updated 1/3/2006 12:24:31 PM ET 2006-01-03T17:24:31

Construction spending hit an all-time high in November as government spending to build schools, highways and sewer systems offset a slight dip in home building.

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The Commerce Department reported that total building activity rose to a record $1.146 trillion at an annual rate in November, up 0.2 percent from the October pace.

Through the first 11 months of 2005, construction spending is 9 percent above the pace set in 2004 as a boom in housing helped to push construction activity to record levels. However, home building by the private sector was essentially unchanged in November, which could be a harbinger of the expected slowdown in this sector as rising mortgage rates cool housing activity.

Manufacturing remains robust
In other economic news, a closely watched gauge of manufacturing slowed a bit in December but remained at a level indicating manufacturing will continue to expand in coming months. The Institute for Supply Management’s manufacturing index turned in a reading of 54.2 last month, down slightly from the November reading of 58.1.

The manufacturing reading in December was the weakest since August and showed reduced momentum across a number of key areas from orders to production and employment.

But analysts said this slowdown came after three very strong months and reflected the struggles in the auto industry to deal with falling demand.

“Manufacturing is growing but the pace of growth has decelerated,” said Daniel J. Meckstroth, chief economist for the Manufacturers Alliance/MAPI, an industry trade group. “The outlook for manufacturing production in 2006 is for moderate growth.”

Brian Bethune, an economist at Global Insight, said the slowdown in construction activity reflected in part a big drop in spending on home improvements, a category that can be volatile from month to month.

“The overall momentum in construction remains solid,” he said. “We expect this pattern to continue, with public and commercial construction taking the leadership baton in 2006 as housing starts ease back moderately.”

The 0.2 percent rise in housing construction in November was below the 0.5 percent increase that Wall Street economists had been forecasting and reflected a weaker-than-expected showing in home building, which was flat after having posted a 0.9 percent gain in October. It was the weakest showing for housing in five months, since a 0.4 percent decline in June.

Analysts believe that housing, which is on track to set a fifth consecutive year of record sales in 2005, will slow considerably in 2006 under the impact of rising mortgage rates.

The Federal Reserve, which has already raised interest rates 13 times, is expected to boost rates at least two more times this year as the central bank strives to slow economic activity enough to keep inflation in check.

The 0.2 percent rise in overall construction followed a 0.8 percent surge in October and was the weakest performance since a 0.5 percent drop in activity in June.

Private construction rose by 0.2 percent to an all-time high of $892.4 billion even though home construction was unchanged. The strength in November came from a 0.5 percent rise in nonresidential construction, reflecting big gains in construction of offices, hotels and the category that includes shopping malls.

Government construction spending was up 0.3 percent to a new record of $253.9 billion. Analysts said part of this strength could reflect rebuilding efforts in Gulf Coast areas devastated by a string of 2005 hurricanes.

Spending by state and local governments was up 0.7 percent to an all-time high annual rate of $236.2 billion while spending by the federal government dipped 5 percent to an annual rate of $17.7 billion.

The strength in public construction in November was led by a 9.2 percent jump in spending on sewage and waste disposal projects and gains of 1.6 percent in highway construction and 1.3 percent for school construction.

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