There are some signs of weakening in retail sales and a softening in the manufacturing sector. Capital goods industries are still doing well, but automotive-related business has been hit hard. Large firms appear to be weathering the effects of the energy situation better than smaller firms. Prospects for the steel industry remain good, despite the downturn in autos and housing.

Department store sales in the District seem to have been a mixed situation during the holiday season. One of our directors, with a national retailing firm, reported that sales were poor in the District relative to the nation. There was strong demand for luxury items, which was attributed largely to anticipatory buying, as a hedge against inflation or, possibly, as an investment. The same director also indicated that he expects additional upward pressures on retail prices in the months ahead as a result of higher priced goods in the early stages of the retail pipeline. Finally, the senior management of the firm is less optimistic about the economic outlook than they were last fall, and they are reexamining their capital expenditure plans for 1974.

In contrast, the president of a large department store in Cleveland reported that holiday sales were good, although he noted some decline in luxury goods. Credit sales were stronger than expected because of a highly publicized deferred billing plan promoted by the firm. The post-Christmas season, however, has been marked by a larger volume of merchandise returns than last year. A vigorous promotion to interest customers will be necessary in the coming months, according to the executive, because of the rising number of layoffs taking place in firms caused by the energy situation.

Our monthly (December) survey of District manufacturers indicates further slowing in the pace of manufacturing activity and continued upward pressures on prices. There was a significant reduction in the proportion of firms reporting gains in new orders, and a continued slowdown in the rate of inventory accumulation, employment, and hours. In addition, business expectations for January are not particularly encouraging. The diffusion index for prices paid reached a record high for the third consecutive month.

Automotive-related business has dropped sharply in many firms, and in recent weeks there have been widespread reports of layoffs among auto producers and suppliers in the District. According to an economist with a firm heavily dependent on the motor vehicle industry, cyclical forces are expected to account for the bulk of the decline in new car sales this year. As early as last August, this economist had forecast an 8 percent decline in new car sales for 1974. He expects that the petroleum situation will reduce sales by another 3 percent.

Purchasing agents in the Cleveland area report that virtually everything they buy is in short supply and that delivery time continues to grow longer. The lead times on orders now being placed go well into 1974 and 1975. More than half of the buyers say that three to six months are needed for delivery of production materials and a year or more for capital equipment.

Machine tool builders in the area report that incoming new orders are still strong and that a heavy volume of inquiries indicated strength in future orders. Although a few firms report some cancellations as a result of the energy situation, the cancellation rate is viewed as normal with the current length of lead times. The high level of backlogs assures capacity operations in the industry well into 1974, even if new orders should decline in the months ahead. One of our directors in the machine tool business corroborates the strength in the industry and, he adds, the coal companies are buying everything they can get their hands on.

A leading producer of casting equipment in Cleveland says the foundry business is so strong these days that the firm has a year's backlog on the books-three times the normal level.

Economists from three major steel firms in the District all report some order cancellations from the automotive industry. Two companies, however, say the decline in steel orders is less than the cutback in auto production. According to the steel industry economists, the auto firms usually draw down their steel inventories when output is reduced, which reinforces the decline in steel orders. The auto companies do not appear to be following their normal steel-inventory policy, thus far, however.

The slack created by the auto firms is being absorbed by other steel-using industries. Demand for steel products other than sheets remains greater than the steel firms' ability to produce. The steel companies are continuing to operate at peak capacity with full order books. Some of their concern over possible fuel shortages has been alleviated since last month. It now appears that the steel companies will receive enough fuel in 1974 to enable them to produce as much steel as last year. The 5.5 million to 6 million tons of steel shipped from mill inventories last year, but not available this year, will just about be offset by reduced steel demand for autos, furniture, and appliances. Moreover, imports are expected to be hit before domestic steel by any decline in demand, because the price differential is so large.