Economic expansion throughout the Twelfth District continues to be paced by consumer spending and business fixed investment. Strong demand is keeping production near capacity in most industries, but investment expenditures appear to be directed more toward modernization of existing equipment than toward construction of new plants. In some cases, such as forest products, new capacity is not being added because of an expected turndown in demand later this year. Banks report strong loan demand and upward pressure on interest rates.

Consumer spending is maintaining the high levels established in the first quarter, but a few directors expect that spending for durables will be lower in the second half of the year. The other major source of demand is fixed investment by industry. Many industrial firms are not able to keep up with new orders, and the backlog of orders continues to grow. Aerospace and forest products are facing particularly strong demand. In Washington, Boeing continues to expand its work force due to increased orders, and the forest products industry is running at full capacity. Other industries operating at capacity include electronics, pollution-control equipment, and recreational vehicles.

In agriculture, increased production of most crops and livestock is expected, despite such local problems as lack of rain (eastern Oregon) and cold weather (Idaho). The wheat crop is expected to be near record. In the opinion of one director, world demand for exports, rather than domestic demand, will determine final wheat prices. Both grain and food crop production should be higher this year and prices somewhat lower, although weather conditions may adversely affect prices of individual crops. Current high prices should stimulate pork and poultry production and bring about lower prices this fall. On the other hand, it will take another year to increase the number of cattle, and two years to have greater numbers available for slaughter. None of our directors expects any major decline in beef prices this year.

Against this expansionary background, loan demand has been very strong, and has resulted in upward pressure on interest rates. Opinion is divided, however, whether large increases in long-term rates are likely. Generally, the commercial banks have been able to hold their deposits, and in some areas have even gained funds. However, they have had to rely heavily upon CDs with maturities under 90 days, and some bankers foresee difficulties in holding these funds if short-term rates continue to rise. Savings and loan associations, which have been unable to match market rates, apparently are losing deposits, and have raised their mortgage lending rates.

Our directors were asked to describe local industries facing capacity limitations and those that are making major additions to plants. The most commonly cited industry operating at capacity is the timber industry. Yet in this district, the industry is not building new plants. Lumber demand is expected to fall later this year in response to an expected slowing of construction; hence investment in forest products is being directed at modernization of existing plants and at installation of pollution-control equipment. Builders' hardware manufacturers are following a similar policy for much the same reason. On the other hand, capacity is being enlarged by such consumer-oriented businesses as manufacturers of mobile homes and recreational vehicles.

Insufficient capacity is not the only limitation on production in the Pacific northwest. Lack of rain has forced power rationing, causing the aluminum industry to cut production. A shortage of boxcars also has impeded shipments of timber to eastern markets. Pollution-control and other environmental factors are forcing heavier investment in some cases, but are also preventing other projects from being initiated.

On balance, the consensus is that expansion will continue through the rest of 1973, with the principal slowdown expected in construction. The major policy concern of our directors continues to be inflation control.