According to our directors, business conditions vary widely from continuing strength to considerable weakness. Materials shortages are widespread and are creating production bottlenecks. Concern that materials will be unavailable when needed has led to inventory accumulation, according to bank directors.

New orders are reported as very strong in machinery and equipment manufacturing, especially items dealing with oil exploration. Ship-building orders are also heavy because of the need to build new types of tankers to transport liquefied natural gas. One director commented that "business is better than the headlines."

Material shortages were mentioned by all the directors. One director commented that "anything you want takes extra time and effort to get". This director reports that purchasing agents have to look all over the world for even minor items in order to keep production going. Steel products—tubular pipes for oil drilling and sheet plates for ships—were among the many items cited as in short supply. Aluminum, metals, castings, plastics and semi-manufactured parts were also reported as being part of the "amazing conglomeration of shortages." As a result of the shortages, several directors reported that firms are building larger than needed inventories to keep a hedge on needed materials. Hoarding of raw materials is especially evident in imported goods,

One director noted that when price controls are lifted, the shortages disappear. He cited that resins had been unavailable from domestic sources at the controlled price (and were being bought previously in Mexico with their Ohio labeling still on them), but in the one week since resins have been decontrolled, they have become readily available—at twice their previous price. Other directors also expressed the belief that materials shortages have been created by producers who are either shipping goods abroad in order to import them at decontrolled prices or are diverting supplies to get them into the most expensive channels. The oil industry was mentioned as an example of the latter machinations.

Small business firms were particularly singled out as being hurt by these shortages. One director expects unemployment rates to rise to well over 10 percent in those areas of Connecticut where small manufacturing firms predominate. Gasoline shortages, he noted, will make labor mobility more difficult from the high unemployment areas. Unemployment rates rose in December in all the New England states, climbing to 7.3 percent (seasonally adjusted) in Massachusetts. A director from a Connecticut telephone company mentioned that due to the low level of residential and commercial construction in Connecticut, the company is considering going on a shorter workweek at the end of March, for the first time since the 1930s.

Another area of weakness is the recreational area. Ski areas have been hurt by lack of snow and the scare over gasoline shortages, although gasoline is reported as available in ski country. Manufacturers of recreational vehicles have also been hurt. Camper business is reported as "limping" by one director and the motor boat business is also slow, although sailboat sales are reported as "fantastic." General aviation aircraft backlogs were being reduced, one director noted.

There was a sharp split in the policy advice of the academic correspondents this month. To Dr. Shapiro, the main danger is that the Fed be "drawn off course [of 5 to 6 percent growth in money narrowly defined or 8 to 9 percent growth in money broadly defined] by political forces." He cited with approval the Chairman's statement that an oil shortage cannot be overcome by an excess of liquidity. He likened the present situation to the 1940 and 1945 experiences when supply constraints were binding in face of large increases in demand. To Professors Eckstein, Samuelson, and Tobin, the primary danger lies in an insufficiently expansionary policy. Eckstein was optimistic about a recovery by the fourth quarter but based his optimism on a 7 percent rate of monetary growth this year. A 5 percent growth rate would produce a substantial rise in interest rates in the second half of the year which the projected "tender" recovery could not survive.

Pointing to the weakness of nonagricultural final sales last quarter, Samuelson expected negative growth in both the first and second quarters. He has become less confident about the end of the oil boycott and feels the damage to auto sales will be irreversible. Restating his view that the Fed should not seek to roll back energy-related inflation, he advocated between now and April or May, an 8 percent rate of growth of money narrowly defined and a 10 percent rate for the broad definition. The risk of error, he argued, lies on the downside, Neither Samuelson nor Tobin found the decline in short rates too rapid. Tobin felt the Fed should not be afraid to accommodate the increase in liquidity demand which has occurred and should lower the Federal funds rate to the 7 1/2 to 8 percent range in the next policy period.