updated 10/1/2008 10:17:03 AM ET 2008-10-01T14:17:03

Construction activity was unchanged in August even though spending for residential projects posted the first increase in 17 months, a rare bit of good news in the midst of the worst housing downturn in decades.

Major Market Indices

The Commerce Department on Wednesday said construction activity was flat in August, a better-than-expected outcome than the 0.5 percent fall that economists expected.

The big surprise was a 0.3 percent rise in residential activity, the first increase in housing activity since March 2007.

It was only the second monthly rise for housing in the past 29 months, a prolonged period of distress when the industry has been battered by slumping sales, falling prices and soaring mortgage defaults.

The tidal wave of mortgage defaults also has rocked the financial industry, leaving banks saddled with billions of dollars in bad debt and triggering a severe credit crunch as they have become fearful of making new loans.

To try to unfreeze credit markets, the Bush administration is pushing Congress to approve the biggest bailout in history, a measure to allow the government to buy up to $700 billion in bad mortgage loans and mortgage-backed securities from banks as a way to get them to resume more normal lending.

The House defeated the original proposal on Monday but the administration and congressional leaders have been scrambling to get the proposal back on track. The Senate is expected to vote on it Wednesday evening.

The performance in August for overall construction was better than the decline analysts expected. However, the government revised July activity to show a much bigger drop of 1.4 percent, compared to the 0.6 percent decline initially reported.

The 0.3 percent increase in housing left spending in this area at a seasonally adjusted annual rate of $343.6 billion. The gain was offset by a 0.8 percent drop in spending on nonresidential projects, which fell to $415.95 billion.

The concern is that the severe credit crunch will cause banks to shut off lending for commercial projects, further deepening the economy's problems.

Spending on government projects rose by 0.8 percent to a record $312.5 billion at a seasonally adjusted annual rate, with both state and local governments and federal projects at all-time highs.

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