Spending on U.S. construction projects unexpectedly rose in March for the first time in six months as increases in commercial and government projects overshadowed an ongoing drop in home building. The 0.3 percent gain followed a revised 1 percent drop the prior month, the Commerce Department said today in Washington. The advance in non-residential projects was led by building of power plants, hotels and factories. Spending on infrastructure projects is projected to increase in the coming months as state and local governments use funds from the $787 billion fiscal stimulus package. In addition, mortgage rates at historic lows may support sales of new homes, helping the economy begin to recover later this year. ``Construction activity will not give a big boost to growth in the months ahead, but at least the big drag on economic activity should be leveling off,'' Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. Economists projected construction spending would drop 1.6 percent, according to the median estimate of 45 economists surveyed by Bloomberg News. Forecasts ranged from declines of 3.2 percent to 0.5 percent. Non-residential construction, including public projects, increased 2 percent. Compared with a year earlier, it was up 1.7 percent. Smaller Drop Today's report may cause the government to revise figures on gross domestic product, released last week, to show a smaller decline. The advance report showed spending on non-residential construction fell at a 44 percent annual rate in the first quarter, the biggest decline on record. Residential construction fell at a 38 percent rate, the most since 1980, as builders delayed projects after financing dried up late last year. Gains in state and local government spending, perhaps spurred in part by the first of the government's infrastructure stimulus expenditures, supported public construction, which rose 1.1 percent. Declines in corporate investment and government spending in the first quarter helped drag down gross domestic product. The U.S. economy contracted at a 6.1 percent annual rate in the first quarter following 6.3 percent decline the prior three months, the Commerce Department said last week. Residential construction dropped 4.1 percent in March and was down 33 percent from a year earlier, today's report showed. U.S. builders broke ground on fewer homes in March and permits fell to a record low, as homebuilders sought to rein in inventory amid rising foreclosures. Still, starts of single- family homes were little changed for a third month, a sign a bottom may be forming. Foreclosures Notices of default or pending foreclosure sales surged 46 percent to a record in March from a year earlier, said RealtyTrac Inc., an Irvine, California-based seller of mortgage data, last month. Commercial builders have little incentive to start new projects as vacancies at U.S. malls and shopping centers rose to their highest in more than 10 years, according to first-quarter data released April 8 by Reis Inc. The increase reflected the slump in consumer spending at the end of last year. ProLogis, the world's biggest warehouse owner, said first- quarter earnings fell as the recession made it more difficult to lease out space. Chief Executive Officer Walter C. Rakowich said last week that ProLogis was dealing with a ``challenging environment'' for warehouse space.

Source