Construction Spending Falls for 3rd Month

Spending on construction projects fell for a third straight month in May, reflecting declines in the building of homes, offices and shopping malls.

The Commerce Department (search) reported Friday that construction activity dropped 0.9 percent in May to a seasonally adjusted annual total of $1.1 trillion. The decrease caught economists by surprise. They had been forecasting that construction would climb to a record level in May, rising a solid 0.5 percent.

Instead, the new report painted a more subdued picture of construction activity in May and the early spring. Gains in the previous two months were revised to show, instead, declines of 1.1 percent in April and 0.2 percent in March. It marked the first time since mid-2002 that construction had declined for three straight months.

Even with the declines, construction activity remained close to its all-time high of $1.13 trillion at an annual rate, which had been set in February. Analysts believe that construction will continue to be a source of strength for the economy this year as long as interest rates do not rise too quickly.

The Federal Reserve (search) on Thursday boosted a key short-term interest rate for the ninth time in the past year as it continued a campaign of gradually raising rates to make sure a growing economy does not trigger inflation pressures.

So far, those Fed rate increases have had little impact on long-term rates, which are set by financial markets. In fact, 30-year mortgage rates declined this week to the lowest level in 14 months.

However, economists believe that with the Fed signaling that it will continue raising interest rates in the months ahead, long-term rates such as mortgages probably will begin rising on a sustained basis.

The construction report showed that private construction dropped by 1.6 percent to an annual rate of $856.2 billion after declines of 1.5 percent in April and 0.5 percent in March.

The weakness for May came in both residential and nonresidential projects.

Housing activity dropped by 1.7 percent in May to an annual rate of $614.3 billion following declines of 2.2 percent in April and 1 percent in March.

Nonresidential construction was down 1.6 percent to $241.9 billion in May with weakness in office construction, commercial, a category that includes shopping centers, and factory construction.

Government building projects rose by 1.7 percent to an annual rate of $246.8 billion, an all-time high. State and local building was up 1.7 percent while federal building projects rose by 0.7 percent.