updated 10/2/2006 10:54:44 AM ET 2006-10-02T14:54:44

Spending on construction projects unexpectedly edged up in August as the best gain in nonresidential activity in 11 months offset another big decline in home building.

Major Market Indices

The Commerce Department reported that construction spending rose by 0.3 percent to a seasonally adjusted annual rate of $1.20 trillion. It followed a huge 1 percent decline in July and represented the best showing in five months.

Analysts had been forecasting construction spending would drop in August, reflecting continued weakness in residential construction. However, a big drop in residential activity was offset by strength in office building and other nonresidential projects. Spending by state and local governments also rose.

Nonresidential construction was up 3.4 percent to a seasonally adjusted annual rate of $312 billion. It was the biggest one-month increase since a 4.1 percent rise in September 2005.

The strength came from increases in office construction, hotels and the category that includes shopping centers.

Spending on private home construction dropped 1.5 percent in August to a seasonally adjusted rate of $617 billion. The August decline followed an even bigger 2.1 percent July decrease and marked the fifth straight home building has fallen.

The housing industry, which has enjoyed five years of booming sales and construction activity, has been losing altitude this year under the impact of higher mortgage rates. The slowdown has been engineered by the Federal Reserve, which raised interest rates as a way of slowing the economy and keeping inflation under control.

Spending on government projects rose 1.1 percent to a seasonally adjusted annual rate of $271.6 billion. That reflected an increase of 1.4 percent on state and local projects and a 4.3 percent decline on federal projects.

Big increases in private construction included an 8.2 percent jump in spending to build factories, a 4.8 percent rise in spending on amusement parks, a 3.1 percent rise in office building and a 1.8 percent increase in hotel and motel construction.

The 1.4 percent rise in state and local government projects followed a 1.5 percent drop in that category last month.

The 4.3 percent fall in spending on federal projects was the biggest setback since last April.

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 This material may not be published, broadcast, rewritten or redistributed.

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