updated 8/1/2008 11:06:34 AM ET 2008-08-01T15:06:34

The housing slump and inflation continue to hurt construction spending and manufacturing activity.

Major Market Indices

Construction spending fell for the 11th time in the past 13 months in June as continued steep declines in housing activity offset strength in nonresidential building activity. The Commerce Department reported Friday that building activity dropped by 0.4 percent in June, a decline that was in line with expectations.

U.S. manufacturing activity was flat in July, as higher prices weighed on growth. A private research group's survey shows that the reading of 50 from the Institute for Supply Management on Friday slid slightly from 50.2 in June. It still beats economists' prediction of a reading of 49.2, however. A reading above 50 signals growth.

Home building plunges
Home building plunged by 1.8 percent, the 15th straight drop, as builders continued to slash activity to cope with the steepest decline in housing in more than two decades.

Nonresidential activity jumped 0.8 percent to an all-time high of $408.1 billion at a seasonally adjusted annual rate, reflecting a big increase in building activity for hotels and motels and gains in a number of other commercial building projects.

The 0.4 percent fall in overall construction spending left total building activity at a seasonally adjusted annual rate of $1.08 trillion, a decline of 5.9 percent from a year ago.

Analysts believe that housing still has further to fall given that the backlog of unsold homes is remaining at near record levels. The problem is that a rising tide of mortgage foreclosures is forcing even more properties onto an already glutted market. Construction of new single-family homes has already declined nearly 60 percent from the peak in early 2006.

Economists are also concerned that the strength in nonresidential construction could soon start to falter, reflecting the tight credit conditions as banks cut back on all of their lending in the face of billions of dollars of losses on bad mortgage loans.

For June, construction spending by state and local governments fell by 0.4 percent to a seasonally adjusted annual rate of $278.3 billion. Economists expect this activity to weaken in the months ahead as local governments struggle with falling tax revenues in a weak economy.

Construction spending by the federal government rose by a strong 2.4 percent in June to an all-time high of $22.97 billion at an annual rate.

Prices rise as do exports
The index of prices manufacturers pay for raw materials grew, but at a slower rate than June, when it hit its highest level since 1979. About 88.5 percent of manufacturers said prices in July were higher than June. No commodities prices fell, according to the report.

At Columbia Gear Corp., a 385-person gear maker based in Avon, Minn., vice president of sales and marketing Lyle Nuhring said steel suppliers that used to change their fuel surcharges every quarter are now changing them every month.

The company's customers are growing increasingly resistant to Columbia's resulting price increases, asking to see invoices Columbia gets from its suppliers as proof of higher prices the company is paying, Nuhring said.

"It's increasing every month and you can't keep going back to them every month," he said.

Kevin O'Marah, chief strategist at AMR Research, a manufacturing industry consultant, said he expects manufacturer price increases to continue.

"If you're a manufacturer, you're not going to go into losses to absorb the higher costs of plastic resins and corn syrup," he said. "You'll cut production and raise prices. You will not just eat it."

Exports continue to fuel the index, however. The rate of growth for exports slowed, but it was the 68th straight month that exports grew, thanks to the weak dollar.

Industries reporting growth included electronics, food, petroleum, metals, paper and chemicals.

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