U.S. builders increased their spending on construction projects in October by the largest amount in five months, led by a surge in housing.

The Commerce Department said Monday that construction spending rose 1.4 per cent in October.

It was the largest gain since a 1.7 per cent increase in May. The increase raised spending to a seasonally adjusted annual rate of $872.1 billion. That is nearly 17 per cent higher than a 12-year low hit in February 2011.

Still, even with the gain, the level of spending on construction remains only about half of what's considered healthy.

Housing construction spending jumped three per cent in October. Non-residential building rose 0.3 per cent. The government said Superstorm Sandy, which hit in late October, had only a minimal effect on the figures.

Sales of new homes fell slightly in October, dragged lower by steep declines in the Northeast partly related to Superstorm Sandy. New-home sales were still 17 per cent higher in October than the same month a year ago.

Strength in home building has been one of the bright spots for the economy this year. But overall construction is still being offset by weakness in commercial real estate and tight state and local government budgets.

Residential spending rises 29%

The strong three per cent increase in housing construction spending in October left the rate of annual spending 19 per cent above the level of October 2011.

The housing market appears to be withstanding fears that the economy will go over a "fiscal cliff" next year without a budget deal to prevent tax increases and spending cuts from kicking in, said Paul Dales, senior U.S. economist at Capital Economics.

Dales noted that residential spending over the past three months has jumped at a 29 per cent annual rate. The pace of spending on non-residential construction is now 10.7 per cent above its level a year ago.

Spending on hotel construction and shopping centers both rose in October. Government construction spending barely rose, to a level that's still below its rate of a year ago.

Public projects have been under stress because of budget problems at all levels of government. Federal construction spending rose 10.7 per cent in October.

But spending fell slightly among state and local governments. From July through September, residential construction grew at an annual rate of 14.2 per cent. Housing construction is on track to contribute to economic growth this year — the first time that's happened in the five years since the housing bubble burst.

Though new homes represent only a fraction of the housing market, they have an out-size impact on the economy.

Many can't qualify

Each home built creates an average of three jobs for a year and generates about $90,000 in tax revenue, according to statistics from the National Association of Home Builders. Builders are increasingly confident that the housing recovery will endure.

A measure of their confidence rose in November to the highest level in 6 1/2 years. And builders broke ground on new homes and apartments in October at the fastest pace in more than four years.

But there are factors dragging on the housing recovery. Many Americans, particularly first-time homebuyers, are unable to qualify for a mortgage.

And many can't afford larger down payments that are being required by banks.

While housing has strengthened this year, the broader economy has lagged behind. The government reported last week that overall economic growth increase to an annual rate of 2.7 per cent in the July-September quarter, up from 1.3 per cent in the April-June quarter.

But through the first nine months of this year, economic growth has averaged just two per cent, far below what is needed to make a significant dent in unemployment. Many analysts think growth is slowing in the current October-December quarter to below two per cent.

The disruptions caused by Superstorm Sandy weighed on consumer spending in October. And many consumers and businesses may also be worried about automatic tax increases and spending cuts that are scheduled to kick in next year, if Congress and the Obama administration fail to reach a deal before then to avert them.