updated 7/3/2006 2:04:05 PM ET 2006-07-03T18:04:05

Construction spending fell in May by the largest amount in nearly two years as the once booming housing sector suffered another big decline.

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The Commerce Department reported that building activity dropped by 0.4 percent in May to a seasonally adjusted annual rate of $1.206 trillion following a 0.2 percent fall in April. It marked the first time in more than three years that construction spending had fallen for two consecutive months. May represented the biggest one-month decline since a 0.7 percent fall in September 2004.

The softness in construction is just one of several signals of slowdown that the economy was sending in the spring under the impact of rising gasoline prices, higher interest rates and a cooling housing market.

In other economic news, the Institute for Supply Management reported that its closely watched gauge of manufacturing activity dipped to 53.8 in June, down from 54.4 in May. That was a weaker reading than had been expected and showed that manufacturing, while still expanding, is slowing from last year’s rapid pace.

Analysts are forecasting that construction, after setting record highs, will decline gradually this year as higher mortgage rates crimp demand for housing. However, the slowdown is expected to be gradual with strength in nonresidential building and government building projects expected to cushion the decline in housing.

For May, private residential construction dropped by 0.8 percent to a seasonally adjusted annual rate of $651.2 billion after an even bigger drop of 1.2 percent in April.

Nonresidential private construction fell by 0.3 percent in May to a rate of $288.2 billion, reflecting declines in construction of shopping centers, schools and power plants which was partially offset by increases in the building of hotels and office buildings.

Total public construction rose a strong 0.7 percent to an annual rate of $266.8 billion, which was an all-time high. That gain reflected a 0.8 percent increase in state and local construction which hit a record of $247.1 billion.

Federal construction spending dropped for the first time in six months, falling 1.4 percent in May to an annual rate of $19.7 billion.

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