In discussing current economic and credit conditions at the May 9, 1974, meeting of our Board, the directors expressed opinions on inventory positions in their own industries, expected business loan demand, status of shortages of supplies and materials, and overall price trends.

Directors, in the retail field, believe inventories to be increasing. largely in the big-ticket items such as furniture and appliances, but think a sizable portion of the increase can be accounted for by price changes as opposed to large increases in numbers of units. The retail business generally has remained fairly strong although there has been some leveling in sales. It was pointed out that goods to be offered for sale in the next 90 days will be at higher prices, and it remains to be seen what consumers' reactions to such prices will be. In looking at the southwestern part of the United States, generally the opinion expressed was that increase in sales are about even with the increase in inflation. The cost of maintaining inventories has increased substantially with higher interest rates, and there is somewhat of a squeeze on profits. Most retailers appear to be holding their inventories a little lower than usual in order to avoid committing too far in advance.

On production, continued shortages of supplies and materials in certain areas are causing disruptions. Business is very active in energy-related fields. While there have been increases in the quantities of units produced, the large dollar figures are accounted for in considerable measure by inflation. New price increases will be a real factor in how well business fares over the coming months. All directors anticipate further price increases and referred to the fact that prices of a number of items, such as heavy equipment, manufactured goods, and steel products, are set at the time of delivery, rather than at the time of ordering. Concern also was expressed with the ability to finance large projects in the energy field.

The bank directors reported that business loan demand at commercial banks is continuing quite heavy in this part of the country, particularly with large national companies calling upon previous commitments. It is expected that such business loan demand will continue quite strong. There is evidence of disintermediation as deposits are trending downward and money is going directly into high yield investments.

There were differences of opinion as to whether interest rates have topped out and whether there will be a sharp decline in interest rates this year. Most of the directors do not expect significant declines in interest rates in the near future. It was recognized that if interest rates are not effective in dampening loan demand, the alternative will be greater restriction on the availability of credit. The principal problem here, of course, is to avoid a credit crunch.

Home-building in Texas is being hampered by tightening mortgage markets. A survey of leading savings and loan associations in the state revealed that most, suffered sizable deposit losses in April. For example, the two largest savings associations in Houston lost in excess of $1 million each during the month. Many large accounts, those in excess of $100,000, were withdrawn and were reported to have been mostly reinvested in Treasury bills. But lenders feel that the current round of disintermediation has been less severe than the loss of deposits following the implementation of wild card CD's last summer.

Nevertheless, recent deposit losses are proving difficult to offset from other sources. The secondary mortgage market is currently described by those surveyed as a "buyers market." In addition, the Federal Home Loan Bank of Little Rock, which has jurisdiction in the Southwest, is maintaining a restrictive policy stance. The variable rate on advances was raised on April 30 from 9-1/2 percent to 10 percent, which is equal to the usury ceiling in Texas on primary mortgage loans. Also, by regulation, advances cannot be made to cover the loss of CD's in excess of $100,000. Therefore, savings institutions in the state that are losing these large deposits are now looking elsewhere for funds.

Savings and loan associations across the state are responding to losses of deposits by raising rates and cutting back sharply on loans and commitments. During the last two weeks of April many raised their prime mortgage rates on conventional loans to 9 percent from 8-1/2 percent. Most of the lenders interviewed felt mortgage rates will go higher, probably reaching 9-1/4 percent by mid-May.

Mortgage lenders report home buyers are much less sensitive to the recent rise in mortgage rates than they were when rates moved up at the end of last summer. Buyers generally expect housing prices will continue to climb rapidly, and waiting until mortgage rates decline is no longer viewed as a means of reducing the total cost of a house. However, the president of a large savings and loan association in Texas points out that borrower resistance to rising mortgage rates stiffens as rates approach whole numbers, and he predicts many borrowers will shy away, at least temporarily, from the 9 percent rate. The most noticeable impact of tightening mortgage markets is that lending institutions are making more conservative estimates of the value of homes and are cutting back on the size of individual mortgage commitments.