The construction industry is mired in gloom, and the forecasts for the future don’t look much better.

New housing starts fell 11 percent in July from June, to an annualized rate of 965,000 — the lowest level since March 1991, the Commerce Department reported.

Building permits, an indicator of construction plans, fell to an annualized pace of 937,000, 17.7 percent below June and 32.4 percent lower than in July 2007. “The housing market is in a deep recession, and it is getting worse,” Global Insight economist Patrick Newport told clients in a conference call.

Housing starts were skewed by a rule change in New York, prompting builders to start projects earlier in the year. The change made the data in June higher than they would have been otherwise, and lower in July than they would have been otherwise.

Newport estimates that 70 percent of the drop in housing starts in July was in the multifamily sector in the Northeast – the area affected by the New York rule change.

The market for single-family homes continued to suffer. Single-family starts slowed to an annualized 641,000 units in July, the lowest since 1991. Building permits for single-family homes slid to 584,000, the lowest rate since August 1982.

“Permits suggest that starts have some distance to come down yet,” says David Seiders, chief economist for the National Association of Home Builders. He thinks housing starts will bottom in the first quarter of 2009.

Even do-it-yourselfers have been cutting back on major projects, says hardware giant Lowe’s. “We continue to experience weakness in spending for larger projects and more discretionary purchases,” Lowe’s CEO Robert Niblock said on a conference call with analysts.

“Today, nearly 90 percent of our stores are in markets experiencing year-over-year home price declines, and generally our weakest comps are in those markets that have experienced the greatest declines,” Niblock said.

Lowe’s second-quarter earnings beat Wall Street expectations, but were still down 8 percent from the same period last year. Rival Home Depot said Tuesday it expects sales to fall 5 percent for its 2008 fiscal year.

Ken Goldstein, economist for The Conference Board, said the gloomy construction numbers might not be as bad as they look. “It’s not good news, but it’s not a catastrophe,” he says. “We’re seeing signs that housing is closer to bottoming than we were six months to a year ago.”