Home building, manufacturing slowing

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2:38 p.m.

The U.S. economy appears to be shifting into a lower gear, with residential construction falling sharply and manufacturing activity slowing.

Those developments and a benign reading on wage pressures helped ease worries that an overheated economy might spawn inflation troubles.

The Commerce Department reported today that residential home building dropped by 1.1 percent in April, the biggest decrease since January 2004. The weakness in home building contributed to a drop in overall construction of 0.1 percent, the first setback since June 2004.

A second report from the Institute of Supply Management shows that its closely watched gauge of manufacturing activity turned in a weaker-than-expected reading of 54.4 in May. That was down from 57.3 in April and a sign, analysts said, of a significant slowing in momentum in manufacturing over the past four months.

The construction report was one of the strongest signs yet that the nation's five-year housing boom is cooling off, a development that reflects a campaign by the Federal Reserve to boost interest rates as a way of slowing the economy and keeping inflation under control.

In another report of slowing housing activity, the National Association of Realtors said its index for pending home sales fell for a third straight month in April, dropping by 3.7 percent from the March level. This index tracks sales of previously owned homes for which a contract has been signed but the deal has not gone to closing.