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U.S. September construction unchanged from August as housing takes a drop

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WASHINGTON -- U.S. construction spending was unchanged in September following seven straight months of gains, with home building, which accounts for more than half the month's total, taking its biggest drop since February 2003.

The total $1.014 trillion came after a revised 0.9 percent August gain, the Commerce Department said. Spending surpassed the trillion-dollar mark for the first time in July.

Construction helped bolster economy over the past year amid increased home building caused by mortgage rates under 6 percent.

The report "is entirely a function of weather-related slowdowns associated with the three hurricanes that hit Florida in September," said Richard Yamarone, chief economist at Argus Research Corp. in New York. "There probably wasn't a hammer swung in Florida in September."

The September total was less than the 0.4 percent expected in a Bloomberg News survey of 28 economists. Estimates ranged from a 0.5 percent decline to a 0.6 percent increase. The August gain was revised from a previously reported 0.8 percent.

The value of construction is the sum of work done on all projects, includes new buildings, renovations and additions to existing structures, during September. Three hurricanes that struck the South last month may have reduced some activity.

"Nominal construction spending was fairly strong in the third quarter, but a good portion of the increase was due to higher prices for lumber, concrete, steel and other building materials," said John Herrmann, director of economic commentary at Cantor Fitzgerald LP in New York.

Private residential construction, which accounts for more than half the total, fell 0.2 percent in September to an annual rate of $551.6 billion, the biggest drop since February 2003.

David Seiders, National Association of Home Builders' chief economist, said Friday that the U.S. housing market is topping out. He forecast a 4.2 percent decline in housing starts next year and a 5.2 percent drop in new home sales.

The U.S. economy grew at a slower-than-expected 3.7 percent annual rate in the third quarter, held back by a record trade deficit and slowdown in inventory building, a government report showed last week. Residential and business construction's share of Gross Domestic Product growth dropped to 0.21 percent in the third quarter, from 1.02 percent in the second quarter.

"Construction spending is a source of strength for the economy because it's growing faster" than GDP, said Sung Won-Sohn, chief economist at Minneapolis-based Wells Fargo & Co. (NYSE: WFC).

September construction spending rose 8.9 percent over the same period in 2004.

Privately funded construction fell 0.1 percent to $777.5 billion in September after rising 1.5 percent in August, according to the report. Private non-residential building rose 0.2 percent, the third straight monthly advance, to $225.8 billion.

Lodging, religious and manufacturing facilities led the gain in private, non-residential construction. Construction of office buildings fell 2.8 percent to a $31.9 billion pace. Spending on factories and related buildings rose 3.7 percent to $14.8 billion.

Government-funded construction rose 0.3 percent in September to $236.4 billion at an annual rate. Federal construction spending fell 1.1 percent to $17.2 billion. State and local spending rose 0.5 percent to $219.2 billion.

Public spending on transportation projects rose 0.4 percent to $19.7 billion. Spending on roads and highways declined 1.5 percent to $63.9 billion.

"There won't be any big increases (in government spending) with the budget deficits we're seeing," said Tim Rogers, chief economist at Briefing.com in Boston, before the report.

Michael Crawford, chief executive of Sukut Construction Inc., said his excavation firm has a 10-month backlog of residential work orders. The Santa Ana, Calif.-based company needs that backlog to carry it through a government work slowdown, he said.

Crawford estimated that $1 billion in transportation spending has been diverted by California lawmakers the past two years to cover state budget shortfalls. Closely held Sukut has $200 million in annual revenues and 550 employees.

"Speculators are leaving the housing market and it's starting to cool off, but we should be fine," Crawford said. "We expect state transportation funding to rebound" under Gov. Arnold Schwarzenegger and the residential backlog "should carry us through next year."

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