Construction spending in September posted a better-than-expected performance, powered by the largest jump in housing construction in more than six years.
The advance spurred hope that the battered housing sector is starting to turn around and will provide support for the overall economy as it struggles to emerge from the worst recession since the 1930s.
The Commerce Department said Monday that total construction spending was up 0.8 percent in September, much better than the 0.3 percent drop that analysts had forecast. The August performance was revised down to show a 0.1 percent drop rather the 0.8 percent gain first reported.
The overall increase reflected a 3.9 percent rise in spending on residential construction, the biggest jump in housing activity since July 2003. Economists believe that this sector is starting to rebound and should help support an economic recovery.
There is a worry, however, that a big part of the activity in recent months may have reflected a rush by builders to start projects that could qualify for a tax credit of up to $8,000 offered by the government to first time home buyers.
That tax credit is due to expire on Nov. 30 although a group of senators last week agreed to extend the tax credit for potential buyers who have sales agreements signed by the end of April. Those buyers would have until the end of June to close on their new homes.
The housing industry has lobbied for the extension, arguing that without this support the tentative rebound that is now occurring in housing could be derailed.
The 3.9 percent rise in housing pushed activity in this category to an annual rate of $255.97 billion, still 27 percent below the pace of a year ago.
Total construction spending grew to $940.28 billion at an annual rate in September. It was the first increase after four straight declines but still left construction spending 13 percent below the level of a year ago.
The strength in housing was offset somewhat by a continued slump in nonresidential construction activity which fell 1.8 percent in September to an annual rate of $357.9 billion, marking the fifth straight decline in this category. Spending for hotels, office buildings and commercial developments such as shopping centers all fell.
Nonresidential construction is being hurt by a credit squeeze as banks, struggling through the worst financial crisis since the 1930s, have tightened up on loan standards in reaction to soaring loan defaults in the commercial sector.
Public construction rose 1.3 percent to an all-time high of $326.4 billion in September. Federal construction was up 0.7 percent while state and local building activity rose 1.4 percent. Government construction is being supported by the $787 billion economic stimulus bill passed by Congress last February to jump-start the economy and guard against an even deeper recession.
The government reported last week that the overall economy, as measured by the gross domestic product, grew at an annual rate of 3.5 percent in the July-September quarter, after a record four straight declines in GDP.
The hope is that the jump in GDP activity signals an end to the longest recession since the 1930s although some economists worry about the possibility of a double-dip downturn in which the recovery will falter as government support is withdrawn.