Little change in the overall level of economic activity is expected by our directors. In their view, inflation will remain the number one policy problem. Manufacturing is generally at capacity levels, but shortages continue to hamper output. Consumer spending is described as steady to cautious. Residential housing activity is very weak, and this weakness is contributing to a slowdown in the lumber industry. The agricultural outlook is good. Banks face heavy loan demand, and some classes of borrowers are experiencing difficulties in raising funds. Our directors do not expect that there will be much real growth in GNP during the second half of the year. They are very concerned with inflation, and some think cost-push pressures are increasing. Business investment expenditures are heavy. Consumer spending is variously described as cautious or stable. Department store sales appear to be good, and automobile sales continue to show a recovery although considerable inventories of small cars have accumulated. Except for housing, no major weaknesses are apparent.

Manufacturing activity is very strong in most District states. Shortages and slow deliveries, especially of steel and chemicals, are causing production difficulties. Heavy equipment producers report large order back-logs, and Boeing's activity is helping to strengthen the Seattle economy. Strikes which had been causing disruption have been settled in many areas, for example, Portland and Salt Lake City, but they continue in some industries in Idaho, Washington and Southern California.

Nonresidential construction is maintaining its recent pace despite some strikes and shortages of structural steel. Some construction wage settlements were very high, and the resulting wage costs are expected to weaken construction activity in the future. Residential housing is still weak with little sign of recovery, and multiple construction is even weaker. In the Portland metropolitan area, multiple units in the first half of the year were down 63.2 percent over the same period a year ago, and single-family houses were down 33.5 percent. Lack of housing activity has in turn contributed to falling lumber demand. Lumber production has declined in the Pacific Northwest, and some mill closings are expected. In contrast, pulp and paper and packaging materials are continuing to keep that part of the forest products industry at or near capacity production.

The Seattle-Tacoma-area economy is sustained by aerospace, agriculture, and pulp and paper industries. The Alaska pipeline development is also stimulating port activity. In western Washington, the Spokane world's fair has stimulated local construction and tourism, and the region's agricultural crop prospects are excellent. Except for lumber, the Oregon economy is experiencing a good year, particularly in agriculture and manufacturing. Agriculture shows some weakness in Idaho and Utah, where cattle production is more relatively important, but producers of potatoes and other crops in irrigated areas expect large crops. Agricultural processors are expanding capacity, and mining activity also contributes to the strength of the local economy. California's overall level of growth is expected to be somewhat above the national average. Like most other District states, its agricultural outlook, except for cattle, is good. Business activity, although hampered somewhat by strikes, should remain high. Tourism in the state appears to be recovering.

Banks report that commercial loan demand remains strong, and consumer and real estate loans have been growing modestly. The real estate demand at banks reflects the reduced lending capacity of savings and loan associations. Consumer-type savings deposits are not showing much growth, and the larger banks have had to bid for CDs in the money market.

High interest rates had some impact on credit demands. Some projects have been postponed, but many firms have turned to bank lines in order to avoid long-term market issues at this time. Issues are being postponed because long-term rates are expected to be somewhat lower next year. Capacity expansion is being financed in many cases by internal funds and in a few instances from either foreign customers or through Euro-dollar loans. High rates have hurt those industries which ordinarily rely upon the money market or other short-term sources for a large proportion of their funds, for example, finance companies, leasing companies, and auto dealers.

Public utilities are experiencing particular difficulties. A Washington power company held back from marketing a new long-term issue and has been relying upon bank debit, but Pacific Northwest Bell went to the market and received a 8.90 percent rate. Consolidated Edison's problems, in the view of some utilities' management, have made all utilities' issues more difficult to float. One utility applied to the SEC for an exemption to sell an issue to underwriters on a negotiated basis rather than to use competitive bidding.