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Why a Bounceback in Building Permits Is Good for the US Economy

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Building permits rise in August

The Conference Board Leading Economic Index (or LEI) uses the number of building permits issued as a constituent. The construction industry is one of the key sources of employment in the United States, and the number of building permits gives some insight into future demand for the industry and its workers.

The time gap between the issuing of a permit and the commencement of construction makes this indicator a leading indicator. The last time this indicator peaked was in 2005. Building permits then fell but started increasing again in 2011. Continued progress in the industry is a positive sign for the economy.

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Recent building permit data

In August, the number of building permits issued increased from a revised figure of 1,230,000 in July to 1,300,000. This bounceback in the number of building permits is in line with the overall trend in the construction industry. The impact of Hurricanes Harvey and Irma is likely to be seen in the next few months as new permits are issued. The weight of building permit data on the Conference Board LEI is 0.03, and it had a net positive contribution of 16% in August.

Market impact

In US markets (SPY), the iShares US Home Construction ETF (ITB) is a major fund operating in the construction sector. Other key funds in this space include the SPDR S&P Homebuilders ETF (XHB) and the Power Shares Dynamic Building & Construction ETF (PKB). Whereas activity in the industry dropped after Hurricanes Irma and Harvey, reconstruction efforts are likely to increase demand. In the next part of this series, we’ll analyze how the stock market (QQQ) has affected the LEI.

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