Economic building blocks
The number of building permits is considered an important leading indicator for the US economy. The change in the number of building permits gives us an idea about the health of the construction industry.
Permits are usually applied for a few months before planned construction. Once granted, the process for a residential project could take 12–18 months. A rise in the number of building permits signals an improvement in construction activity for the next few months, and a fall is a sign of slowing activity in the industry.
The global economy is still recovering from the last housing crisis, which began in late 2007. A sudden fall in housing permits signaled the end of an expansion cycle and led to a subprime mortgage crisis that triggered a global financial crisis in 2008.
Recent trends in building permits data
The number of building permits issued in June 2017 stood at 1.25 million, an improvement from May’s 1.17 million. The overall trend in the housing market has been positive since the beginning of its recovery in 2011. There was a minor fall in the number of permits in May 2017, but that was deemed transitory by market participants.
We’ll have to wait and watch to see if this bounce in building permits can be sustained. The Conference Board Leading Economic Index (or LEI) has a weight of 0.03 for building permit data, and this economic indicator has a net contribution of 0.21, or 21%, to the LEI’s overall performance.
The major ETF that tracks construction activity in the US market (SPY) is the iShares US Home Construction ETF (ITB), which has risen 24% year-to-date. Key companies that are affected by the trends in the housing market include D. R. Horton (DHI), Home Depot (HD), and Mohawk Industries (MHK).
The overall outlook for the sector remains positive, but rising interest rates could affect the sector as borrowing costs for home owners rise.
In the next part of this series, we’ll analyze how the market’s (QQQ) performance has affected the LEI.