updated 7/1/2008 1:34:06 PM ET 2008-07-01T17:34:06

Construction spending fell in May for the 11th time in the past year as a continuing slump in housing offset strength in nonresidential building.

The Commerce Department reported Tuesday that construction spending dropped 0.4 percent in May, slightly less than had been expected. There was strength in spending on hotels and office buildings but continued declines in housing, which has been in a slump for two years.

Residential construction dropped 1.6 percent in May, the 25th decline out of the past 26 months.

Home builders have been frantically slashing back on their production in the face of the worst slump in housing in more than two decades. Analysts believe housing activity will keep falling for some time because even with the cutbacks in production, the backlog of unsold homes is remaining near record levels. The problem is that a rising tide of foreclosures is forcing even more properties onto the already glutted market.

Private nonresidential construction rose by 0.2 percent in May to an all-time high of $405.3 billion at a seasonally adjusted annual rate. The small increase followed even bigger 1.6 percent gains in both April and March.

The strength in May reflected a big increase in spending on hotels and motels and a smaller advance in office construction. These gains helped to offset declines in spending on shopping centers and amusement and recreation centers.

Economists believe that strength seen recently in nonresidential construction will not last. They are concerned that a severe credit crunch occurring as banks tightening standards in the wake of rising mortgage defaults will begin to squeeze nonresidential building projects as well.

Patrick Newport, an economist at Global Insight, said he expected residential construction to continue to be a drag on the overall economy for the rest of the year. Other analysts expressed concerns about the impact falling tax revenues will have on government building projects.

“Growth in public construction has already slowed from its 12 percent peak trend in the second half of last year and will slow further as state and local governments run out of money,” predicted Ian Shepherdson, chief U.S. economist at High Frequency Economics.

Spending on government projects rose by 0.4 percent to a record of $301.1 billion at an annual rate in May. A gain of 0.6 percent in state and local building projects offset a 1.7 percent drop in federal construction spending.

The 0.4 percent drop in overall construction spending represented the 11th decline in the past year and left total construction spending at $1.085 trillion at a seasonally adjusted annual rate.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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