Little change has occurred in the economic outlook of our directors from the previous month. Inflation is the major policy concern. Existing levels of activity are expected to be maintained, with little real growth until the third quarter. Business expenditure on plant and equipment is a major source of strength, but expansion efforts are hampered by shortages. Consumer spending appears to be off somewhat, but there has been a recovery in car sales. Agricultural prospects are excellent throughout the District. Despite record interest rates, there has been little impact on borrowers' demand and banks continue to be selective in making loans.

Businesses continue heavy spending to expand plant and equipment, as pressures on capacity and build-up of orders show little sign of easing. Delays in shipments and shortages are a common problem that is affecting both expansion and current production. Businesses are attempting to protect themselves against the uncertainties of obtaining needed supplies by building up inventories whenever possible. Plastics, basic petrochemicals, steel, and electrical goods are all subject to delays in shipments. Inflation causes additional uncertainty, and contract prices are being quoted as "those existing at time of delivery."

Some of the large California banks report slower consumer spending. The growth of retail spending has continued but at a slower pace, in part because inflation is making consumers more careful. Automobile sales have been recovering, and sales are at higher levels in most areas. Sales of standard-sized cars are better, and some directors report that sales of foreign compact cars are off now that the gasoline shortages have eased. Higher prices on these cars is another factor in their weaker sales. Foreign luxury car sales, in contrast, are being maintained.

Several directors are concerned about a deterioration in consumer credit and a rise in personal bankruptcies. In one case, a bank president in southern California feels that a similar weakness exists in some major businesses that are continuing to receive "unbelievable" lines of credit from competing banks.

Residential construction shows little sign of recovery, although one large California bank expects modest gains in the months ahead. Nonresidential building, in contrast, reflects heavy investment spending. Activity is high, but the completion of many projects is being hampered by structural steel shortages. A director cites the case of a building requiring 1,300 tons of structural steel, of which reasonable delivery exists for only 500 tons. In some regions, strikes by construction workers might also disrupt building activity. In southern California, a director described several major projects which are being delayed by new environmental controls.

In forest products, lumber prices are lower, but demand for pulp and paper remains good. Producers in this industry also report that supply shortages are hampering production. Agricultural prospects appear to be excellent in all parts of the District. Weather conditions, with few exceptions, have been favorable, and farmers expect good crops with satisfactory prices. Farmers are continuing to expand acreage and to upgrade their equipment, in part to offset labor shortages.

Record interest rates, according to the replies from commercial bankers, have not had any significant impact on loan demand, except perhaps in construction finance. Borrowers are willing to pay going rates and either try to pass the cost on or accept temporary reductions in profits. The problem for borrowers is availability, not prices. Banks are generally more restrictive and more careful in accepting new customers. Business demand is directed toward inventory build-up as well as expansion. Consumer loans show more variation among banks, but credit-card borrowing is continuing to increase.

Borrowing is heavy in agricultural districts, both to finance new construction by food processors and to expand crop production. Additional borrowing needs reflect demands by fertilizer and equipment dealers for cash payment. Dealers in such states as Washington, Idaho, and Utah are ceasing to carry their customers over the growing season. Higher interest rates are not restraining agricultural loan demand.

Inflation remains the major concern of our directors. Opinion is somewhat divided, but a majority think the rate of inflation will become less during the rest of the year. Yet, several directors are worried about the size of future wage settlements and expansionary tax cuts which may stimulate even more price rises.