Third Federal Reserve District is showing some hopeful signs. The downward slide of business activity experienced during the first quarter of 1974 has been stemmed, and the local economy may be preparing for a modest recovery. Production activity and employment have both been stable during the last month, and most manufacturers are anticipating a pickup in the next six months. Retail sales are already showing strength. Rising prices are still a problem for area businessmen as well consumers, and their long-run expectations are for more of the same. Bankers report exceptionally high loan demand and see little short-term softening in the credit needs of their customers. Disintermediation is not yet serious, but there is some indication that it may become more of a problem in the weeks ahead if money market rates remain high.

According to the executives responding to this month's business outlook survey of manufacturers in the Third District, business activity in the local economy has been steady in the last month. New orders, shipments, delivery times and inventory were all relatively stable. This represents progress of sorts since the economy has been in a slide for the last several months. Employment is also holding steady with four out of five businessmen surveyed reporting no change in either the number of employees or in the average workweek.

The outlook for general business activity in the future, however, is much brighter. Over half of the survey's respondents predict that the economy will be stronger six months from now. While hopes are high for increased manufacturing activity, less than ten percent of those surveyed expect delivery times to increase. This suggests that the supply constraints that have been such a problem in the manufacturing sector for many months may be less binding in the future. The employment picture is not expected to improve in the foreseeable future. The number of firms planning to hike their payrolls is exactly matched by those planning to decrease employment during the next six months. Capital spending plans remain strong and have increased slightly in each of the last three months. Retail sales in the Delaware Valley have picked up recently. The depressing effects that the energy crisis has on consumer buying of general merchandise are reported to have worn off, and business is brisk. Virtually all spring and summer merchandise lines are selling well. Prices continue to be a difficult problem for area businessmen. More than eight out of ten claim that they paid more for their purchases this month than they did last month. Six out of ten of these businessmen charged more for the goods they sold to their customers. Very few of these executives expect any relief in the next six months.

The region's largest commercial banks are experiencing very heavy demands for credit. The bulk for the lending activity has been precipitated by inventory and capital investment and increasing substitution of bank loans for commercial paper (especially by the REITS). The recent Treasury note issue caused some deposit outflows at local institutions. However, the bankers report that disintermediation has been building gradually over the last month and a half, and they expect it to be a more serious problem in the weeks ahead unless money market rates drop soon.