June 1 (Bloomberg) -- Spending on construction in the U.S. unexpectedly rose in April as the housing slump eased and more commercial projects got under way.

The 0.8 percent gain was the biggest since August and followed a revised 0.4 percent increase the prior month, the Commerce Department said today in Washington. Residential construction climbed 0.6 percent and work on power plants and factories propelled commercial construction up.

Federal and local government spending will ramp up as funding from the $787 billion fiscal stimulus package filters through to worksites. Borrowing rates near historic lows and improving business and consumer confidence may help stem the worst housing slump since the Great Depression.

“Residential construction may be bottoming,” said Steven Wood, president of Insight Economics LLC in Danville, California. “Over the next several quarters, federal stimulus dollars may support public construction activity despite weak state and local government funding.”

Other reports showed manufacturing contracted in May at the slowest pace in eight months and consumer spending fell in April.

Stocks rallied and Treasury securities fell amid signs the worst of the recession is over. The Standard & Poor’s 500 index was up 2.3 percent to 940.54 at 10:48 a.m. in New York. The yield on the 10-year note soared to 3.63 percent from 3.46 percent late in the day on May 29.

Projected to Drop

Economists projected construction spending would drop 1.5 percent, according to the median estimate of 45 economists surveyed by Bloomberg News. Forecasts ranged from a decline of 2.5 percent to a gain of 0.1 percent.

Non-residential construction, including public projects, increased 0.8 percent. Compared with a year earlier, it was up 2.5 percent.

Public construction decreased 0.6 percent, restrained by declines in the building of schools, water-supply and sewage- treatment plants. Such projects may increase in coming months as funds from the government’s infrastructure stimulus spending filter through to worksites.

Spending on structures fell at a 42 percent rate in the first quarter, while residential outlays dropped at a 39 percent pace, the government reported last week. The economy shrank at a 5.7 percent rate, after a 6.3 percent decline in the fourth quarter.

Billings

Architects in the U.S. reported billings dropped in April at a slower rate than the prior month as federal funding started to flow, the American Institute of Architects said last month.

The Architecture Billings Index fell to 42.8 in April from 43.7 in March, when it posted its biggest gain since August 2006. Still, billings have been falling since January 2008, the last time the index was above 50, the dividing point between contraction and growth.

“A growing number of architecture firms report potential projects arising from federal stimulus funds,” said AIA Chief Economist Kermit Baker in a statement on May 20.

General Growth Properties Inc. on April 16 filed the biggest real-estate bankruptcy in U.S. history, as the global credit freeze blocked it from refinancing some of the of the $27.3 billion of debt it amassed on its way to becoming the nation’s second-biggest shopping mall owner.

“We intend to emerge as a leaner company,” General Growth President Thomas Nolan said in an interview. “We want to come out as a less leveraged company. Our business model remains strong.”

Homebuilders are still reeling. D.R. Horton Inc., the largest U.S. homebuilder by market value, on May 5 reported a quarterly loss that exceeded analysts’ estimates as orders plummeted 45 percent from a year earlier.

“Market conditions in the homebuilding industry are still challenging,” Chairman Donald Horton said in a statement.

To contact the reporters on this story: Bob Willis in Washington at bwillis@bloomberg.net; Courtney Schlisserman in Washington at cschlisserma@bloomberg.net

Last Updated: June 1, 2009 10:49 EDT