In general, our directors report that firms at the moment are being only moderately adversely affected by higher petroleum prices. They are more concerned about a recession in 1974 reducing business activity than they are about shortages of oil. Shortages of supplies other than oil appear more critical to current production and are causing rising inventories of almost completed products.

The New England states appear to have enough heating oil to meet the needs of residences and industry. At the moment, residual oil requirements of utilities are being met by the allocation programs. Petrochemicals for the plastics industry and resins are still very short, and shortages here appear to have been created or exacerbated by price controls. The newly announced allocation program on petrochemical feedstocks has made plastics manufacturers more hopeful, although temporary layoffs are continuing.

Our directors did note some adverse impact on their businesses arising from the energy situation. A director of a large conglomerate reports that his firm has closed down its recreational vehicle and large motor boat facilities. Sales of single-engine planes are also down. On the other hand, sailboat sales are up strongly, and twin-engine plane sales are good. An industrial supplier to the auto industry also reported lower sales and orders. Again, however, orders for industrial supplies for utilities, for chain saws, and for helicopters (used for offshore oil exploration) have skyrocketed as a result of the energy situation. Capital goods orders are reported, for the first time, to be tapering off, but order backlogs are so high that shipments in 1974 will continue at high levels.

Supply problems continue to hamper production. A director of a large manufacturing conglomerate reports that inventories of almost completed products, like airplanes and ovens, are piling up and cannot be shipped for lack of some small parts. This has already led to a 10 percent cut in employment because the conglomerate cannot keep people just standing around waiting for one part.

On balance, our directors see profits in 1974, varying from level with 1973 to down 15 percent.

Our Bank directors report that loan demand is firm. Interestingly, firm loan demand does not indicate good business conditions. A director from a large Boston bank reports that his bank's loan demand is being bolstered by firms building inventories of raw materials, like metals, whose supply they fear could be shut off in a manner similar to oil. Thus a mild form of hoarding is occurring. A New Hampshire bank director states that loan demand is strong because the recreational business is so weak that firms need operating capital.

A Boston bank director also reported that other bankers with whom he has spoken share his surprise that short-term rates have not yet come down. The financial community is beginning to question the Federal Reserve's commitment to an easier policy.

Our Bank directors report that demand for mortgages is very weak and home sales are down sharply. Consumer apprehensiveness is blamed for the rising stock of unsold homes. Mortgage rates have not yet come down but are expected imminently to begin slowly declining.

Although Professors Eckstein, Tobin, and Wallich were contacted this month, Wallich preferred not to give his policy views. Eckstein and Tobin agreed that the economic slowdown has been at least partly and perhaps primarily demand, rather than supply, determined. Tobin believes the supply situation is not so tight that substitution possibilities cannot be found. He was still distressed by the weak performance of the stock market. Both pointed out that weakness in the demand for housing and automobiles had been expected before the energy scare. Eckstein argued the economy's behavior will generate the feeling of a recession, whether or not a recession is officially declared. The unemployment rate, for example, is certain to be rising rapidly. The role of the monetary authorities, he stated, is to avoid compounding the recession. Eckstein's policy prescription is a 7 percent to 8 percent rate of monetary growth over the next six to nine months. He felt this target would be accompanied by a Federal funds rate in the 8 to 9 percent range in the first quarter and in the 7 to 8 percent range in the second quarter. This policy, according to Eckstein, would not be a very easy one in the current context. Specifically, with the amount of uncontrollable energy-related inflation the economy will experience and with the legacy of a year of modest money growth in a highly inflationary setting, the quantity of money available for output expansion would be quite modest. Tobin's policy prescription is a gradual reduction in the Federal funds rate to 8 percent. He believes the recent uncertainties have produced a shift into more liquid assets and that no harm would be done by creation of additional liquid assets.