Although second quarter District manufacturing sales were up substantially from a year earlier, respondents to our latest Industrial Expectations Survey foresee some slowing in sales growth. Recent price increases and uncertainties about the economy have not dampened District consumers enthusiasm to spend, and District retailers expect business to remain good. Despite high interest rates and Phase IV regulations, Bank directors report that District businessmen have not altered their investment plans. However, high interest rates and a lack of mortgage funds are expected to curb District residential construction.

According to results of our third quarter Industrial Expectations Survey, District manufacturing sales continue to expand at a brisk pace. Following an extremely large first quarter advance of 21.8 percent, District manufacturing sales in the second quarter were up 15.7 percent from a year earlier. These large gains undoubtedly reflect substantial price increases and are not considered by survey respondents to be sustainable. Looking ahead to the third and fourth quarters, District manufacturing sales are expected to surpass year- earlier levels by 12.9 and 9.8 percent, respectively. By the first quarter of 1974 sales growth is expected to slow to a 6.9 percent rate. In recent surveys, however, actual sales gains have generally exceeded manufacturers' earlier expectations.

Bank directors report that District consumers are continuing to spend at a brisk pace, and District retailers are optimistic about their sales prospects. A Twin Cities area director associated with the retail trade industry indicates that his firm's sales were good in August and that he expects business to continue strong for some time. Another director reveals that his area's merchants foresee good sales gains, providing merchandise is available. Industrial construction activity is stimulating retail spending in Michigan's Upper Peninsula, and directors from District agricultural regions, where farm income is up markedly, report sizable advances in retail spending. Another director, however, foresees some slowing in the Minneapolis/St. Paul metropolitan area's economy and looks for future retail sales gains to be smaller than they have been recently. One director believes that recent gains in consumer spending stem from consumers' desires to avoid future price increases.

According to directors' responses, record high interest rates and Phase IV regulations have not caused District businessmen to alter their plant and equipment expenditure plans. One director, for example, says that high interest rates have not affected his firm's plans. Another director indicates that high interest rates have deterred some of his area's businessmen, but most are going ahead with their plans. No slowdown in northeastern Minnesota's economy was foreseen, and businessmen there have not changed their spending plans. One director, however, thinks that capital spending in real terms in the Minneapolis/ St. Paul metropolitan area will not change much between 1973 and 1974.

A lack of mortgage funds and high interest rates are expected to dampen District home building, but several directors foresee no letup in nonresidential construction. In the Minneapolis/St. Paul area, where Minnesota's 8 percent usury law has significantly contributed to a drying up of mortgage funds, a decline in housing starts is foreseen. Many directors report that mortgage funds remain available in their areas but interest rates have risen, which has discouraged many potential home buyers. A South Dakota director indicates that the decline in farm loan demand in his area is providing mortgage funds.