ECONOMIC

machinery and ferrous and nonferrous metals. Investment growth in nondurablemanufacturing, except for petroleum refining, and in the commercialsector is expected to be comparatively weak. The sluggishness in theconstruction of commercial and office buildings should persist through 1977owing to overbuilding earlier in the decade.HOUSING STARTS AND RESIDENTIAL INVESTMENTThe housing recovery, which accelerated in the third and fourth quartersof last year, should continue in 1977 and be an important factor in the growthof final demand. Total housing starts are expected to average between 1.7and 1.8 million units this year with approximately 1.3 million single-unitstarts. Since this represents a significant increase over last year, and becauselast year's increase was concentrated in the second half of the year, real investmentin residential construction is expected to rise by 15 percent in 1977.The major sources of strength for housing in 1977 will be continued growthof real disposable income, continued strong flows of funds for mortgagecredit, slightly lower mortgage rates, and some stimulus from programs ofthe U.S. Department of Housing and Urban Development (HUD).An important influence on residential construction is the availability andcost of long-term funds for mortgages. Short-term interest rates have declinedduring the recovery and savings flows to thrift institutions are likelyto remain strong, making funds for mortgages readily available. Moreoverthe decline in secondary-market mortgage rates in the latter half of 1976has begun to bring primary-market mortgage rates down slightly.Until the latter half of 1976 the recovery in multifamily housing hadbeen relatively weak. Overbuilding in 1972 and 1973 and continued lowprofitability on rental housing had evidently been restraining the constructionof multiple-dwelling units. Vacancy rates for rental housing havefinally dropped, however, and are now below the 6 percent average of 1975.These factors, coupled with the HUD Section 8 lower income housingassistance program and the $5 billion in Government National MortgageAssociation (GNMA) loan commitments during 1976, should support therecent recovery in the multifamily sector.INVENTORY INVESTMENTThe dramatic $21-billion shift from real inventory liquidation in 1975 topositive accumulation in 1976 was a major reason for the high rate of GNPgrowth last year. This year we expect continued growth in inventory investmentas demand advances, but the growth will be slower than last year. Inreal terms, inventory investment should increase only by about $2 to $4 billionfrom 1976 to 1977. In view of some apparently undesired inventory builduplast year, as well as uncertainty about the outlook for 1977, businesses canbe expected to proceed cautiously in building new stocks.38