updated 3/1/2005 11:39:48 AM ET 2005-03-01T16:39:48

Construction spending rose a strong 0.7 percent in January as low mortgage rates continued to bolster home building and nonresidential construction climbed to the highest level in more than two years.

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The increase, reported Tuesday by the Commerce Department, pushed total construction activity to a record high of $1.05 trillion at a seasonally adjusted annual rate and followed an even larger 1.2 percent rise in December. Analysts had been forecasting a slightly smaller increase given the huge gain in December.

The strength in January reflected a 0.6 percent increase in private construction, which included a 0.4 percent rise in residential activity and a 1.2 percent jump in nonresidential building. Government construction rose 0.8 percent in January.

The 1.2 percent surge in nonresidential construction spending pushed spending in this category to a seasonally adjusted annual rate of $231.3 billion, the best showing since May 2002.

The strength in this category last month came from gains in construction at amusement parks, communication and power transmission facilities and commercial buildings, a category that includes shopping malls.

Construction spending for factories, hotels and motels and office buildings fell during the month.

Residential construction in the private sector rose by 0.4 percent last month following huge gains of 1.5 percent in December and 1.3 percent in November.

For all of last year, building activity turned in a 9 percent increase, the best showing since 1996, as home builders continued a mad rush to erect houses to meet soaring demand propelled by the lowest mortgage rates in four decades.

Recent reports have shown that sales of both new homes and existing homes edged down in January and economists are predicting that home demand will likely level off this year under the impact of rising mortgage rates. The Federal Reserve has been pushing up interest rates since last June in an effort to make sure that a rebounding economy does not generate unwanted inflation.

The construction report showed that activity in the government sector rose by 0.8 percent to a seasonally adjusted $241.6 billion last month, an all-time high. State and local construction activity climbed 1.4 percent to a record $224.7 billion while building activity by the federal government slipped 6.9 percent to $16.9 billion.

Copyright 2005 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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