But spending on construction of single-family homes and apartments increased again, a hopeful sign for the modest housing recovery.
The Commerce Department said Tuesday that overall construction spending declined 0.9 per cent in July. It followed three months of gains, which were driven by increases in home and apartment construction.
The June decline left spending at a seasonally adjusted annual rate of $834.4 billion. That's nearly 12 per cent above a 12-year low hit in February 2011. Construction activity is roughly half of what economists consider to be healthy.
"In short, a weaker than expected report," said Jim O'Sullivan, chief U.S. economist at High Frequency Economics. Still, O'Sullivan noted that the data are extremely volatile and the trend in residential spending "is clearly still upward."
Spending on residential construction fell 1.6 per cent in July from June to a seasonally adjusted annual level of $264.6 billion. But that was dragged lower by a 5.5 per cent decline in home improvement projects.
Spending on single-family homes rose 1.5 per cent, the fourth straight monthly gain. And spending on apartment construction was up 2.8 per cent, the ninth straight gain.
Separately, CoreLogic, a private real estate data provide, said U.S. home prices jumped 3.8 per cent in the 12 months ending in July. The year-over-year increase was the biggest in six years and the third national measure of home prices to show steady gains.
Rising prices and higher home sales have made builders more confident in the housing market. A survey of builder sentiment rose in August to its highest level since the housing market went bust five years ago. The gains in housing have been fueled in part by record low levels for mortgage rates. The average rate for a 30-year fixed rate mortgage has been below 4 per cent all year.
Still, the construction industry remains weak.
Spending on nonresidential projects fell 0.9 per cent to an annual level of $294.1 billion. Spending on government projects dropped 0.4 per cent to a level of $275.7 billion. Spending on state and local building projects fell 0.3 per cent, while spending on federal construction projects was down 1.3 per cent.
Despite the modest gains in housing, the broader economy weakened in the spring. Economic growth slowed to an annual rate of just 1.7 per cent in the April-June quarter, down from a 2 per cent rate in the first three months of the year.
Economists forecast growth will average 2 per cent in the second half of the year. That's not enough to significantly lower the unemployment rate, which stood at 8.3 per cent in July.