U.S. housing starts slipped in May as the construction of multi-family housing units dropped, but further gains in building permits suggested a rebound that would continue to support economic growth in the second quarter.

Groundbreaking fell 0.3 percent to a seasonally adjusted annual pace of 1.16 million units, the Commerce Department said on Friday. May's decline followed a 4.9 percent surge in April.

Housing remains a pillar of strength for the economy, with residential construction adding almost six-tenths of a percentage point to first-quarter gross domestic product, the biggest contribution in more than three years.

Economists polled by Reuters had forecast housing starts falling to a 1.15 million-unit pace last month.

U.S. Treasury prices pared losses after the data. Stock index futures were trading lower and the dollar .DXY was weaker against a basket of currencies.

Groundbreaking on single-family homes, the largest segment of the market, rose 0.3 percent to a 764,000-unit pace last month. Single-family starts in the South, where most home building takes place, rose 2.6 percent to their highest level since December 2007.

Single-family starts in the Northeast surged 12.7 percent. In the West, groundbreaking on single-family housing projects rose 1.9 percent. But single-family starts in the Midwest tumbled 14.7 percent to a six-month low.

Further gains in single-family starts are likely after a survey on Thursday showed confidence among home builders rose to a five-month high in June amid optimism over sales and buyer traffic. But single-family home construction continues to run ahead of permits, which could limit gains in the near term.

Housing starts for the volatile multi-family segment fell 1.2 percent to a 400,000-unit pace. The drop followed an 11.9 percent jump in April.

The multi-family segment of the market continues to be supported by strong demand for rental accommodation as some Americans remain wary of owning homes years after the housing market collapse.

Multi-family home construction is also being aided by rising household formation as a fairly strong labor market increases employment opportunities for young adults.

Building permits rose 0.7 percent to a 1.14 million-unit rate last month. Permits for the construction of single-family homes fell 2.0 percent last month to a 726,000-unit rate.

But single-family permits in the South rose 0.8 percent to a five-month high. Multi-family building permits increased 5.9 percent to a 412,000-unit pace in May. 

By Lucia Mutikani; Editing by Paul Simao) - Reuters