08/01/2013 10:05 EDT | Updated 10/01/2013 05:12 EDT

US construction spending drops 0.6 per cent in June, biggest setback in 5 months

WASHINGTON - Spending on U.S. construction projects fell in June by the largest amount in five months as government building activity declined to the lowest level since 2006.

Even housing activity slowed but that setback was likely to be temporary.

Construction spending dropped 0.6 per cent in June compared with May when spending had surged 1.3 per cent, the Commerce Department reported Thursday. It was the biggest decline since a 2.3 per cent drop in January.

Housing construction was flat during the month with a gain in remodeling offsetting declines of 0.8 per cent in single-family construction and a fall of 3.3 per cent in multi-family projects. Residential construction has been a bright spot in a sluggish economy this year and that strength was expected to continue even though mortgage rates have risen from their lows.

Total construction stood at a seasonally adjusted annual rate of $883.9 billion in June, 3.3 per cent above the level of a year ago.

Even with the June slowdown in residential construction, activity in this area is 18.1 per cent above the level of a year ago.

Nonresidential construction dropped 0.9 per cent in June, reflecting weakness in the construction of offices, hotels and shopping centres. It marked the first decline in this category after four months of gains.

Government spending declined 1.5 per cent to an annual rate of $261.1 billion, the lowest level since November 2006. State and local building was down 1.1 per cent and federal construction projects fell 1.5 per cent. All levels of government construction have been under pressure because of budget problems.

The government reported Wednesday that the overall economy, as measured by the gross domestic product, grew at an annual rate of 1.7 per cent in the April-June quarter, marking the third straight quarter of lacklustre growth. The economy barely edged ahead at an annual rate of 0.1 per cent in the last three months of 2012 and then grew by just 1.1 per cent in the January-March quarter.

Economists hold out hope that economic growth will rebound to a more respectable 2.5 per cent rate in the second half of this year as the effects of the federal tax increases in January and the automatic government spending cuts begin to lessen.

For the spring quarter, residential construction was the strongest performing sector, growing at a sizzling annual rate of 13.4 per cent, the fourth straight quarter of double-digit housing growth.