ECONOMIC

Last year's Report noted that investment held up quite well during therecession in those industries which faced capacity constraints in 1973. Inthe past year capacity growth in the paper, chemicals, and petroleum refiningindustries has been above 3 percent, reflecting substantial investmentin these industries over the past 2 years. In paper, however, the operatingrate is perhaps high enough that constraints on capacity for the mostrefined kinds of paper could occur in the next year. In iron and steel, anotherindustry of shortages in 1973, capacity has recently been growing at about 2percent annually, close to the long-term trend growth rate of steel usage.There was a slowing of investment last year by steelmakers, however, followingthe very sizable acceleration in 1975. Other industries are operatingconsiderably below capacity levels and shortages in 1977 are unlikely.INVENTORY INVESTMENTReal inventory investment in the national income and product accounts(NIPA) reflects the difference between aggregate production and deliveries.With real consumption expenditures growing strongly in the lasthalf of 1975 and the first quarter of 1976, and with completion of the massiveinventory adjustment of 1975, production increased very sharply in thefirst quarter of 1976 as firms moved to keep output in line with the anticipatedgrowth of final sales. With an only modest rise in total final sales,inventory investment in the first quarter was $10.4 billion, compared with adecline of $5.5 billion in the fourth quarter of 1975. The $15.9-billion swingin the first quarter of 1976 accounted for more than half of the 9.2 percentannual rate increase in gross national product in that quarter. Inventoryinvestment did not accelerate later in the year, since slower growth of retailsales gave rise to conservative orders and production policies in manybusinesses.The NIPA nonfarm business inventory-to-sales ratio stayed in the neighborhoodof 0.272 throughout last year. This was below the peak levels ofabout 0.300 at the trough of the recession but was still significantly abovethe approximately 0.250 levels of the 1972-73 period, a fact suggesting thatinventory accumulation will not accelerate sharply in the immediate future.The book value of manufacturers' work-in-process inventories, which wasnot rising at the beginning of the year, rose in the second half, reflectingthe moderately strong growth in producers' durable equipment.HOUSING AND RESIDENTIAL INVESTMENTThe 1976 recovery in residential investment reflected the recovery inhousing starts which began in 1975. Real residential investment grew at an18 percent annual rate in the first 3 quarters of 1976 and accelerated to a 37percent annual growth rate in the fourth quarter. Housing demand becameone of the most favorable developments during a period of general weaknessin the economy. A strong 11 percent increase in total housing starts in62