The majority of our Directors believe that monetary policies are not sufficiently restrictive to bring the inflation under control within a reasonable time frame. A sizable minority, however, are very concerned over the present high level of interest rates and the difficulties in obtaining financing for productive capital expenditures. They believe some form of credit allocation other than by higher rates will be necessary.

Nevertheless, most industrialists in the Eleventh District have not yet made significant revisions in their capital spending plans for 1974 in response to tight credit conditions, rising prices, and material shortages. The firms interviewed covered a wide range of industries and included companies financing capital expenditures wholly from internal funds as well as those heavily dependent on external sources. Corporate executives who are relying on debt financing said they are going ahead with needed improvements since they believe "higher interest rates are here to stay." There were no cases of stepped-up spending plans in anticipation of rising prices, or reports of project delays due to shortages of building materials. The majority of firms interviewed said capital expenditures for 1974 will be at roughly the same level as last year. However, big increases in spending are planned by the oil field machinery and public utility industries. Two large utilities in Texas, for example, are spending about 30 percent more this year on plant and equipment, despite the fact that both claim internal financing will account for only 40 percent of the total funds required.

Tight credit markets are having a substantial impact on the long term expenditures of small businesses in the District. Consultants to small businesses in Dallas and Houston report that capital expenditures by their clients are sharply lower. Many of these firms, heavily dependent on bank loans, are having difficulty obtaining financing. Moreover, when loans are available, the cost has been prohibitive. For the most part, smaller businesses have chosen to make do with their present equipment and facilities.

A survey of leading savings and loan associations in the state reveals that large deposit losses are continuing, resulting in further tightening of the mortgage market. The most pessimistic accounts come from Houston where the inventory of unsold new homes has climbed to 6-8 months' sales, as compared to the normal 2-3 months' sales. That city's two largest S&Ls have stopped accepting new commitments and are only making additional loans to cover outstanding commitments. Although the rate of net deposit outflow at these institutions slowed in June, managers say a resumption of loan activity is impossible until they experience a positive savings flow. A more representative response came from a financial holding company with affiliated savings and loan associations across the state, where lending activity is down "drastically" from the first of the year, but financing is still available at 9-1/2 percent—the prevailing rate in Texas on 80-percent conventional loans. The high offering rates necessary to attract deposits will hinder any substantial reduction in mortgage rates. For example, one lender reports he is becoming "locked in" at a minimum rate of 9 percent since most of his deposit inflows in recent months have been in the form of 7-1/2 percent certificates, and he estimates that a 1-1/2 percent margin is necessary to operate at a profit.

Depressed cattle prices are having a substantial impact on the ability of cattlemen to repay loans at banks in cattle feeding areas. A recent survey of such banks revealed that one-fourth of them were taking losses on loans for cattle feeding, but none were in any danger financially. These banks, with deposits ranging from $15 million to $30 million, described their losses as "big," "substantial," and "sizable."

Although the rest of the banks contacted reported no current losses on loans for cattle feeding, several expressed doubt as to how long they could continue under current market conditions without experiencing some losses. A very pessimistic outlook for the repayment of some working cattle loans was shared by most of the bankers interviewed. They felt that the most critical period for repayment of loans will be during the next several months. One banker anticipates that several banks that he is familiar with will be under severe financial stress by fall unless conditions change markedly.

The attitude of bankers toward their cattle feeding customers is generally accommodative. Most expressed a desire to stay with their established customers through the current depressed cattle market. However, one banker felt he would have increasing difficulty discounting loans made to cattle feeders because of the low equity positions of these feeders. All bankers interviewed indicated they were not "calling in" any loans but several have advised some customers to sell a portion of the cattle they now have on feed. A few bankers are also asking for additional collateral on old loans in anticipation of losses. Many loan officers are taking a very conservative attitude regarding new loans for placement of cattle on feed and will require much more stringent terms on these loans.