Construction Activity Suffers First Setback Since June 2004

Fri June 09, 2006 - National Edition

WASHINGTON (AP) The U.S. economy appears to be shifting into a lower gear with residential construction falling sharply and manufacturing activity slowing.

Those developments and a benign reading on wage pressures helped ease worries that an overheated economy might spawn inflation troubles.

The Commerce Department reported May 30 that residential home building dropped by 1.1 percent in April, the biggest decrease since January 2004. The weakness in homebuilding contributed to a drop in overall construction of 0.1 percent, the first setback since June 2004.

A second report from the Institute of Supply Management showed that its closely watched gauge of manufacturing activity turned in a weaker-than-expected reading of 54.4 in May. That was down from 57.3 in April and a sign, analysts said, of a significant slowing in momentum in manufacturing over the past four months.

Those developments plus a sharp downward revision in unit labor costs for the first quarter helped to calm Wall Street fears that inflation was threatening to get out of control.

The construction report was one of the strongest signs yet that the nation’s five-year housing boom is cooling off, a development that reflects a campaign by the Federal Reserve to boost interest rates as a way of slowing the economy and keeping inflation under control.

In another report of slowing housing activity, the National Association of Realtors said its index for pending home sales fell for a third straight month in April, dropping by 3.7 percent from the March level. This index tracks sales of previously owned homes where a contract has been signed but the deal has not yet gone to closing.

David Lereah, chief economist of the Realtors, said that home sales, which set records for five straight years, are now “falling from historic highs” but appear set to stabilize at a solid pace for the year.

For April, total construction spending fell to a seasonally adjusted annual rate of $1.195 trillion. The 1.1 percent drop in residential construction was offset somewhat by a 2.5 percent rise in non-residential activity, reflecting solid gains in office, hotel and shopping center activity.

Spending for public construction projects dropped by 0.2 percent with state and local activity falling by 0.3 percent while spending on federal projects surged by 0.6 percent to an all-time high of $20 billion at an annual rate.