Boom conditions prevail in the Tenth District. Growth continues in all major sectors, with the possible exception of residential construction. The agricultural sector is especially strong with a large volume of output being marketed at record high prices. Recent sales gains, reinforced by heavy orders, are encouraging manufacturers to build up inventories of materials. Shortages are thwarting their efforts somewhat, driving up prices and lengthening lead times. Transportation difficulties are slowing grain deliveries, causing country elevators to borrow heavily at a time when banks are experiencing very strong loan demand from other sources. Bankers are concerned about disintermediation; businessmen criticize the uncertainty, and doubt the effectiveness, of Phase Three.

Purchasing agents throughout the District continue to add to their inventories. Many buyers complain of lengthening lead times and late deliveries. They grumble about especially short supplies of sheet steel, textiles and paper, castings, petroleum derivatives, copper materials, and certain plastics and chemicals. Machine tools also are more and more difficult to come by, as are electric motors, glass bottles, refrigeration controls, pressure gauges, and radio-TV components. One agricultural supplier cannot get enough 1,000 gallon fuel storage tanks as farmers buy up those available, apparently planning to hoard gasoline so as not to be caught short again.

Prices of some materials have increased sharply in recent weeks. The cost of goods bought abroad jumped up following the devaluation. Most other big price increases appear to reflect market forces; they are confined largely to products of those industries operating at capacity. Virtually all prices, however, are increasing. Purchasing agents are optimistic about business this year, but they doubt that Phase Three will effectively curb inflation. Some worry about 1974, because "recession follows inflation".

Boxcar shortages have severely restricted grain movements from country positions to terminal ports for exporting. Many elevators are unable to deliver grain in accordance with contractual agreements that were negotiated several months ago. Some penalties have been assessed for failure to make delivery, but by and large the exporters and processors are taking a lenient stance because of the transportation bottlenecks. Nonetheless, the inability to deliver grain has created huge credit requirements to refinance inventories and to meet higher margin requirements on short hedges in the future market because of high grain prices.

Commercial banks and banks for cooperatives (BCs) have reported sharp increases in loan demands from country elevators. Two of the BCs headquartered in the District indicated that outstanding loans are roughly double those of a year ago, with about 40 percent of the increase coming in the last two months. Even if the marketing channels should open soon, which appears doubtful, any reduction in the amount of credit outstanding for grain will be largely offset by normal seasonal increases in loans to finance farm supplies. On balance, most country elevators are expected to come out of the current situation intact due to the availability of credit when it was needed.

Besides the extraordinary loan demands of grain elevators, District commercial bankers report very strong loan demand from other sectors. Commercial and industrial, consumer installment, and agricultural loans have all been expanding at greater than normal seasonal rates in the past month. Respondents cited the vigorous pace of economic activity as a major source of loan demand, but a number mentioned specifically the impact of higher prices on the nominal financial needs of borrowers. In particular, sharply higher prices paid have greatly increased loan requirements for livestock feeding and other agricultural activity. Several banks reported that, because of relative interest costs, larger national firms had borrowed from banks instead of selling commercial paper. A month ago this was an insignificant factor in the lending activity of Tenth District banks, which have relatively few large national accounts and are called upon for such financing to a greater extent during periods of tight credit and misaligned rates.

Total deposits at large District banks rose moderately in February, roughly in line with the normal seasonal pattern. However, this came about through a somewhat unusual combination of sizable demand deposit outflow (primarily from state and local government accounts), a minuscule inflow of consumer savings deposits, and a large increase in certificates of deposit (CDs). Despite their apparent success in selling large CDs, more bankers seem concerned about disintermediation than was true a month ago. A few asserted that rising market rates had already affected their deposits.
A greater number felt that the maintenance of present Regulation Q ceilings, along with restraints on lending rates, would put them in a difficult position in the near future.