District businesses, according to bank directors' responses to this month's Redbook questions, are very concerned about the economic outlook. Reports indicate that District businessmen have cut back on operations to avoid unwanted inventories and that supply shortages have disappeared with the slackening pace of business activity. Also, District businessmen are becoming more cautious in their plant and equipment spending plans. Nevertheless, District manufacturers and retailers continue to expect their sales to increase. Despite some pickup in savings inflows, mortgage money continues very tight, and no immediate improvement in District housing construction is foreseen.

The feeling was expressed that businesses are more pessimistic about the economy than several weeks ago. Bank directors reported that supply shortages have disappeared and that many District businessmen are concerned about accumulating unwanted inventories. Thirty-four per cent of the manufacturers responding to our quarterly industrial expectations survey taken in November considered their inventories excessive in light of anticipated sales. Last August, 25 per cent expressed this view, and 12 months ago only 12 per cent held this opinion. A number of large Twin Cities area manufacturers have either laid off workers or reduced working hours to bring production and sales into line. Also, many businessmen are experiencing faster delivery times than in recent months. A director associated with the construction industry stated that most supply shortages in his industry have literally disappeared. As a result, he foresees the prices of these materials remaining at their current levels with the possibility of a decline next year. Another director reported that prices in some commodity lines are beginning to weaken and expressed concern about inventory accumulation at the retail level. A director associated with the gas and electric utilities industries, however, reports that shortages have not disappeared in these industries. Nevertheless, no director expressed any concern about the adequacy of his area's winter fuel supplies.

The prevailing attitudes about the business situation have also caused District businessmen to alter their plant and equipment spending plans. One director stated that businessmen are now much more conservative in their capital spending plans than they were six months ago. In November, 11 per cent of our quarterly industrial expectations survey respondents considered their plant and equipment inadequate in light of anticipated sales as contrasted to 34 per cent 12 months earlier. A Twin Cities area banker indicated that several large firms have recently reviewed their capital spending plans-some for the second time. A western Montana director indicated that no capital spending is anticipated in his state's depressed timber industry. A western South Dakota director stated that the cost and availability of capital, rather than the current business outlook, has been the important factor in curbing investment spending. One director foresees both financing difficulties and lower estimated future demand causing capital spending reductions by gas and electric utilities. However, he believes some of these utilities may have overstated that extent of their cutbacks.

Despite the concern about the business outlook, manufacturers and retailers expect their sales to continue to advance in dollar terms. After increasing 22.0 per cent from a year earlier in the third quarter, respondents to our latest quarterly industrial expectations survey look for their sales to expand 17.9 per cent in the fourth quarter. Looking ahead to 1975, sales are anticipated to increase 15.5 per cent in the first quarter and 12. 9 per cent in the second quarter. Price increases undoubtedly account for a large part of these anticipated sales increases. The strength in District manufacturing sales continues to be centered primarily in the electric and nonelectric machinery industries where respondents look for sizable sales gains. However, in the lumber and wood products and stone, clay, and glass industries, which are closely associated with construction, year-to-year sales declines are expected. Most major retailers in the Twin Cities area have been pleased with their sales since Thanksgiving and are hopeful that their business will remain good for the remainder of the Christmas season.

Although several directors reported some pickup in savings inflows at their area's banks and thrift institutions, no immediate improvement in housing construction is foreseen. The recent increases in savings inflows have been modest, and in the Twin Cities area, S&Ls have used these funds for paying off indebtedness rather than for expanding loans. Consequently, loan commitments have not increased, and in general, no easing has occurred in mortgage terms and interest rates. Once mortgage money becomes available, however, several directors anticipate a pickup in their areas' housing construction. In the Twin Cities metropolitan area the housing vacancy rate is at a low level, and a North Dakota director reported a shortage of homes in his area.