Although District business activity is currently stronger than in the nation, signs of weakness are emerging. The livestock industry's depressed condition combined with poor weather which has significantly cut crop production has made the prospects for farm income a primary concern. District retail sales so far this year have increased at faster rates than nationally, but retailers are uncertain about the future. However, District resort operators look for good business this winter. A lack of mortgage funds nationally has also hurt District homebuilding, but not as severely as in the nation. Business loan demand continues strong at District banks with no letup foreseen.

After increasing very sharply in 1973 and 1974 the outlook for District farm income is not very encouraging. Early frosts in September combined with a wet spring and a dry summer have significantly reduced District crop yields. Although higher prices will offset part of the production decline, gross receipts from the District's 1974 harvest will probably be down slightly from 1973's level. Gross receipts from District livestock sales are also expected to be down from a year ago. The marketing of livestock this year will not be off significantly but prices are down considerably from a year ago. This softening in gross farm income comes at a time when farmers' production costs have been rising rapidly. Consequently, District net farm income is expected to weaken considerably in the last half of 1974 and into 1975.

Relative gains in District retail sales have outpaced comparable increases in the nation so far this year, but retailers are concerned about the future. Much of the strength in District retail sales can be traced to large farm increases in 1973 and early 1974 which have spurred retail spending outside of the Minneapolis-St. Paul Metropolitan Area. Discussions with District retailers have revealed that sales this summer were good. However, most admitted that higher prices accounted for a major part of their recent sales gains. Our contacts reported good sales of apparel and home improvement items and declines in big ticket merchandise such as furniture and major appliances. Freezers and similar items are in great demand and in very short supply. District retailers are cautious in assessing their fourth quarter sales outlook and some fear was expressed that this year's short Christmas shopping season might cut into their business.

Automobile sales in July, August, and early September were exceptionally good, according to a survey of regional sales managers. Despite large sales in the last two months, cumulative sales for 1974 are still below those for 1973, however. On the other hand, truck sales continue to run well ahead of last year. The supplies of large luxury cars are very low in the District. Current inventories of smaller cars are greater than normal, but dealers say they are confident of selling them once the higher priced 1975 models are on the market. Automobile dealers are worried about the impact of the 1975 model prices on their sales and that current high sales of 1974 models might cut into their future sales.

District resorts reported a very good summer and look for business to remain good. An increase in business by local people and group vacationers this summer was noted by several resorts. They also reported that family groups stayed longer than in the past. With regard to their winter recreational business, resort owners are anticipating a very strong winter season and report that reservations are well ahead of last year's at this time.

Residential construction is off in the District but not as severely as in the nation. The number of housing units authorized in the District for the seven-month period ending in July was 9.5 percent lower than those for the same period a year ago, as compared to a 38.4 percent decline nationally. Savings inflows have been off at District thrift institutions, and mortgage lending has declined. Mortgage loans made by Minneapolis and St. Paul S&Ls in August were 41 percent below the August 1973 level. Interest rates and nonprice terms of mortgage loans made by Twin Cities financial institutions have stiffened during the past three months. Despite a substantial cutback in recent months, outstanding loan commitments at District S&Ls are at a high level due to the large volume of commitments made in early 1974 when savings inflows were unusually heavy and were expected to continue at a higher rate.

Business loan demand continues strong at District banks and no letup is foreseen. Discussions with the three largest banks in the Minneapolis/St. Paul area indicate that they consider their loan demand strong and foresee no change over the near term. Consequently, these banks are raising interest rates and tightening other terms and conditions on new commitments. The outlook for loan demand at District rural areas will be largely influenced by farm income developments. Because of lower net incomes, spending on capital items and consumer durables will fall, resulting in lower loan demand for such purposes. However, refinancing needs will increase to cover production costs not met by the year's income. In addition, feeder cattle loans will be soft for some time, but ranchers may demand more credit to cover holding their cattle over the winter months.