Home builders took a bit of a breather in June, sending housing construction (search) down to its lowest level in just over a year. It was another sign that the economy slowed down last month.

The number of housing projects that builders broke ground on clocked in at a seasonally adjusted annual rate of 1.80 million units, an 8.5 percent drop from May's level, the Commerce Department (search ) reported Tuesday.

Although the 1.80 million pace was the lowest since May 2003 and was weaker than economists expected, it still represented a respectable level of activity, analysts said.

Housing construction in May rose by 0.4 percent from the previous month, according to revised figures. That turned out to be stronger than the decline previously estimated.

Tuesday's report is consistent with other economic data — including retail sales, the nation's employment situation and industrial production — that suggested the economy hit a rough patch in June. Analysts, however, are confident that's just a temporary lull, rather than a sign of trouble ahead for the economic recovery.

"The builders, God bless their hearts, may have gotten a little bit cautious in June, reacting to all the hype about what the Fed was going to do with interest rates," said David Seiders, chief economist at the National Association of Home Builders (search ).

At the time, there was speculation as to whether the Federal Reserve (search ) would raise interest rates by a modest one-quarter percentage point or a bolder, half-point move, said Seiders, whose industry is sensitive to interest rate changes. Mortgage rates had moved up in the middle of June in anticipation of Fed action. But in recent weeks, mortgage rates have been falling.

Fed policy-makers on June 30 boosted interest rates for the first time in four years by one-quarter point to 1.25 percent from a 46-year low of 1 percent, a move aimed at keeping inflation at bay. The Fed's action pleased investors.

On Wall Street, stocks took the report in stride. The Dow Jones industrials gained 18 points and the Nasdaq was up 12 points in morning trading.

Seiders and some other economists predict housing starts will rebound in July. Yet, they also believe housing construction — a powerhouse over the last several years — will remain in good shape, but probably will gradually slow through this year.

Home builders, meanwhile, feel pretty good about sales prospects for July as well as for the next six months, according to a monthly survey by the National Association of Home Builders.

One of the reasons for optimism: Mortgage rates have been falling in recent weeks. Rates on benchmark 30-year mortgages last week fell to 6 percent, marking the fourth straight week of decline.

Investors' growing confidence in the Federal Reserve's ability to keep inflation under control and recent economic reports showing the economy is growing solidly — but not so fast as to force the Fed to boost interest rates aggressively — has helped to push down bond rates, causing mortgages rates to decline.

In Tuesday's report, housing construction fell across all regions of the country.

The number of housing units builders started in the Northeast last month fell by 3.5 percent to a seasonally adjusted annual rate of 165,000. In the Midwest, housing activity declined by 11.5 percent to a pace of 315,000. In the South, housing starts went down by 3.1 percent to a pace of 846,000, and in the West they dropped by 16.5 percent to a pace of 476,000.

"Was it a 24-hour virus or pneumonia? I think it was a 24-hour virus," said ClearView Economics' President Ken Mayland.