Construction spending fell by a larger-than-expected amount in October, another indication the problems facing builders in the form of a...

Share story

WASHINGTON — Construction spending fell by a larger-than-expected amount in October, another indication the problems facing builders in the form of a sinking economy and severe credit crisis are deepening and likely to persist.

The Commerce Department reported Monday that construction spending dropped by 1.2 percent in October, much bigger than the 0.9 percent decline many analysts expected.

Meanwhile, the Institute for Supply Management said its gauge of manufacturing activity fell to a reading of 36.2 in November, a 26-year low. That was a steeper-than-expected drop from the October reading of 38.9 and underscored that the hard economic times were beginning to have a major effect manufacturing. A reading below 50 indicates the sector is contracting.

The construction weakness was led by another sizable drop in home building, which has fallen every month but two over the past 2 ½ years. Nonresidential building also weakened as developers face tougher times getting financing because the banking system is going through a severe credit squeeze.

Economists believe the construction industry will be facing severe troubles until an economic recovery is firmly launched, probably not until the second half of 2009.

These analysts believe the country has slipped into what could be the worst recession since the 1981-82 downturn. The current economic slump is being worsened by the most serious financial crisis to hit the country since the 1930s as banks struggle to deal with billions of dollars of loan losses, beginning with troubles with mortgage debt that reflect a record level of foreclosures.

Housing construction, which has been in a slump for more than two years, fell by 3.5 percent in October following a 0.5 percent drop in September. Private residential building activity, which totaled $338.8 billion at a seasonally adjusted annual rate in October, has managed increases in only two months over the past 31.

D.R. Horton Inc., a Fort Worth, Texas-based home builder, last week reported a nearly $800 million loss in its fiscal fourth quarter, reflecting in part slower home sales. Other reports last week showed that sales of new homes in October dropped 5.3 percent to their lowest level in nearly 18 years, while sales of existing homes fell a bigger-than-expected 3.1 percent in October.

The Commerce Department report Monday also showed that nonresidential construction dropped by 0.7 percent in October, the third decline in the past four months, leaving activity at a seasonally adjusted annual rate of $417.7 billion. Nonresidential activity had been an island of strength in the midst of the steep downturn in housing, but that area has begun to weaken because of the severe credit squeeze, which is making it harder for developers to get financing.

Government building projects did show strength in October, rising by 0.7 percent to an annual rate of $316.1 billion. State and local construction was up 0.3 percent to a rate of $291.1 billion, while federal construction activity totaled $25 billion at an annual rate, an increase of 5.5 percent from September.

The Bush administration got Congress to pass a $700 billion financial system rescue package on Oct. 3, but many economists believe the bailout won’t keep the country from undergoing a prolonged recession, a development which could make it even harder for the construction industry to mount a sustained recovery.

Manufacturers also have been hit hard by the housing slump and financial crisis, which have led to cutbacks in business and consumer spending.

Deere & Co., which makes agriculture and construction machinery, has seen its profit fall amid the economic downturn. The Moline, Ill.-based company said last week that its fourth-quarter earnings fell 18 percent and it forecast that profit will drop by 7 percent in 2009.