U.S. construction spending posts biggest drop in 1-1/2 years in August

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FILE PHOTO: A worker walks on the roof of a new home under construction in Carlsbad

WASHINGTON (Reuters) – U.S. construction spending fell by the most in 1-1/2 years in August, pulled down by a sharp decline in outlays on single-family homebuilding amid surging mortgage rates.

The Commerce Department said on Monday that construction spending dropped 0.7% in August, the largest decline since February 2021, after decreasing 0.6% in July.

Economists polled by Reuters had forecast construction spending would slip 0.3%. Construction spending increased 8.5% on a year-on-year basis in August.

Spending on private construction projects fell 0.6% after dropping 1.2% in July. Investment in residential construction declined 0.9%, with spending on single-family projects plunging 2.9%. Outlays on multi-family housing projects rose 0.4%.

The Federal Reserve’s aggressive monetary policy tightening, marked by oversized interest rate increases, has weighed heavily on the housing market, with homebuilding and sales weakening significantly in recent months.

The U.S. central bank has hiked its policy rate from near zero to the current range of 3.00% to 3.25% since March. The 30-year fixed mortgage rate averaged 6.70% last week, the highest since July 2007, from 6.29% in the prior week, according to data from mortgage finance agency Freddie Mac.

Residential spending contracted at its steepest pace in two years in the second quarter. That contributed to gross domestic product declining at an annualized rate of 0.6% last quarter after shrinking at a 1.6% pace in the January-March quarter.

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Investment in private non-residential structures like gas and oil well drilling edged up 0.1% in August. Outlays on non-residential structures have declined for five straight quarters.

Spending on public construction projects dropped 0.8% after rising 1.9% in July. Investment in state and local government construction projects slipped 0.4%, while federal government construction spending tumbled 6.6%.

(Reporting by Lucia Mutikani; Editing by Paul Simao)