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Construction Activity Plummets

[Sep 29, 2007.]


The Commerce Department reports that construction activity plummeted in July—the largest decline in six months.

The problems in the housing market occurred as the amount of money spent on houses dropped for the 17th month in a row. Construction spending decreased 0.4% in July. That's the worst rate since a decline of 0.6% in January.

Forecasters had predicted a less precipitous drop in July—a clear indication that the housing market is in an even worse condition than many economists had thought.

Meanwhile, housing activity dropped by 1.4%. That's more than twice June's decline. As a result, the housing situation is now the worst it's been in some 16 years. In fact, the crisis could deepen in the months ahead because of the troubles in the mortgage industry. Delinquencies are on the rise, especially among holders of subprime mortgages.

In the midst of the crisis, some builders are offering extra incentives in an attempt to build business. The housing market is not expected to recover until well into next year.

The specter of recession is also looming large. The housing market is one of the engines which drive the U.S. economy; therefore, when the housing industry is barely getting by, other sectors of the economy can also suffer significantly. The housing crunch has already created turbulence in financial markets, with investors skittish about securities that have been backed by mortgage debt.

The chairman of the Federal Reserve, Ben Bernanke, has said the Fed is willing to "act as needed to limit the adverse effects on the broader economy." Forecasters predict the Fed will reduce rates at its September 18th meeting.

Meanwhile, on another economic front, manufacturing activity increased at a slow rate in August. In fact, the rate increase was slower than that of July, leading to additional worries of recession. Fortunately, however, despite a great deal of negative economic news, the U.S. economy appears to be holding its own at this point.

Julie Ann Amos
September 29th 2007

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