In the Tenth District, concern remains high over the pace of inflation and the near-term prospects for any improvement, based on a telephone survey of a number of purchasing managers. Respondents expressed a sense of frustration at current policies to deal with inflation, but most were ambivalent at the usefulness or desirability of an approach involving controls.* In contrast, the agricultural sector was marked by increased concern over the likelihood of declining farm prices in the months ahead.

The moderate improvement in District economic activity reported in the last Red Book continues to be confirmed by reports from directors and District bankers, although business loan demand has weakened further. At the same time, some loss of strength in deposit flows has been noted in recent weeks and expectations of some disintermediation are not uncommon.

A telephone survey of a sample of purchasing managers elicited the view that there had been little change in the pace of inflation. In fact, a few, such as relatively large users of steel and steel products and rubber users, indicated that there had been some quickening of the pace.

One firm, a large purchaser of chemicals, did report that, for the first time in several years, two successive quarters have gone by with no renegotiation of prices on large annual contracts. However, other chemical purchasers indicated that there was no abatement in the rate of price increases for chemicals. For these firms, most recent increases in cost of materials stemmed primarily from higher freight charges. A number of other firms also cited higher freight charges as the principal reason for increased prices to them. Most of the purchasing managers queried said that their firms would try to pass higher materials costs on to consumers. However, one did indicate that they hoped to absorb some of the higher costs of materials by selling more high-margin items.

In the course of their remarks dealing with price trends, the purchasing managers expressed a sense of frustration at current policies to deal with inflation. However, when asked about controls, most were ambivalent at the usefulness or desirability of such an approach. Though one respondent said that he would favor a price freeze and a strict review of all wages, and others were in favor of some form of incomes policy, most purchasing managers were wary of controls. Their major objection was that any system of price-wage controls would undoubtedly require, in their opinion, a massive addition to government bureaucracy. Also, some indicated that past experience illustrated that controls had loopholes and served only to postpone wage and price changes. Even among those who indicated that they would not like to see wage and price controls used at this time, there was little confidence expressed that present economic policies would be able to contain or roll back inflationary forces.

Recent developments in the agricultural sector of the economy tend to confirm earlier reports in the Red Book about the likelihood of declining farm prices in the months ahead. At the same time, farm equipment business in the District is reported as quite soft. The prospects for record production levels of corn, grain sorghum, and wheat point to a substantial drop in grain prices this fall. In this connection, two directors referred to the fact that corn prices already have fallen sharply. While such developments might serve to dim income prospects for crop farmers, lower feed costs would benefit the livestock industry. With improved feeding margins, feeder cattle prices may spurt upward by yearend. If this encourages producers to carry their animals to heavier slaughter weights, and to expand breeding herds, slaughter prices may well fall somewhat below projected levels for next spring and the rest of 1972. Thus, in the year ahead, it is conceivable that farm prices could serve as a source of stability in the overall wholesale price index.

Deposit flows into Tenth District banks have not been as strong in recent weeks as in the first half of the year. This is true both for demand deposits and consumer-type time and savings deposits. However, net inflows of large CD's have strengthened somewhat at several banks. Larger banks (weekly reporting) in the Tenth District experienced a net decline in consumer-type time and savings deposits in July, although those bankers contacted did not seem to feel that the situation was as bad as might have been expected. The reason most frequently cited for declining deposits was increased Treasury bill rates, although some also detected an increased tendency to draw on savings to finance purchases. District bankers apparently are expecting some disintermediation to occur in the next few months. The contact at one large bank indicated that his bank has a large volume of consumer-type CD's maturing in September, and, under certain conditions, they could experience a large outflow.

Residential mortgage and construction loan activity at District banks continues strong. In addition, consumer installment loans, such as for home remodeling purposes and for automobiles, are showing further steady growth. Aside from residential construction loans, however, the commercial and industrial loan picture appears to be rather spotty. In fact, both recent data and discussions with District bankers suggest that business loan demand may have weakened further in recent weeks.

*The telephone survey of purchasing managers was conducted prior to President Nixon's August 15 speech on economic policy changes.