Businessmen and bankers in the Twelfth District expect little change in economic activity until later in 1971. Despite the easing of financial conditions through lower interest rates and the greater willingness of banks to lend, the demand for loans has not changed significantly. Business investment plans are cautious, and consumers, instead of increasing their spending, are increasing their saving. It is expected that activity in the housing market will increase in 1971, stimulated in part by the greater availability and lower price of mortgages.

Retail sales are not showing any signs of marked increase; in most areas they are proceeding at a moderate to slow pace. There had been a jump in sales during the ten days before Christmas, but this increase has not been sustained, and post-Christmas sales are described as disappointing. As a result, inventories are higher than desired and staffs are being reduced by some stores.

Automobile dealers in particular are finding that their sales are disappointing since 1971 models are not selling as well as expected. One factor, it seems, is that customers are reluctant to increase their indebtedness. Dealers have heavy inventories and some are complaining about manufacturers' pressures to build up stocks still more. A favorable factor is that lower interest rates have reduced the costs to dealers of carrying their inventories.

Business expectations are in line with consumer behavior. In general, businessmen are maintaining their current activities in line with their expectation of no immediate recovery in the economy. Business investment plans indicate that expenditures will be somewhat smaller than in recent years. A survey of anticipated expenditures for plant and equipment among Arizona companies found a definite shift toward caution. For 1971, only 37 percent of the firms reported they would have higher expenditures, while 35 percent reported lower spending plant. In contrast, the figures for the 1969 and 1970 surveys averaged 60 percent for increased outlays and 16 percent for lower expenditures. The Seattle-Tacoma area continues to report poor business prospects and one bank there describes local business loan demand as being at it lowest level in 24 months. A Southern California steel mill recently has made a sharp cut in its work force. In Arizona, a state which is otherwise prosperous, manufacturing employment is at its lowest level since June 1968.

The liberalized depreciation allowances, recently announced, are not expected to have any immediate impact on business spending. Most businessmen report that the change is too small to affect their decisions or that their investment plans are based on longer-run forecasts of the demand for their products.

There are some favorable trends in manufacturing. A large oil company reports that it is maintaining its planned investment in 1971 at the same $800-million record set in 1970. A major electronics firm in Oregon, which had previously announced a layoff of 1,000 employees, has reversed itself and, instead of a layoff, will only require each employee to take a 10-day, unpaid vacation before May 1. In the face of an expected increase in housing demand, building materials firms are expanding production and beginning to undertake new investment in plant. Timber mills are starting to increase output and rebuild inventories of certain product lines. Some mills which had been closed are being reopened.

Changes in housing demand are in line with these expectations. In Southern California, sales of houses are rising according to reports of local real estate firms. In Idaho and Utah, construction activity continues to expand. Overall, most of the strength has been in residential rather than nonresidential building.

Agriculture in the District has mixed trends. Fruit prices have held up well. Other crops have had large yields, but their prices are likely to fall as a result. There are also large stocks of poultry and beef on hand which make any substantial increase in livestock prices less likely.

Banks are intensifying their efforts to obtain good business loans, but no major increase is reported. Consumers seem to be willing to increase their installment debt and the counterpart of this is an increase in savings deposits. Banks have cut their interest rates on various classes of loans in line with market trends. Several major banks have stopped accepting 5 3/4 and 5 1/2 percent consumer-type savings certificates. The maximum is now 5 percent and reductions are becoming general. There are complaints of a profit squeeze by some bankers and they hope that Regulation Q ceilings will be lowered to facilitate the movement to lower rates on all savings accounts.