Further contraction of house building dragged down the overall construction market according to new data in the Ulster Bank construction purchasing managers index. Employment in the construction sector fell for the first time since August 2003.

Pat McArdle, Ulster Bank's chief economist, said employment in the sector "has ceased to expand" rather than fallen dramatically and he expected it to continue "roughly flat" for the foreseeable future. The impact of a reduction in new house builds impacts most heavily on overall employment in the sector as it is more labour intensive than the two other sub-sectors that Ulster Bank tracks - civil engineering and commercial construction.

At 50.7 in May the overall construction industry index was broadly unchanged from the April figure of 50.6, which was the lowest figure reported in three and a half years. A figure of 50 indicates zero growth.

"Housing weakened further in May but commercial rebounded on cue and civil was also strong," said Mr McArdle.

"However, housing dominated as it accounts for over 60 per cent of the total and its decline was sufficient to offset increased rates of activity in the other two areas, leaving overall construction activity broadly unchanged."

Commercial activity was the strongest sector, reporting a figure of 57.3, a significant bounce on the April figure of 53.4. Civil engineering activity was also up slightly from 55.1 the previous month to 55.6. Housing activity continued to fall off, reporting a figure of 37.0, down from 39.1 in April. The decline in residential building was the largest since December 2001.

Mr McArdle said the big difference between now and previous construction slowdowns in 2001 and 2003 is that previously all three sub-sectors contracted whereas now it is housing activity alone that is dragging the sector down. "With confidence fragile, the sharp curtailment of housing activity is welcome as a lower supply should help prevent greater falls in house prices," said Mr McArdle.

Confidence amongst construction industry purchasing managers in May was unchanged from the previous month. Those with a positive outlook for the coming year commented on new business enquiries and the removal of uncertainty following the election. Those anticipating a decline cited higher interest rates and a weaker housing market.

The price of inputs rose strongly in May, mainly due to increases in metal and oil-based products.

Data for the survey, a seasonally-adjusted index designed to measure the overall performance of the construction sector, is compiled by NTC Economics and is based on interviews with purchasing managers.