WASHINGTON, Sept 3 (Reuters) - U.S. construction

spending fell more than expected in July as higher mortgages and

increased supply weighed on single-family homebuilding.

The Commerce Department's Census Bureau said on Tuesday that

construction spending dropped 0.3% after being unchanged in

June. Economists polled by Reuters had forecast construction

spending dipping 0.1%. Construction spending increased 6.7%

year-on-year in July.

Spending on private construction projects decreased 0.4% in

July. Investment in residential construction also fell 0.4%.

Outlays on new single-family construction projects plunged

1.9%. Spending on multi-family housing was unchanged. A surge in

mortgage rates in the spring weighed on homebuilding and sales,

leading to an inventory overhang in some regions.

The excess supply and weak demand has forced builders to

hold back breaking ground on new projects. Single-family

homebuilding dropped to a 16-month low in July, with inventory

near levels last seen in early 2008.

Residential investment, which includes homebuilding,

contracted in the second quarter after double-digit growth in

the January-March quarter. Mortgage rates have since dropped to

16-month lows amid expectations the Federal Reserve will start

cutting interest rates this month.

Spending on private non-residential structures like

factories dropped 0.4% as the boost from a drive by President

Joe Biden's administration to bring semiconductor manufacturing

back to the United States fades.

Investment in public construction projects edged up 0.1%.

State and local government spending slipped 0.1% and outlays on

federal government projects jumped 2.1%.