Our Directors have mixed views on the prospects for a recession in 1974. Some expect a slower, though still not satisfactory, rate of growth, but others expect a mild recession. Inflation is expected to be less severe in 1974. A new source of uncertainty is the impact of fuel shortages on employment and production. Bankers report less demand for some classes of loans and interest rates are somewhat lower.

Although the general level of economic activity remains high in this District, and many of our Directors expect a continuation of growth at a somewhat lower rate, other Directors think there will be a mild recession in 1974. Weakness is now apparent in consumer durable expenditures, and residential housing construction remains weak. A further complication is the energy shortage which is beginning to create significant problems in some states such as Oregon and Washington. Layoffs, caused by fuel shortages, are likely to be more common later this winter. In contrast, outlook is for continued strength in business investment expenditures and exports.

The labor market in most District states is nearly fully employed, with the exception of Washington where the unemployment rate is still above 7 percent. In most states, unemployment is highest among unskilled workers. Banks report no shortage of applicants, including college graduates, for entry and training positions. In particular, there is a surplus of applicants with graduate training. Despite reports of shortages of skilled workers, there is no indication that lack of labor is holding up production; the principal bottlenecks in industry are caused by lack of capacity and materials. There are, however, some industries where layoffs have occurred because of lack of demand. Lockheed has recently laid off production workers in its southern California plants. Generally, the unemployment picture in this District has not changed very much in the past six months.

Agricultural prospects remain excellent. Farmers are maintaining heavy expenditures for new equipment and for consumer durables. In most areas the demand for farm land has jumped substantially, and in California new irrigated farm land is being brought into production in response to high agricultural prices. Farm income in the District is expected to climb in 1974.

In construction, non-residential building remains very strong, but residential construction continues to fall. The decline in housing activity had caused lower lumber and plywood prices, and producers had expected to cut back production this winter0 However, fears of shortage of fuel and glues for plywood has caused a resurgence of demand by buyers who are attempting to build up inventories.

Except in agricultural areas, consumer spending on durables and automobiles has fallen off. Spending on nondurables is still growing and many, but not all, retailers expect excellent Christmas sales. Demand for automobiles has weakened with large domestic automobiles experiencing the greatest declines.

Demand for compact cars, both foreign and domestic, is still satisfactory. Many Directors are worried about a possible energy crisis this winter. The energy shortage is likely to be most severe in the Pacific Northwest where a hydro-electric power shortage exists. If serious oil and gasoline shortages develop, then production cutbacks would occur. Reductions in oil imports might also create further shortages of chemical fertilizers.

Many banks report less demand for loans but there is considerable variation among banks as to the specific categories affected. A large Oregon bank reports a decline in consumer credit to finance durable but an increase in general consumer credit, especially through its credit-card lending. Agricultural lending is high at some banks, but at others, increased farm income has resulted in less borrowing. In Utah, a softening in demand for mortgages is noted, but a large California bank reports an increased demand for real estate loans. Business loan demand is lower at several California and Oregon banks. One bank explains the decline as reflecting a shift to financing through other sources such as commercial paper. Other banks expect a recovery in business loan demand in the next few months. In contrast, loan demand at other banks in California is still strong, with the funds being used to finance inventories.

Interest rates have eased off, but they are expected to be firmer in the months ahead.