While weakness was evident across all major building sectors, the biggest falls were in engineering and commercial construction, which were in part a reflection of the long lead times between development and construction of projects. All sectors were affected by difficult market conditions, subdued client demand and intense competition to secure new work.

Australian Industry Group Director of Public Policy, Dr Peter Burn, said: "Consumer and business caution is detracting from demand across the industry as suggested by declines in activity and new orders. This, together with the dampening impacts on the construction industry of the continued unwinding of public sector spending and higher interest rates, is slowing the momentum of recovery in the broader economy. Businesses in the construction industry are competing vigorously for new work with a nervous eye both on their order books and emerging wage pressures."

Housing Industry Association Chief Economist, Harley Dale, said: "A universally negative result for the Australian PCI® across all construction sectors for July 2010 represents a disappointing and weak update on the Australian domestic economy early in the September quarter.

"Contraction in both the detached and non-detached housing sectors unfortunately adds to the overwhelming evidence that, post a highly stimulatory monetary and fiscal policy environment, new home building activity will run out of puff. This further highlights the need for stable interest rates and the urgent need for further policy reform to reduce the obstacles to boosting Australia's new housing supply," Mr Dale said.

Australian PCI® Key Findings for July:

• The Australian Industry Group/Housing Industry Association Performance of Construction Index (Australian PCI®) fell further in July with the seasonally adjusted index dropping 3.1 points to 43.3 (readings below 50 indicate a contraction in activity).
• Weakness was evident across all major building sectors.
• A long lead time between development and construction of projects was reflected in the engineering and commercial construction results.
• All sectors continue to be affected by difficult market conditions, subdued client demand and intense competition to secure new work.
• Engineering construction activity fell 16.7 points to 36.2; commercial construction dropped to 35.3.
• Residential builders cited tight finance restrictions on new house building and weak demand from first home buyers as affecting activity.
• Activity in the apartment building sector fell for a third straight month.
• No sectors recorded growth in July.
• Across construction, the activity sub-index dropped 9.4 points to 40.0.
• New orders were down across construction.
• Wages and deliveries increased in July.