Builders cut back on spending by the largest amount in six months in July with sharp reductions in outlays for government building projects.

Construction spending fell 1.3 percent to a seasonally adjusted annual rate of $789.5 billion, the Commerce Department reported Thursday. That is 3.5 percent above an 11-year low hit in March but it is still only about half the $1.5 trillion that economists view as a healthy level for construction. Economists believe it could take four years before construction activity returns to more normal levels.

The weakness in July reflected a 2.1 percent drop in spending on government building projects, which fell to the slowest pace since late 2006.

Spending on residential construction fell 1.4 percent, reflecting a big drop in spending on home improvement projects. Spending on new homes and apartments showed small increases with total residential construction standing at an annual rate of $248.1 billion.

The 0.4 percent drop in non-residential spending, to an annual rate of $266.4 billion, reflected declines in spending on hotels, recreation facilities and factories.

The 2.1 percent drop in spending for government projects pushed this sector down to an annual rate of $275 billion, the lowest level since late 2006. State and local governments have been forced to cut back because of severe budget problems while the federal government has come under pressure from a drive to get control of soaring budget deficits.

Housing has been a drag on the economy and is a key reason the economy has struggled to recover two years after the recession officially ended. Home sales are on pace this year to be the worst in 14 years.

High unemployment, larger down payment requirements and tighter credit are preventing many buyers from entering the market. Many who can afford to buy are waiting because they are worried prices have yet to hit bottom.

Economists believe home prices will fall further once banks resume millions of foreclosures, which have been delayed because of a government investigation into mortgage lending practices. If the U.S. economy slips back into another recession, prices could drop even further.

The pace of sales for previously occupied homes is trailing last year's 4.91 million sold, the fewest since 1997. In a healthy economy, people buy roughly 6 million homes each year.

Sales of new homes dropped in July for third straight month. This year is shaping up to be the worst for sales of new homes on records dating back to 1963.