The Twelfth District economy led by consumer spending continues to maintain a strong rate of expansion. Many of our Directors now feel that this expansion will not continue through the rest of the year and a slowing may occur in the fourth quarter. The price freeze is viewed as a temporary measure in terms of restraining inflation but recent Federal Reserve actions are expected to restrain the economy. In addition, the price freeze may cause serious shortages, especially of processed agricultural products, if it is maintained beyond 60 days.

Consumer spending is reported to be strong in all parts of the District, particularly for consumer durables and for automobiles. Industrial production similarly is maintaining output, and wood products is the only industry where some signs of weakness are present. In Washington and Idaho, mills are still operating at full capacity, but in Oregon some mills are now operating at 25 to 50 percent below capacity. Aerospace activity continues to be a major source of strength in Washington and southern California.

Construction activity, except for residences, is still vigorous, and shortages of skilled tradesmen continued to be reported. Residential construction is weaker in some areas—for example, Washington. Directors in California and Utah report construction of new housing has not turned down, but a decline is expected later this year, as construction may soon be affected by reduced credit availability. Savings and loan associations have less funds, and some banks report that they are rationing real estate loans because the demand cannot otherwise be met at the rates set under the price freeze.

The gasoline shortage is continuing to cause some concern in tourism-oriented areas. In Idaho, an oil distributor describes the marketing situation as confused. Increased numbers of visitors are reported in some areas but others have experienced less activity. Oregon manufacturers of recreational vehicles blame reduced orders on uncertainty about gasoline availability. Despite the local problems, the gasoline shortages have not caused serious difficulties in this District.

In general, our directors feel that the current strength of the economy will not be maintained into 1974, and a slowdown is expected before the end of the year or earlier. Recent actions by the Federal Reserve System are expected to have a major restrictive influence according to some directors. The directors think consumer expenditures on durables will be lower. Other factors tending to cause uncertainty and to slow down the economy are the international situation, the Watergate hearings and prospective energy shortages. Several directors advocate more restrictive fiscal policy to reduce some of the burdens on monetary policy.

Local businessmen and farmers are unhappy with the price freeze. It is seen as having only transitory effects in restraining inflation, but it is also beginning to cause dislocations and shortages which would become serious if the freeze is kept beyond 60 days. The major problems are centered in the processing of agricultural products. Feed lot operators and poultry processors are being squeezed by the higher cost of grain, and at the same time mill operators are reported to be cutting production of many types of feed. In reaction to the freeze, millers in Oregon have canceled contracts to furnish flour under government contracts. At present prices, they cannot afford to mill flour. Similar pressures stemming from high feed prices are tending to cut milk and egg production. Livestock producers in Washington have begun to sell hogs and cows ordinarily kept for breeding purposes. A shortage of hay in Oregon and Washington is compounding the difficulties of local cattle producers. Food processors report difficulties in obtaining semi-processed foods, which are being exported at higher prices than domestic buyers are willing to pay.

In nonagricultural industries, some manufacturers report difficulties in obtaining supplies. Suppliers appear to be postponing commitments to fill orders at present prices, in expectation of higher prices at the end of the present price freeze. Retailers do not appear to be experiencing major difficulties as yet. A few chains were caught during a sale period when the freeze was imposed and they are locked into below-normal prices.