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Why the Rebound in Building Permits Is Positive for the US Economy

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Building permits and the economy

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

The time gap between the issuing of the permit and the commencement of construction activity makes this indicator forward-looking. The housing sector (ITB) employs a considerable percentage of the workforce, and so a healthy housing market (XHB) is a positive sign for the economy.

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Recent building permit data

In January, the number of building permits issued was reported at 1.4 million—a sharp increase of 7.4% from the December reading. Just as analysts were writing off the spike in housing following the hurricane season, this rebound indicates that the strength in the housing market could be here to stay. (Click here To read more on the January housing market report.)

The number of building permits has a weight of 2.98% on the Conference Board LEI, and this indicator had a net positive impact of 21% on the January LEI, as the total number of building permits has surged.

The housing sector outlook

According to the National Association of Home Builders’ January report, builders (REM) remain highly optimistic about the housing (PAVE) market. Increasing worker wages and higher levels of employment could increase the demand for single-family housing. Higher interest rates in the future could dent demand, but the decline in demand could be compensated if worker wages continue to increase.

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