Is a Fall in Building Permits a Cause for Concern?



Building permits fall again

The number of building permits issued is considered an important leading indicator for the US economy. The health of the construction industry, which employs a lot of people, can be assessed by changes in the number of building permits issued.

Building permit data is considered a leading indicator because permits are applied for a few months before actual construction commences. For instance, the number of building permits peaked in May 2005, almost two years before the big crash of 2007. A continued fall in the number of building permits is a warning sign for markets.

Recent building permits data

In July, the number of building permits issued was 1.2 million, a fall from the upward revised June reading of 1.3 million. This drop in the number of building permits is not worrying, as the overall trend in the housing market has remained positive. Building permit data has a weight of 0.03 points in the Conference Board Leading Economic Index (or LEI). Building permit data was the only negative contributor to the index in August, with a net contribution of -12%.

Market impact

The iShares US Home Construction ETF (ITB) tracks developments in US (SPY) housing sectors. The fund invests in companies such as D.R. Horton (DHI), The Home Depot (HD), and Mohawk Industries (MHK). Its year-to-date return stands at 20.7%, reflecting a positive outlook for the housing industry. With interest rates expected to stay grounded, further gains in the sector may be seen. In the next part of this series, we’ll analyze how the stock market’s (QQQ) performance has affected the LEI.

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