In the opinion of our directors, the present expansion in the national economy will continue at least through mid-1973. Consumer spending and business investment expenditures are seen as being particularly strong. Construction activity remains on a high plateau, with commercial building showing considerable strength, but a significant decline in home building is expected by midyear. Combined with the overall optimism, there is concern on the part of some directors about inflation and the effectiveness of Phase Three in restraining wage increases.

Most directors believe that a vigorous economic expansion will continue throughout the first half of 1973. Others think that a slowing will occur in the second half of the year, and some believe that the turning point will be delayed until 1974. Estimates of the growth in GNP range from 9 to 10 percent annually, with the real increase being from 5 to 7 percent.

Consumer spending, especially for automobiles and durables, is described as vigorous in most areas of the District. Retail sales in California, for example, are thought to be running 10 percent above last year's level. Plant and equipment expenditures are rising in most areas. Spending is increasing for pollution-control equipment as well as for expansion of productive capacity.

Overall construction activity shows no signs of slowdown, although a decline is expected in the second half of the year. One director attributes this strength largely to commercial construction. He estimates that this type of construction accounts for 25 percent of the increase in completions in the San Francisco Bay area and for 15 percent in southern California, compared with 8 percent nationally. Part of the recent jump in California building permits is ascribed to attempts to start projects before new environmental controls take effect. Whether commercial building activity will be sustained is not certain; one large bank expects a substantial decline in commercial construction in the San Francisco area because of aerospace and government cutbacks. Several directors also expect a significant slowdown in residential construction by midyear. Contrary to most observers, some directors think that the building mix will shift more to apartments, and away from single-family residences.

Inflation is viewed as a serious problem by many directors. There is some doubt about the effectiveness of Phase III, especially in restraining large wage increases in upcoming major union-contract negotiations. Some directors urge a more restrictive fiscal policy as a means of reducing the burdens on monetary policy.

A few directors feel that international conditions are causing considerable uncertainty and disrupting trade patterns. Most directors expressed little, if any, concern over the recent devaluation of the dollar and believe that it should help stimulate exports.

Agricultural prospects are viewed as favorable for most crops, and reportedly have contributed to higher farm investment expenditures and a strong demand for land. Feeder cattle prices are at record highs. High prices have encouraged heavier plantings of wheat, potatoes, and feed grains, but lower prices are expected by some directors later this year if export demand should fall.

Bankers generally report strong loan demand, both by businesses and consumers. Although a few report deposit runoffs and rising loan-deposit ratios, most bankers think they can meet their customers' loan demands without experiencing major liquidity problems. One bank estimates a 13 percent increase in its business loans for the year, but also expects a late-year slowdown in real estate and consumer loans. Interest rates are expected to be higher, with short-term rates rising the most. The higher rates paid on time and savings accounts may not be matched by higher lending rates, and therefore several bankers expect a profit squeeze.