Our directors report more pessimism and uncertainty about the economy. High interest rates and inflation are singled out as major concerns. The weakest sectors are residential housing and industries such as forest products which are dependent upon housing. Lack of demand is beginning to affect retail sales in some areas, but agriculture, manufacturing, and mining remain strong. Banks face heavy demands for credit, and they are being very selective in making loans.

Our directors expect little recovery in general activity during the rest of 1974, and they report that there is much more pessimism and uncertainty, particularly about prospects for controlling inflation. High interest rates are thought to be slowing business investment spending and further depressing the housing industry. With a few exceptions, inventory holdings do not seem to be excessive, but many firms are building up stocks to avoid delivery delays and shortages.

Residential construction, both for single units and apartments, shows no sign of recovery. This lack of activity is causing more shutdowns by lumber and plywood mills in the Pacific Northwest. The only buoyant sector in the forest product industry is pulp and paper. Business capital spending is being adversely affected by the high cost of funds, so that expenditures are climbing more slowly. Nevertheless, manufacturers in sectors such as steel and electronics, stimulated by large order backlogs, are expanding capacity. Nonresidential construction remains high, but shortages of structural steel are causing problems for contractors. Mining production, especially copper and coal, is running above last year's levels.

The general slowing of the economy is affecting retail sales. For example, a large Portland department store reports sales declines for the past three weeks. So far, retail inventories have been kept in line by tight controls, and firms do not regard them as excessive. Sales of durable items are mixed; freezers are selling well, but demand is weaker for other large-ticket items.

Automobile sales are improving. Purchases of 1974 models have been stimulated by the announcement of higher prices for 1975. Although sales are still below those of a year ago, they are much higher then in recent months. Because production and dealer allocations had been cut back earlier this year, the recent jump in sales has kept domestic car inventories to reasonable levels. In contrast, inventories of imported cars are quite high. The jump in current sales is likely to be reversed soon. Sales of 1975 models are likely to suffer from buyer resistance to the recently announced auto price increases.

Agriculture throughout most of the District continues to benefit from good crops and prices, with the principal exception being livestock. Oregon had a record winter wheat crop, and shippers are facing a local shortage of storage facilities. The livestock picture is described as unsettled. Feedlot producers are cutting back their operations because of higher costs, and they are bringing cattle to market earlier. Consequently, prices will be weaker, but later in the year higher prices are likely. One element of uncertainty in the livestock situation is the size of the grain harvest and its effects on feed prices.

Banks in the Twelfth District are still facing very strong loan demand, and they are following restrictive policies in allocating available funds. Loans are being limited to productive uses; and in many cases, only current customers' applications are being approved. Several large banks reported that the growth of business borrowing is slowing, due to a combination of high interest rates and restrictive loan policies. Consumer lending is stronger than would be expected, considering the reduced level of consumer durable sales. Problems for borrowers are probably most serious in real estate because saving institutions have been losing funds and commercial banks are not able to meet requests. Interest rates are now reaching 10 1/2 percent, and downpayments of 20 percent or higher are being required. Savings and loan associations in California suffered extremely heavy deposit runoffs in August as their customers have been shifting to market instruments bearing higher yields. Commercial banks also have been experiencing withdrawals from savings accounts, and they have had to rely primarily upon the money markets for funds to meet loan demands.