Our directors report that the present economic expansion remains strong in the twelfth reserve district, with major growth indicators in most district states running ahead of the national average. Inflation remains the major economic concern: Some directors advocate more restrictive fiscal policy and stronger Phase 3 price controls; others believe that price pressures will ease, especially for agricultural and timber products, in the second half of the year. Bankers expect further increases in short-term interest rates, but they foresee no serious liquidity problems. A number of bankers commented on distortions introduced into financial markets by the CID's efforts to control the prime rate. General expectations are for continued strong growth with rising prices.

Consumer and business investment expenditures are reported to be high in all district states, and to be providing the main impetus for high overall growth rates in the West. Growth is especially strong in California and in the Pacific Northwest. In Oregon, the usual seasonal increase in unemployment did not develop this year, and the unemployment rate is below that for the Nation as a whole. Prospects for the Puget Sound area of Washington are excellent. Boeing Aircraft is increasing production, and payrolls are growing at Washington's defense facilities. Local agriculture, timber production and port activity also are experiencing an excellent year. Consumer spending is reported to be setting new records with department store sales in some localities 10 to 15 percent above last year's levels. Automobile sales also are high and would be still higher if dealer inventories were larger.

Construction activity in the district still shows no signs of decline. Recent high levels of residential and nonresidential building are being maintained, with apartment construction being the only area of weakness reported. A manufacturer of builders' equipment reports difficulty in meeting current demand. However, another director thinks that recent cutbacks in government spending and subsidies will slow down construction, especially construction of low-income housing, dams, and flood control projects.

Bankers report that loan demand by both businesses and consumers is very strong. No serious liquidity problems are expected, though many banks have been forced to sell short-term securities and bid up short-term CD rates to avoid a liquidity squeeze. Some bankers are concerned about the prospect of interest rate controls, and about the possible instigation of a two-tier prime rate system. The latter is seen as the first step toward a complex system of selective credit controls. Higher interest rates paid on time deposits are expected to squeeze earnings, because loan rates are not expected to rise enough to offset these costs.

The major short-run policy concern of our directors is the control of inflation, although a majority of them believe that price increases will moderate in the second half of the year, with increased agricultural production being an important element in the adjustment. Two directors reported that increased acreage will lower grain prices, and other directors think that meat prices also will fall as the result of increased supplies. Similarly, a director in Oregon forecasts that timber prices will begin to fall in mid-year, and by the end of 1973 market prices will be significantly lower.

A minority of directors see no slowing of price inflation, and are especially worried about coming wage settlements. One described Phase 3 as "a failure" and feels Phase 2 was ended too soon. These directors advocate the imposition of stronger controls, and feel that a tax increase also is needed.

Only two directors singled out international conditions as a major source of concern.