Economic activity in the Twelfth District shows continued strength. Inflation remains the main policy concern of our directors, but rising interest rates are expected by some directors to cause additional problems. Business investment expenditures remain strong, reinforced by efforts to build up inventories. Consumer spending is high, and with the exception of autos, sales of durables are good. Banks face strong loan demand, particularly for business loans. The majority of our directors see little sign of any slowing in economic activity after the pause caused by energy shortages in the first quarter. Business spending to expand capacity is a major source of strength, but expansion efforts are being hindered by material shortages and slow deliveries. Shortages are reported by most of our non-banking directors and few expect any major improvement in the supply situation during the next six months. Steel and other metals, chemicals and plastics are the materials which are most difficult to obtain. Consumer spending is good throughout the District for nondurables and durables, with the exception of autos. Although auto sales are still weak, they have been recovering. Sales of full-sized cars are increasing, in part because of the effects of manufacturers' sales incentives programs. Some consumer reaction against high prices is reported. In California, milk consumption has fallen by 10 percent after a 13 percent price increase. Consumer demand for credit is described as strong at most banks, but it is accompanied by rising delinquencies. One large Los Angeles bank reported its delinquencies were at an eleven-year high.

Expenditures on tourism are lower than last year. Concern exists in such states as Oregon as to the impact of travel of possible gasoline shortages this summer. Spokane, because of the opening of its World's Fair, expects to attract large numbers of tourists with favorable effects on the local economy. The weakest sector in this District remains residential housing. After a low point in the first quarter, housing starts have increased but this recovery is threatened, in the view of some directors, by high interest rates. Commercial construction, while much stronger than the residential sector, is hampered by materials shortages in steel, construction equipment, and builders' hardware. The timber industry is experiencing mixed trends. Pulp and paper mills are working at full capacity, but there has been a weakening in lumber and plywood. In Oregon, the closing of several plywood plants has been reported. The president of one lumber company feels that high interest rates which are causing problems for this industry will also precipitate a turndown of the general economy within the next three to four months.

Agricultural prospects are generally reported as excellent, and farmers are attempting to expand acreage in production. In Idaho farmers are uncertain as to which crops offer the best prospects, but surveys indicate they are shifting to potatoes and grain and away from such crops as beets. Shortages of fertilizers persist, but acceptable substitutes are being used. Agricultural equipment is in strong demand and buyers face delays for weeks before receiving delivery. Banks are experiencing a strong loan demand, particularly by business. The business loan demand is being felt by both large= and medium-sized banks. Much of the demand is to finance inventory accumulation in anticipation of higher prices or to avoid future shortages. Additional demand is for capacity expansion. More banks are facing liquidity pressures and have become more selective in lending or have imposed loan ceilings. In Idaho, business loans are being curtailed for another reason. The state usury laws set a 10 percent ceiling on loans to proprietorships and partnerships, and this is below the rate paid on Federal funds. Another factor in the heavy business borrowing, according to one bank, is speculation that long-term rates will fall, and therefore businesses are willing to borrow at high short-term rates in order to refinance at lower rates later in the year. The existing high rates are viewed by some bankers as hurting small businessmen and residential housing, but the consensus is that rates will begin to decline.