The prospects for the District economy are not as promising as earlier in the year. A price-cost squeeze is still hurting the District livestock industry, and dry weather is expected to reduce crop yields markedly. District consumer spending has softened recently, and no substantial sales pickup is foreseen. Tourist business is good in the eastern part of the District, but is sluggish in the western states. Savings inflows to District financial institutions have slowed as large investors have sought higher yielding investment opportunities. District loan demand is expected to remain strong at both rural and urban banks.

District livestock producers have sustained substantial losses and are expected to do so until the price-cost situation improves. Bankers report much refinancing of feeder-cattle loans. However, District livestock producers appear to be getting the credit they need, and the Bank is not aware of any bankruptcies in this industry in the District. The pricing problem in the cattle industry is rapidly reverberating from the feedlot owner to cow-calf operators, many of whom are still holding their 1973 calves. For the cow-calf rancher, the full impact of the high grain prices will probably be felt later this fall. A Montana director indicated that there are currently no buyers for feeder cattle in his area because buyers are holding back, given current uncertainties about feed and cattle prices.

Although the situation was undoubtedly improved by recent rains, dry weather is expected to lessen District crop yields noticeably. Within the District, South Dakota is experiencing the most severe drought conditions, and a lack of moisture is also a serious problem in North Dakota and Montana. With the exception of the southwestern corner, crop yields in Minnesota, on the other hand, should be quite good.

The prospect of reduced crop yields points toward some softening in District consumer spending, especially in the District's rural areas. However, if farm commodity prices remain high, business should be quite good in the areas where crops are satisfactory. Directors generally looked for some slowdown in retail sales growth throughout the District in the second half of 1974, and a North Dakota director described people in his area as "scared". In fact, a director's remarks indicate that District retail spending has already slowed. One director stated his area's retailers are not breaking their old records as in the past, and two other directors reported a softening in large appliance and furniture sales. Also, an upper peninsula of Michigan director states his area's consumers were being more cautious in their spending and slower in paying their bills. In Montana, on the other hand, a director indicated consumer spending has held up quite well.

The tourist situation in the District is mixed. Directors from Minnesota and the upper peninsula report good tourist business, but directors from the western states indicated that their tourist business is slow. Total attendance at the Minneapolis Aquatennial, for example, was as good, if not better, than any prior festival year. A Montana director, on the other hand, stated that the tourist business in his state was down from 5 to 20 percent in various areas and would have been worse if it were not for Expo in Spokane.

Although savings inflows have slowed, directors generally reported that their area's financial institutions were holding their own. One director indicated that much of the "hot" money left his bank last year and the time deposits his bank currently is attracting are not as sensitive to interest rate movements. Another director stated that savings deposits have continued to increase at his bank. Nevertheless, most directors reported that large savers have withdrawn funds from their area's financial institutions and invested these funds in higher yielding alternatives.

Respondents to our latest agricultural credit conditions survey reported that no letup is expected in the strong loan demand experienced by District agricultural banks in the second quarter. Eighteen percent of the respondents reduced or refused a loan in the second quarter, and 20 percent expect to have problems meeting loan requests in the next three months. Factors contributing to this continued strong loan demand are a reduction in the availability of merchant credit, increased prices of farm inputs, the continued need to refinance feeder-cattle loans, and the expected need to finance wheat inventories. Also, the absence of Government payments this summer has increased loan demand: previously Government funds were used to cover mid-year operating expenses and pay off bank loans. Loan demand is also very strong at urban banks, and a twin cities banker reported that his bank is allocating loan funds among customers and has a flat prohibition against commitments to other than traditional customers. This bank looks for its loan demand to continue very high in the months ahead.