The economic situation in the Twelfth District has changed little from the previous month. Unemployment has increased somewhat, but the overall level of output is still rising. Business capital expenditures remain an important source of demand, and agricultural prospects for the coming crop year are excellent. The greatest weaknesses are in consumer durables, automobiles, and residential housing. Gasoline shortages are causing problems and creating uncertainty, but the economic effects so far are limited.

Consumer retail spending is steady, although there are some indications of slowing in February. Sales of durables are lower, and this reduction in spending is matched by increased savings flows to banks. Sales of standard-sized automobiles continue to be weak. Because of gasoline shortages, the tourist centers, such as Disneyland, have had significant drops in business in February.

The strongest sectors are business capital spending and agriculture. Aerospace activity is strong in the Pacific Northwest, where Boeing continues to attract new orders, but weaker in southern California. Industrial output is being hampered by shortages in steel products and petrochemicals. The petroleum shortage has had a minor effect except for those industries closely tied to automobile usage and the availability of gasoline supplies. Recreational-vehicle and mobile-home producers have had to cut production.

Agricultural prospects are good throughout the District. In western Washington, the weather has been excellent and farmers are increasing planted acreage by bringing marginal land into cultivation. A similar situation exists in California, Idaho, and Utah where farmers are optimistic and attempting to increase production. The demand for new agricultural equipment is very strong, and dealers are having difficulties in getting deliveries. Fuel shortages may also cause problems. Generally, farmers expect continued high prices, and wheat producers are hoping to receive $4 to $5 per bushel for this year's crop.

Residential construction activity is still falling and, although one director notes a slight improvement in housing sales, there seems little expectation of an immediate change in this situation. Nonresidential construction, reflecting the efforts of business to expand capacity, is still strong.

The consensus of our directors is that there will be a slight downturn in economic activity in the first half of this year followed by a recovery. Only a few think there will be a serious recession, even though there is uncertainty over the effects of the fuel shortage. Inflation is regarded as the major problem, and little moderation in price rises is expected.

In banking, credit demands by business remain strong, although shifts in relative yields have caused some shift of borrowing into commercial paper. Real estate loan demand is weak in all regions of the District, but some recovery is expected by some bankers in the second half of the year.

Consumer borrowing has declined with the largest drop occurring in automobile loans. Several bankers report an increase in delinquencies in consumer credit. Others think that losses on problem automobile loans will begin to increase, because of unemployment and the lower resale value of standard-sized cars. On the other hand, the unwillingness of consumers to increase their indebtedness is matched by their greater savings. Both banks and savings and loan associations are experiencing heavy inflows of savings. For other classes of deposits there has been little change.

Bankers expect a continued decline in short-term rates at least until midyear. The lower limit for short-term rates would be in the 5 to 5 1/2 percent range. The most common forecast of the level of the prime rate is that it will fall to
7 1/2 percent, and a few bankers think that the prime rate might even go down to 7 percent. Real estate loans will probably fall to 8 percent. The continued inflation expected for this year will, in the view of most bankers, prevent any substantial fall in the long-term rates.