Construction spending fell again in July

updated 11:19 a.m. ET Sept. 4, 2007

WASHINGTON - Construction activity plunged in July by the biggest amount in six months as spending on homes fell for a record 17th straight month.

The Commerce Department reported Tuesday that construction spending dropped 0.4 percent in July, compared with June, the weakest showing since a 0.6 percent fall in January.

It was a bigger drop than economists had been expecting and underscored the continued drag the severe slump in housing is having on building activity.

Overall spending dropped to a seasonally adjusted annual rate of $1.169 trillion after having posted a 0.1 percent increase in June.

Housing activity fell by 1.4 percent, more than double the 0.6 percent decline in June, and has now declined for a record 17 straight months as home building suffers through its worst slump in 16 years.

Economists believe the downturn will get even more severe in coming months, reflecting the spreading problems in the mortgage markets. Rising delinquencies, especially by borrowers of subprime mortgages, are dumping more homes on an already glutted market. That is forcing builders to slash construction plans even further and offer a variety of incentives to move the homes they have already built.

Some economists believe that the downturn in housing may not bottom out until the middle of next year.

The rising mortgage delinquencies have roiled global financial markets over the past few weeks as investors worry about which big investment house or hedge fund will be the next to declare huge losses in the market for securities backed by mortgage debt.

The housing troubles and market turmoil have raised the risks of a recession, but many economists believe the Federal Reserve will begin cutting interest rates soon to give the economy a boost and keep the current expansion, now in its sixth year, from tumbling into a recession.

Federal Reserve Chairman Ben Bernanke, speaking on Friday to a conference in Wyoming, said the central bank was prepared to “act as needed to limit the adverse effects on the broader economy.” Many analysts are betting the Fed will start cutting rates at its next meeting on Sept. 18.

Bernanke said Fed policymakers will be paying “particularly close attention to the timeliest indicators, as well as indicators gleaned from our business and banking contacts around the country” to determine the future course of interest rates.

In other economic news Tuesday, the Institute for Supply Management said that its closely followed gauge of manufacturing activity rose at a slower pace in August compared to July. The index was up 52.9 in August compared to a reading of 53.8 in July.

The construction report showed that the weakness in housing was offset somewhat by strength in nonresidential building which rose by 0.4 percent in July to an all-time high of $346 billion at an annual rate. Construction of shopping centers, office buildings and hotels all showed increases.

Spending on state and local government projects also showed strength in August, rising by 0.8 percent to an all-time high of $269.58 billion at a seasonally adjusted annual rate. Federal building projects fell by 0.4 percent to a rate of $19.4 billion.

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