updated 9/1/2006 4:48:37 PM ET 2006-09-01T20:48:37

Construction spending plunged by the largest amount in nearly five years, reflecting spreading weakness in the housing industry.

Major Market Indices

The Commerce Department reported Friday that construction activity dropped to a seasonally adjusted annual rate of $1.20 trillion in July, down 1.2 percent from the June level. It was the biggest one-month decline since a 1.3 percent fall in August 2001, when the country was mired in the last recession.

The decline was far worse than the unchanged level of activity that Wall Street forecasters had been expecting. It served to underscore that the Federal Reserve’s two-year campaign to raise interest rates to slow the economy was having a significant impact on construction, one of the most interest-rate sensitive sectors of the economy.

The July decline, which followed a 0.4 percent increase in June, was led by a 2 percent fall in private residential construction.

It was the fourth consecutive decline in residential construction and the biggest drop since January 2002, providing dramatic evidence that the nation’s five-year housing boom has come to an end. The declines pushed private residential construction down to a seasonally adjusted annual rate of $627.4 billion.

Builder confidence has plunged this year as they have struggled with weakening demand in the face of rising mortgage rates. A record backlog of unsold homes has forced many builders to offer an array of incentives to reduce supplies.

Outside of housing, there continued to be areas of strength in construction as nonresidential private building activity edged up 0.3 percent to a record annual rate of $303.5 billion. Gains in July came in construction of office buildings, power plants and transportation facilities.

Public construction fell by 0.7 percent in July reflected a 1 percent decline in state and local building projects which was only partially offset by a 2.6 percent rise in federal construction activity.

Copyright 2006 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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