Construction activity in October plunged a sharp 1% — the biggest drop in more than five years, with housing activity falling for a seventh straight month, the Commerce Department said Friday. The overall plunge in the construction measure was the sharpest since September 2001, the month of the terror attacks on the World Trade Center and Pentagon.

Non-residential building, which has helped prop up construction employment and take some of the edge off the decline in housing activity, dipped 0.7%, the second monthly drop. Only public works construction showed strength.

"Unfortunately, it appears that growth in non-residential spending is starting to top out," says Gina Martin of Wachovia. "Total construction numbers are likely to show a fairly steady string of declines in months ahead."

Also Friday the private Institute for Supply Management said its index of manufacturing activity dropped below 50 in November. The 49.5 reading indicates the sector is contracting.

"The momentum of the nation's factory sector has gone flat," says Ken Mayland of Clearview Economics.

While the manufacturing slump has been led by a slowdown in the auto sector, the slump in housing is hurting wood products and appliance makers. New orders, production and employment all took a hit according to the index, indicating problems are becoming more widespread.

Analysts for Moody's Economy.com said a buildup in inventories will take some time to correct. While they expect manufacturing to remain soft in the near term, they foresee a rebound by mid-2007.

Fed Chairman Ben Bernanke in a speech earlier this week said he expected continued moderate growth. But an increasing number of economists suggest the outlook is more glum than Bernanke suggests.

"A period of slow (economic) growth is virtually inevitable," says Roger Kubarych of HVB-Unicredit. "The Federal Reserve is already being criticized openly ... for downplaying risks to the economy."

After expanding for a record five years, the housing sector is in the midst of a significant correction. That, in turn, shaved about a percentage point off economic growth in the third quarter of the year.

The economy has cooled from a strong 5.6% annual pace of expansion in the first quarter of 2005, to a 2.2% rate from July-September.

Some economists, such as Nouriel Roubini, an economics professor at New York University, forecast a recession ahead. Other forecasters, such as Bear Stearns, predict about a 2% annual pace of growth.

The Fed, which raised its target for short-term interest rates steadily from June 2004 to June 2006, has been on hold at 5.25%. The central bank is increasingly caught between an inflation rate that Bernanke called too high and an economy that is cooling uncomfortably fast.