Bank directors expressed dissatisfaction with Phase III, but their views varied on how to contend with the economy's current inflationary pressures. Gasoline rationing has begun in the district, and businessmen fear fuel shortages could hamper district economic activity. Although some overbuilding exists in the Minneapolis/St. Paul metropolitan area, bank directors generally indicated that in their areas the outlook for residential and nonresidential construction was favorable. District agricultural loan demand was strong in the first quarter and is expected to remain vigorous in the second quarter.

Bank directors expressed various views on how to control the inflationary pressures currently confronting the economy. Several directors advocated eliminating the investment tax credit, while others favored retaining it. A variable investment tax credit, which could be adjusted in response to changing business conditions, was favored by some directors. A South Dakota director indicated that his area's farm implement dealers would oppose eliminating the investment tax credit which has significantly boosted their business. Another opinion was that abolishing the investment tax credit would not dampen consumer demand and would have a delayed effect on the economy. Bank directors felt that an increase in the personal income tax was not politically feasible, and one indicated that his area's businessmen believed increased taxes would only result in increased government spending. A cutback in government expenditures was advocated by several directors, and one director spoke out for tighter monetary policy. Allowing interest rates to reach their own level, one director stated, would help dampen economic activity. Directors generally felt Phase III had not been effective and favored firmer controls. Although one director welcomed the Administration's recent move to strengthen Phase III, he felt it may not be sufficient to curb inflationary pressures.

Although no director reported any disruption in business activity due to fuel shortages, businessmen are concerned about a lack of gasoline dampening district economic activity. Two major oil companies have begun rationing gasoline at the retail level in Minnesota, and in March 104 Minnesota independent gasoline stations were forced to close because of gasoline shortages. Also, two oil companies plan to stop servicing Minnesota customers. Furthermore, several large Minnesota fuel users have reported difficulties obtaining fuel supplies, and Minnesota's state civil defense department estimated that Minnesota's gasoline supplies may be about 10 percent short of anticipated needs by the end of 1973. Another director reported gasoline rationing in South Dakota and indicated dealers were taking steps to prohibit gasoline hoarding. Also, dealers have stopped giving trade discounts which has noticeably increased fuel costs. A North Dakota director disclosed concern over fuel shortages in his state and revealed his firm recently had trouble purchasing diesel fuel. Directors from Minnesota, North Dakota, and South Dakota indicated gasoline shortages could curb their areas' tourist business this summer. Montana directors and a director from the upper peninsula of Michigan, on the other hand, revealed that gasoline shortages are not yet a problem in their areas.

With the exception of the Minneapolis/St. Paul metropolitan area and Duluth, the outlook for residential and nonresidential construction in the district is quite favorable. In the Minneapolis/St. Paul area, overbuilding exists in both residential and nonresidential markets. Single-family constructions however, has remained quite strong but could be curtailed by rising prices. Two directors located on the fringe of the Minneapolis/St. Paul metropolitan area indicated strong construction activity in their areas. In Duluth, a director disclosed a lack of new construction projects, and some construction material shortages. A Montana director reported strong construction activity throughout his state but indicated that the Administration's impounding of highway funds has hurt highway construction. Many directors indicated that rising prices had not discouraged new home purchases, but one director revealed that his area's residents were turning to prefabricated homes in order to hold down new home prices.

Our second-quarter Agricultural Credit Conditions Survey showed that the demand for farm loans increased substantially during the first quarter and is expected to remain strong in the second quarter. Stronger first-quarter loan demand was due to greater spending by farmers and to difficulties in selling wheat in currently clogged marketing channels. An inability to market wheat postponed income and forced farmers to borrow to meet current operating expenses. Greater spending was primarily associated with this year's planned increased crop plantings and a general expansion in farm operations. District farmers' outlays for machinery, land, and cattle were up noticeably. Higher prices for cattle, fertilizer, seed, and equipment also raised agricultural borrowing this spring. Survey respondents look for these same factors to result in strong second-quarter agricultural loan demand, especially as some items, such as fuel and fertilizer, become increasingly costly.