Why a Rise in October Building Permits Is a Good Sign for the US Economy


Nov. 30 2017, Updated 9:02 a.m. ET

Building permits rise in October

The Conference Board Leading Economic Index (or LEI) has the number of building permits issued as a component of its economic model. The housing industry provides a considerable number of jobs in the economy. As a result, an increasing number of building permits is a signal for continued demand for construction workers.

The reason for the number of building permits to be considered as a leading indicator is the time gap between the commencement of construction and the issuance of the building permit.

The previous expansionary cycle in the housing (IYR) industry ended in 2005 when the housing market peaked. It was only in 2011 that the number of building permits started to increase and have remained above 1.2 million permits per month.

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Recent building permits data remains upbeat

In October 2017, the number of building permits totaled ~1.3 million permits, a sizeable increase from the September reading of ~1.2 million permits. An increase in the number of building permits is due to the rebuilding efforts after hurricanes devastated parts of Florida and Texas. The major increase in the number of building permits issued was in the southern region of the country.

The number of building permits has a weight of ~3.0% on the Conference Board LEI. The number of building permits was a positive contributor to the LEI in October and had a net positive impact of 17.0% on LEI.

Market impact

In the US markets (SPY), the iShares US home construction ETF (ITB), which invests in home construction companies, has risen 52.0% in 2017. This increase could reflect the optimism in the construction sector.

The SPDR S&P Homebuilders ETF (XHB) and the PowerShares Dynamic Building & Construction ETF (PKB) have risen 24.6% and 20.7%, respectively.

In the next part of this series, we’ll analyze how stock market (QQQ) performance has impacted the Leading Economic Index.


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