The views of our directors on economic conditions have not changed much from those expressed in the previous month: they expect a steady expansion to continue with a concurrent reduction in unemployment. The directors were asked about the prospects for an early acceleration of capital expenditures, and the consensus was that a strong investment upsurge is not about to begin, but that investment would maintain a moderate pace.

Although consumer spending and construction have provided much of the strength behind the current expansion, some directors expect a weakening in demand from those sectors. Consumer spending certainly has improved, but there seems to be no expectation that it will become much stronger. One director suggested that the improved automobile sales in late 1971 might well be at the expense of sales in 1972. Others pointed out unfavorable factors, such as the cut in disposable income of wage earners caused by the upward revision of the Federal income tax withholding schedules and, in California, the imposition of withholding for the state income tax.

As for construction, reports of continued activity-especially in residential construction-are tempered by concern about overbuilding. In California, vacancy rates have begun to climb in most areas of the state, and in time the point will be reached when financial institutions will be less willing to finance further projects. One respondent expects "substantial declines in authorizations" by lenders within the next six months. Certain classes of nonresidential construction have been strong, for example, highway construction. On the other hand, high-rise commercial construction which had been very important last year in such cities as San Francisco may not be maintained in 1972.

The current level of construction activity has stimulated the lumber industry, particularly in Washington and Oregon. Demand for lumber and plywood has encouraged increased capital expenditures for mill expansion and modernization as well as directly increasing employment. Prospects for agriculture in the District continue to be good. The end of the dock strike has allowed the movement of grain to be resumed, although the carry-over of the 1971 crop may cause problems. Prices are expected to be good for beef and pork, and consequently feed grain producers as well as ranchers expect a profitable year. Sugar beet and seed grain prices are also expected to be favorable. In contrast, prospects are not so good for certain vegetable and fruit crops. The outlook for fruits for processing is unfavorable, and this is attributed by some directors to shifts in public demand away from processed fruits. Other fruit and vegetable producers whose crops cannot be harvested mechanically face rising costs of labor which may not be easily passed on. Yet the demand for some fruits, such as grapes, is rising, and there have been increases in acreage to keep pace with demand. Despite these weaknesses, the overall prospects for District agriculture continue to be favorable.

On the specific question of investment intentions, the majority of our nonbank directors indicate conservative investment plans. The only exception is in the lumber industry where, as previously noted, increased demand has required the expansion of capacity. Certain other industries are being required to make large capital investment to meet new pollution-control standards. There are regional variations as well. In Utah, a survey conducted by one of the banks indicated a jump in 1972 capital expenditures of about 12 percent. With those exceptions, our bank directors confirmed the lack of major shifts in investment activities above the rates of recent months.

In District banking, there have been no major changes. Many banks have cut their passbook savings rates to 4 percent even though savings and loan associations continue to pay 5 percent, and other commercial banks, including some relatively large banks, have maintained the 4 1/2 percent passbook rate. Lending rates have been reduced for certain lenders and categories of loans, but the lower price and greater availability of funds has not resulted in any resurgence of loan demand. Commercial-industrial loan demand in most states is described as unchanged or weak. In consequence, banks have been more aggressive in seeking business and making rate adjustments.