The Commerce Department report Monday also showed that nonresidential construction dropped by 0.7 percent in October, the third decline in the past four months, leaving activity at a seasonally adjusted annual rate of $417.7 billion. Nonresidential activity had been an island of strength in the midst of the steep downturn in housing, but that area has begun to weaken because of the severe credit squeeze, which is making it harder for developers to get financing.

Government building projects did show strength in October, rising by 0.7 percent to an annual rate of $316.1 billion. State and local construction was up 0.3 percent to a rate of $291.1 billion, while federal construction activity totaled $25 billion at an annual rate, an increase of 5.5 percent from September.

The Bush administration got Congress to pass a $700 billion financial system rescue package on Oct. 3, but many economists believe the bailout won't keep the country from undergoing a prolonged recession, a development which could make it even harder for the construction industry to mount a sustained recovery.

Manufacturers also have been hit hard by the housing slump and financial crisis, which have led to cutbacks in business and consumer spending.

Deere & Co., which makes agriculture and construction machinery, has seen its profit fall amid the economic downturn. The Moline, Ill.-based company said last week that its fourth-quarter earnings fell 18 percent and it forecast that profit will drop by 7 percent in 2009.