The Commerce Department reported that spending on construction projects rose by 0.1 percent in November to a seasonally adjusted annual rate of $1.165 trillion, a better performance than what economists expected. Spending had fallen by 0.4 percent in October.

The small improvement came despite the fact that housing fell for a record 21st straight month, with private residential construction dropping by 2.5 percent to an annual rate of $484.9 billion, down by 17.5 percent from a year ago.

However, a closely watched gauge of manufacturing activity showed the factory sector contracted in December, the first decline after 10 months of gains.

The Institute for Supply Management said its manufacturing index dropped to 47.7 in December, down from 50.8 in November. It was the weakest showing since April 2003 during the period of the U.S. invasion of Iraq. Any reading below 50 is considered a sign that manufacturing is contracting rather than expanding.

The much weaker-than-expected reading on the manufacturing sector and a spike in oil prices up to $100 a barrel triggered recession worries on Wall Street and sent stocks plunging. The Dow Jones industrial average fell 220.86 points to close at 13,043.96 on the first trading day of the New Year.

"The contraction in manufacturing activity is yet another indication that the housing market problems are becoming more widespread,' said Joel Naroff, chief economist at Naroff Economic Advisors.

Nigel Gault, an economist at Global Insight, another forecasting firm, said the manufacturing decline "clearly moves recession risks higher."

Minutes released Wednesday of the Dec. 11 meeting of the Federal Reserve showed policymakers were worried about the potential for a vicious cycle to develop in which credit problems could worsen. Fed officials said the current economic outlook was "unusually uncertain."

Home builders have been battered by the worst slump in the housing market in more than two decades, a decline that occurred after five boom years which had pushed home sales and prices to record levels. Analysts believe the slowdown in housing will last through much of 2008, forcing builders to keep slashing their construction plans in an effort to reduce a huge backlog of unsold homes.

The housing meltdown has been exacerbated by a sharp increase in mortgage foreclosures, which dumps more homes on an already glutted market, and tighter lending standards by banks, which is making it more difficult to qualify for a mortgage.

There is a danger that the housing slump could push the country into a full-blown recession but economists believe that worst-case scenario can be avoided if the Federal Reserve keeps cutting interest rates. The Fed cut rates three times last year starting in September.

The blow to the construction industry from the housing meltdown is being cushioned somewhat by strength in government projects and non-residential activity.

Private non-residential spending rose by 1.7 percent, a 14th consecutive monthly gain, which pushed spending in this category to an all-time high of $375.8 billion at an annual rare. Strong increases were seen in November for office building, hotels, power plants, factories and amusement parks.

Spending on government projects rose by 2.5 percent, the biggest one-month gain since December 2006, pushing activity in this area to a record level of $304.3 billion at an annual rate.

Spending by state and local governments was up 2.5 percent while spending by the federal government rose 2.2 percent.

By Martin Crutsinger

Source : Builder Online