According to directors' responses, the combination of scarce mortgage funds and high interest rates has seriously curbed District home building; the directors do not believe recent government efforts to stimulate this industry will significantly benefit the District. So far, high interest rates have not reduced loan demand at District commercial banks, and retail sales have been quite strong. Several directors expect business to remain good this summer, but others are less optimistic. District automobile sales have held up quite well, and the outlook for this summer's tourist business is quite optimistic. Directors indicated that it's still difficult to get farm machinery, but demand may ease later this year or in 1975. Our latest quarterly industrial expectations survey indicates that District manufacturing activity should expand through the rest of 1974.

Directors commented that recent increases in interest rates and a lack of mortgage funds have slowed District home building. A Montana director said that his area's home building had come to a "grinding halt," and a Minneapolis-St. Paul area banker indicated that there are signs of accelerating weakness in the home building industry. Three directors reported no shortage of mortgage funds, but one of them felt that lenders were being more selective in granting home loans. The directors stated that the recent $10.3-billion Federal program to bolster the housing industry would not significantly affect the District. Despite weaknesses cited in residential construction, directors thought that total construction activity would remain strong, with increases in industrial and commercial construction, as well as heavy construction, offsetting declines in residential construction. In Montana, however, strikes have currently stopped construction activity.

Several directors noted that high interest rates have not deterred District businessmen from borrowing and that loan demand is strong at District banks. For example, loan officers at a major Minneapolis-St. Paul area bank foresee no slowdown in loan demand in the near future. One director, however, indicated that businessmen are becoming very sensitive to the cost of working capital. Furthermore, some small and marginal businesses are having difficulty in obtaining funds, and some businessmen may have to forego new projects. Some directors suspected that their area banks may be encountering difficulty in accommodating current loan demand. In one area, District businesses are straining to obtain funds and are leaning on their customers to pay their bills; in another, businessmen have encountered difficulties in collecting accounts receivable.

District retailers have enjoyed a good year so far, and several directors expect business to remain quite good. A director associated with the retail trade industry said that his business, which has been strong all year, has even improved recently. But a Twin Cities area banker looked for slack in consumer spending during the last half of 1974. He also mentioned that although retail spending has been relatively better in Minneapolis-St. Paul than in the nation, the unit volume of goods sold in the Twin Cities has changed very little from a year ago. Reinforcing this observation, one director reported a moderation in retail sales growth in his area and indicated that businessmen are not as optimistic as they were two to three months ago. Furthermore, a southern Minnesota director indicated that concern over recent agricultural price declines may dampen consumer spending in his area this summer.

Automobiles have been selling somewhat faster in the District than in the nation in recent months; however, May sales in the Minneapolis-St. Paul metropolitan area were down markedly. Declines were attributed to consumer resistance to higher car prices. Conversely, consumer interest in recreational vehicles has been renewed. The outlook for the District's tourist business this summer is generally quite optimistic. However, a director in the upper peninsula of Michigan indicated that concern with the availability of gasoline has clouded the outlook for tourism in his area.

Generally, the directors felt it was hard to get farm machinery in the District and, since many dealers have large order backlogs, the situation probably would not improve this year. However, the demand may be overstated if farmers are ordering equipment from more than one dealer. Also, the prospects of lower agricultural prices and farm incomes this year may reduce the demand for farm machinery in 1975. A director from western South Dakota said that because of a lack of moisture and concern over agricultural prices, the major implement dealer in his area expects business may be off as much as 33 percent from last year.

Our second quarter industrial expectations survey shows continued expansion in District manufacturing activity. After rising 12.7 percent from a year earlier in the first quarter, District manufacturing sales are expected to increase 15.9 percent in the second quarter, 14.2 percent in the third quarter, and 11.5 percent in the fourth quarter. With an upward revision in the durable goods manufacturing sales forecast, the second and third quarter sales expectations are higher than those made in February. Nonelectric and electric machinery manufacturers—the District's major durable industries—look for substantial sales gains, while District food processors—the major nondurable goods producers—expect very little growth during the last half.