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Why Building Permits Plateaued in December

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Building permits and the economy

The Conference Board uses the number of building permits issued as one of the constituents of its LEI (Leading Economic Index) model. The number of building permits is a forward indicator of economic activity in the housing and construction (PKB) industry.

The time lag between the issue of the permit and the actual commencement of construction activity makes this indicator forward-looking. The housing sector (ITB) is one of the major employment providers in any economy, and a healthy housing market (XHB) is a positive sign for the US economy.

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Recent building permits data

In December, the number of building permits issued declined marginally to 1.302 million from 1.303 million permits in November. The recent plateau in building permits is likely due to the normalization of demand after the surge in applications following the hurricanes in the US South. On an annual basis, over 1.26 million housing units were authorized by building permits in 2017—a 4.7% rise from just over 1.21 million building permits in 2016.

The number of building permits has a weight of 2.98% in the Conference Board LEI, but this indicator had a net neutral impact on the January LEI because the total number of building permits remained unchanged.

The housing sector’s outlook

In the US, housing market activity—especially in single-market homes—has been improving considerably. US homebuilder (REM) confidence is at a pre-recession high, and housing starts remain elevated.

Overall, the contribution of the housing sector to the US economy can be expected to remain positive in the year ahead, as improving employment and economic conditions foster higher demand for housing.

In the next part of this series, we’ll analyze how the stock market (SPY) performance has impacted the Conference Board LEI.

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