Oct. 31 (Bloomberg) -- Spending on U.S. construction projects unexpectedly rose last month as gains in the building of factories, hotels and schools helped soften the blow from another drop in housing.

The 0.3 percent increase, the first gain in four months, followed a revised 0.2 percent drop in August that wiped away a previously reported rise, the Commerce Department said today in Washington.

Commercial and nonresidential construction projects made up for a 19th consecutive decline in home building, helping the economy overcome the deepening housing recession. The drop in residential investment subtracted a percentage point from growth in the third quarter, the Commerce Department reported earlier.

``While significant difficulties persist in the residential housing market, there have yet to be any signs of the `pass- through''' to other parts of the economy, Ryan Brecht, an economist at Action Economics LLC in San Francisco, said in a note to clients before the report.

Economists forecast spending would decline 0.5 percent after an originally reported 0.2 percent increase in August, according to the median of 52 projections in a Bloomberg News survey. Estimates ranged from a drop of 1 percent to a gain of 0.1 percent.

Increases in exports, consumer spending and business investment helped economic growth unexpectedly accelerate to a 3.9 percent annual pace from July through September, offsetting the plunge in home construction, a report from the Commerce Department earlier today showed.

Homebuilding Decline

Private residential-construction spending fell 1.4 percent in September after a 1.8 percent August decrease.

Non-residential construction, including public projects, increased 1.8 percent, after a 1.2 percent gain in August. It was up 17 percent from a year earlier.

Public construction rose 1.9 percent and private non- residential spending climbed 1.5 percent.

For the past year and a half, demand for new factories, government structures and office buildings has helped soften the blow of the slump in housing.

``I don't think you have reached the point where nonresidential has turned down,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. ``I think that's a next year phenomenon.''

While new-home sales rose in September, the increase followed a steeper than originally reported decline in August that brought purchases to an 11-year low. The supply of unsold homes totaled 8.3 months, two months more than the 2006 average.

Construction Outlook

The relatively high level of inventories suggests builders will continue to hold back in coming months, economists said. Morgan Stanley Chief U.S. economist Richard Berner said in a note to clients on Oct. 29 that builders may have to reduce construction of single-family homes by another 40 percent to even the imbalance between supply and demand.

``The resulting further decline in housing activity would likely knock a quarter percentage-point off our already below- consensus U.S. growth forecast over the next year, leaving the economy a bit more vulnerable to unexpected shocks,'' Berner said.

The housing slump has also had an impact on some manufacturers. Fortune Brands Inc., the holding company for Moen faucets, lowered its full-year profit forecast on Oct. 26 because of slowing sales of housing-related products.

Slower consumer spending and economic growth will probably curb demand for new office buildings and factories, economists said. Public construction projects may also suffer as income tax revenues slow due to a softer job market, said Carl Riccadonna, an economist at Deutsche Bank Securities Inc. in New York.

Little Effect

Some nonresidential companies say they are not yet feeling any impact.

``The cooling of overall growth in the U.S. economy seems likely,'' Frank MacInnis, chief executive officer of EMCOR Group Inc., said on a conference call on Oct. 25. ``However, demand for EMCOR services remains very strong.''

EMCOR, a leading installer of electrical and mechanical systems, said third-quarter profit excluding some items totaled 55 cents a share, beating analysts' forecasts in a Bloomberg News survey.

To contact the reporter on this story: Courtney Schlisserman in Washington cschlisserma@bloomberg.net

Last Updated: October 31, 2007 10:00 EDT