Construction spending plunges in January by most in 14 years

WASHINGTON -- Construction spending took its biggest nosedive in 14 years and manufacturing activity decreased, fresh trouble signs for a struggling economy.

The Commerce Department reported Monday that construction spending plunged by 1.7 percent in January. Builders slashed spending on residential projects, but the weakness spread beyond that ailing sector. There were cutbacks in spending on, among other things, hotels and motels, highways and various projects by state and local governments.

"I think we're in a self-reinforcing downward cycle," said Mark Zandi, chief economist at Moody's Economy.com.

Another report showed fallout from housing and credit problems cutting deeper into manufacturing.

The Institute for Supply Management's manufacturing index clocked in at 48.3 in February. That was the weakest reading in nearly five years. A reading above 50 indicates expansion. Anything below that shows contraction. Still, the reading was a bit better than the 48.1 that economists were forecasting.

On Wall Street, The Dow Jones industrials dropped 7.49 points to close at 12,258.90.

The latest showing on construction activity was worse than economists were expecting. They were forecasting a smaller decline of around 0.8 percent.

The 1.7 percent plunge in total construction spending came after a 1.3 percent decline in December. It was the largest drop since January 1994, when construction spending plummeted by 3.6 percent.

The one-two punch of the housing and credit crises is threatening to push the country into a recession or possibly has done so already.

Harder-to-get credit has thwarted some would-be home buyers and record-high foreclosures are adding to the glut of unsold homes. That's aggravating the housing industry's woes.

Spreading problems are slowing other sectors of the economy and causing employers to restrain hiring.

To bolster the economy, the Federal Reserve has been cutting a key interest rate since September. It recently turned more forceful, slashing rates by an aggressive 1.25 percentage points over the span of just eight days in January. Fed Chairman Ben Bernanke has signaled another reduction when the Fed meets next on March 18.

The economy's troubles are making people and businesses more cautious in their spending and investing, thus weakening the economy.

Soaring energy prices also are hurting the economy. Oil prices marched to a new record -- past $103 a barrel. Those lofty prices are spreading inflation and crimping consumer spending.

The economy barely grew in the final three months of this year -- logging growth at a pace of just 0.6 percent. Many economists believe growth will be even slower in the Janaury-to-March quarter. And, a growing number of analysts think the economy contracted during this period. Under one rule, the country is considered to be in a recession if economic activity shrinks for six straight months.

"Housing poses the biggest downside risk to our economy," Treasury secretary Henry Paulson said Monday in a speech to the National Association for Business Economics. He said the administration's efforts to help distressed owners at risk of losing their homes is making progress.

Monday's construction report showed that private builders cut spending on housing projects by 3 percent in January, the most since October.

Spending by private builders on a range of commercial construction projects, including transportation facilities, communications facilities, hotels and motels, dropped by 1.2 percent in January. That was the largest decline since June 2005.

Government spending on public works projects dipped 0.2 percent in January. All that weakness, however, represented cutbacks in spending by state and local governments. The federal government boosted spending.