In early May the directors were asked about the extent of business inventory accumulation and the outlook for inflation and unemployment. They indicated that businessmen in the Ninth District have been accumulating inventories for at least two different reasons: apparently some businessmen hope to avoid shortages and future price increases by building inventories and others, facing production bottlenecks due to shortages in certain industries, have been caught involuntarily with extra stocks. Acknowledging considerable economic uncertainty, Bank directors nevertheless did not expect either inflation or District unemployment to grow more serious in the months ahead. A few directors even expected inflationary pressures to lessen in the second half. Bankers responding to our second quarter survey of agricultural credit conditions, however, were less optimistic about the outlook for farm income and anticipate some increase in loan demand.

Several directors reported inventory building to avoid shortages and future price increases. One director explained that retailers, in some instances, are paying more to replace an item than they sold it for and that this is encouraging inventory accumulation to avoid price increases. A Twin Cities' banker indicated, however, that high interest rates are "beginning to get to" businessmen, dampening their desire to add to inventories. One director said that the administration could prevent unwanted inventory accumulation with a policy statement that wage and price controls will not be reimposed.

Another kind of inventory accumulation has taken place involuntarily as shortages of key materials and components result in production bottlenecks. Directors from western South Dakota and Montana indicated that although some inventory accumulation may have occurred in their areas, businessmen are primarily concerned about obtaining sufficient merchandise to satisfy customer demands.

Generally, the directors looked for smaller price increases in the second half of 1974. A director associated with agriculture pointed to the decline in livestock and grain prices-a decline which should not be reversed in the near future-as a sign that food price increases will moderate. This opinion was reinforced by a director connected with the food processing industry who expected an improved supply situation and somewhat reduced production costs in the second half of this year. Also, several directors looked for fuel prices to level off later this year.

Despite these developments which should lessen inflation, directors' comments indicated that many pressures for increased prices may remain. Increased labor costs during the second half of 1974, one director stated, would place upward pressure on prices. Another director looked for some relief from inflationary pressures during the third and fourth quarters but expected prices to be up substantially in the second quarter with the lifting of wage price controls. He indicated that some of his firm's material costs recently rose as much as 30 percent. A Twin Cities' area banker foresees some increase in the price of bank services with the lifting of wage price controls. One director reported that residents in his area appear more pessimistic about inflation than they were a month ago, and another director indicated that he could discern no trend in his area toward less inflation.

Reflecting their views that the District's economy should remain quite strong in 1974, bank directors looked for an increase in District employment this spring and for little or no increase in unemployment. A Twin Cities' banker stated, for example, that although he expects the national unemployment rate to approach 6 percent later this year, the District's unemployment rate should remain below this level due to continued strength in both the District's agricultural and manufacturing sectors. Directors did not look for any significant skilled labor shortages. A western South Dakota director, however, indicated that uncertainty over the outlook for his area's tourist business could restrict summer hiring.

Concern over the cattle industry has made many respondents to our April survey of agricultural credit conditions less optimistic about the future of the farm sector than they were in January. While 70 percent of the bankers surveyed reported first quarter farm earnings would exceed 1973 levels, Districtwide, 24 percent of the bankers expected short-term loan demand to be greater than normal in the second quarter, up from 6 percent in the January survey. Although the high cost of farm inputs was expected to bolster loan demand throughout the District, much of this increase should come from the slumping livestock industry. Farmers in the grain-producing areas were apparently still flush with cash from last year's crops, and loan demand in these areas was light.