Energy shortages are beginning to cause considerable concern, but as yet the pace of economic activity continues to be strong. Retailers in most Districts anticipate good Christmas sales, and agricultural earnings continue to climb. Capital expenditures are another source of strength, and although considerable variation is reported for business investment plans for 1974, the prospects are that capital spending will remain high. Weaknesses are most apparent in residential housing and automobile sales.

The impact of petroleum shortages varies considerably from region to region, and from industry to industry. The prospective gasoline shortages are one cause of reduced demand for regular-size domestic automobiles which has resulted in layoffs in several Districts (Atlanta, Chicago, Kansas City and San Francisco). Sales of compact cars are excellent, and so, interestingly enough, are sales of luxury cars. Diesel fuel, in particular, appears to be in short supply and black markets for this fuel are reported to be developing in some areas. Other industries affected include petrochemical-based plastics, manufacturers of recreational vehicles, and plywood mills. Airlines are laying off employees in several Districts, and tourism-related manufacturers are being hurt according to reports from Minneapolis, Kansas City and San Francisco. Atlanta, in contrast, notes optimism about Florida's tourist business.

Shortages of natural gas are causing problems for the manufacturers who are forced to cut production or shift to high-priced fuels such as propane. Electrical shortages are not prevalent. New England, whose utilities rely relatively heavily on residual oil, appears to face the most serious problems and may have power blackouts this winter. In other areas, conditions have improved. The Pacific Northwest's power shortage has been relieved by heavy rainfall in November.

The view expressed in most Districts is that the uncertainty caused by the energy shortages is disrupting transportation and causing shortages. This is likely to slow economic activity in 1974. However, there is considerable variation in opinions as to the net impact. Some respondents do not think that the shortages will be so severe as to cut into expected capital expenditures or to cause serious layoffs, but others think a serious recession is likely. Directors in the Boston District seem to be most pessimistic in this regard.

As to the proper government response, opinion is divided between those favoring rationing and those wishing to rely upon voluntary reductions. In the St. Louis District, there is less concern about energy shortages and more concern about inflation and the effects of government price controls as a factor causing materials shortages. Similar views are noted by Cleveland.

Chicago, Philadelphia and New York Districts report little change in current investment plans. For example, Chicago describes capital goods manufacturers as being overwhelmed by orders, but St. Louis reports reductions in investment plans. Although there is some reluctance to project trends, there is considerable support for expecting continued heavy investment expenditures. Retail sales in most Districts are equal to or exceed last year's levels but retailers are more uncertain about 1974 and are more cautious about their spring orders. A survey by Richmond indicates 70 percent of its respondents expect a lower rate of economic activity.

High agricultural income is stimulating the heavy expenditures by farmers. Dallas reports harvests and plantings equal to or exceeding last year's schedule for all crops. On the other hand, cattlemen are more uncertain about beef markets. Prices have declined and supplies of beef for slaughter are abundant.

Residential construction is continuing to fall off and it is only being partially offset by commercial construction. Increases in flow of mortgage funds, reported in several Districts, may help but the prospect is for a continued decline.

Dallas reports that oil drilling has responded strongly to the incentives of higher prices and is at the maximum level for the existing availability of crews and rigs. But production from Texas fields is expected to decline because these fields are past their peak in production capacity.

In summary, despite local problems the economy is continuing to expand but uncertainty caused by worry about energy shortages may contribute to a revision of spending plans by businesses and consumers.