Business activity in the District remains strong, although there are some signs of slowing. Apart from the weakening in housing and consumer durables, the slowing is probably more a reflection of capacity limitations and a tight supply situation in raw materials and fuels than the result of a decline in underlying demand. Our Directors and businessmen and economists in the District are gravely concerned over the energy situation and its implications for the economy in 1974.

Output in the District's manufacturing sector continues to rise, but signs of slowing in the upward momentum are accumulating. Our monthly survey of manufacturers shows a significant decline in the proportion of firms reporting gains in new orders and backlogs in recent months. September was the poorest month of the year, and early returns for October suggest further weakening occurred. There has also been some slowdown in the rate of inventory accumulation. Delivery time, however, continues to lengthen, compounding the problem of shortages faced by virtually every firm. (The October report of Cleveland purchasing agents questioned how there could be a recession next year in view of the fact that very little inventory is available and deliveries are taking three to six months or more on practically everything.) There was a surge in price increases during October, as the largest proportion of firms in the ten-year history of our survey reported paying higher prices.

Our industrial Directors, particularly those supplying the capital goods market, generally report strong business conditions, although some softening in the consumer area was noted. The Directors are becoming increasingly concerned over problems of inflation, distortions caused by wage-price controls, public confidence, shortages of raw materials, lead times growing worse and—of greatest concern—the energy situation. Some are worried that energy shortages could cause industrial layoffs next year and lead to a recession.

One of the largest refineries in the District is experiencing difficulty in obtaining crude oil supplies. It must purchase 85% of its crude oil, and a significant share of that comes from the Mideast. The company is already allocating supplies to its gasoline stations and oil customers. A financial executive of the company informed us that refinery runs will be cut 20% in December and 30% or more in January if the Arab oil embargo continues.

A major concern of industrial firms in the area is that the energy crisis will precipitate layoffs, especially if natural gas is diverted to home heating. Previously, firms were able to switch to oil when gas supplies were curtailed; now they are uncertain if they can obtain oil.

The rubber industry in Akron reports shortages of raw materials as well as energy problems common to other industries. The petrochemical industry, which supplies the rubber industry with much of its raw materials, has been cut back in its oil allocations, and thus creating problems for the rubber producers.

The steel industry is still operating at peak capacity and is continuing to allocate orders. One major firm just opened its order books for first quarter delivery, and they expect to be filled by December. (As in the past, this procedure of opening and closing order books will cause a distortion in the monthly series on manufacturers' new orders for durable goods.) Fuel shortages are likely to curtail steel output in the months ahead, according to economists from three large steel firms. Cutback in either oil or natural gas will affect their output. In addition, one major steel firm is short on coal and coke. One economist said many of its smaller steel customers have been unable to accumulate inventories and have been forced to operate hand-to-mouth. Thus, any decline in steel output would adversely affect general manufacturing operations.