Bank directors are concerned whether Phase Three will be able to restrain price increases. One director feels that meat prices are at or near their peak but sees no large decline until 1974. Some directors report inventory overbuilding, while others reveal that excess inventories are not a problem. Farm production will be up this year which will place some strain on District farm suppliers. District manufacturers anticipate sizable sales gains in 1973.

Given the recent announcements concerning food price increases and the dispute between the Administration and organized labor over the 5.5 percent wage guideline, bank directors generally express concern about the Administration's ability to control inflation during Phase Three. Two directors indicate that people expect the rate of inflation to increase without question. One feels that Phase Three has lost its grip on the economy, unless the Administration takes some firm action to restrain wage and price increases. Another director states that uncertainty over Phase Three will not be dispelled until "flexibility" with respect to the 5.5 percent wage guideline is clearly defined. A Montana director reveals that prices of products purchased by his area's businessmen have been rising quite rapidly, and an upper Michigan director expresses concern over increasing food costs. One director, however, feels that it is too early to assess the impact of Phase Three, and another discloses that several businessmen in his area are not concerned about price increases.

With regard to food prices, one director believes that the peak for meat prices has been reached or is near. Many farmers, he believes, are currently refraining from marketing cattle in order to take advantage of expected price increases, and as these cattle come to market in the near future some decline in prices will occur. However, he does not expect a pronounced drop in beef prices until next year, since many farmers will hold heifers off the market later this year in order to be able to produce more cattle in 1974. Nor does he anticipate any large drop in hog prices this spring but believes hog production should expand noticeably by next fall which will dampen pork prices.

Directors' opinions regarding inventories are mixed. A Twin Cities area banker indicates that firms surveyed by his bank have not reported any inventory buildup and have generally not experienced a lengthening in delivery times, and a major Twin Cities area retailer indicates that his firm is not experiencing inventory problems. While a Twin Cities area manufacturer reports no speculative inventory buildup, he reveals that certain materials are becoming scarce and that delivery times are lengthening. Some danger exists, he believes, that demand may not be adequate to absorb rising inventories in the future. In the construction industry, according to another director, speculative inventory building is occurring. A South Dakota director discloses that slow delivery times are encouraging his area's businessmen to build up their inventories, while another director states that salesmen encourage businessmen in his area to increase their purchases in order to avoid future shortages. Several other directors report that their areas' businessmen have not experienced inventory problems or difficulty in procuring goods.

District farmers are planning to increase production this year which could place some strain on suppliers of fuel, fertilizer, and other crop-raising inputs. A recent newspaper survey of farm cooperatives discloses that Midwest farmers face a tight supply of fertilizer and fuel. Also, a major railroad may be unable to meet 40 percent of the demand for boxcars to haul fertilizer. According to a bank director, a critical shortage of farm machinery parts is anticipated in South Dakota, and reports reveal that farm machinery is becoming difficult to obtain in Montana and South Dakota. For example, the delivery time on a new tractor is now between six to eight months in South Dakota.

Our first-quarter industrial expectations survey discloses that District manufacturers look for sizable sales gains in 1973 with durable goods sales rising faster than nondurable goods sales. First-quarter sales are expected to be up 12.2 percent from a year earlier, followed by gains of 10.9 percent and 9.5 percent in the second and third quarters, respectively. In the fourth quarter of 1972, District manufacturing sales increased 16.7 percent, which surpassed the 12.8 percent advance anticipated three months earlier.