Construction spending shot up 1.1 percent in December, capping a year in which building activity posted the best performance since 1996.

The Commerce Department (search) said Tuesday that last month's increase, the best showing in eight months, followed a 0.3 percent advance in November and reflected widespread strength in both private and public building projects.

For the year, building activity rose 9 percent to $998.4 billion. It was the strongest increase since a 10.4 percent jump in 1996.

The strength last year came in housing activity as builders continued their mad dash to erect houses to meet soaring demand propelled by the lowest mortgage rates in more than four decades.

Total private residential activity rose by 14 percent to $542.7 billion last year, a 14 percent gain which was the biggest increase in a decade. It marked the second double-digit annual gain. Private residential building had been up 12.9 percent in 2003 after an 8.6 percent increase in 2002.

Total private construction, a category that includes office buildings, hotels and other commercial enterprises, posted a 10.9 percent increase for the year -- to a total of $764.9 billion. That was the biggest increase since a gain of 11.4 percent in 1996. Private construction had risen 5.9 percent in 2003 after having actually declined by 0.1 percent in 2002.

Public building projects were up as well, rising by a smaller 3.4 percent to $233.5 billion for the year. That followed a 2.8 percent increase in 2003 and was the best showing since a 6.7 percent jump in 2002.

Sales of both new homes and previously owned homes climbed to all-time highs in 2004, the fourth straight year both categories have set records.

However, analysts are forecasting declines of around 3 percent in housing sales for this year, reflecting their expectations that mortgage rates (search), now at 5.66 percent, will be rising gradually this year and will be around 6.5 percent by December.

Interest rates are being pushed up by a credit-tightening campaign by the Federal Reserve (search) which is expected to boost a key rate it controls by another quarter point on Wednesday. Fed policy-makers continue to try to cool economic activity slightly to keep inflation from becoming a problem.

For December, the 1.1 percent advance reflected a 0.9 percent increase in private construction, which included a 0.7 percent rise in residential activity, and a 1.8 percent increase in public building projects.

Construction activity for December came in at a seasonally adjusted annual rate of $1.031 trillion.