Building permits and the economy
The Conference Board uses the number of building permits issued as one of the components of its Leading Economic Index (or LEI) model. A strong housing (XHB) market is a positive sign for the economy, as the housing and construction industry (ITB) employs a considerable chunk of the US workforce, which helps reduce unemployment and increase economic output. The reason for using building permits as a forward-indicator is the time gap between the issuing of the permit and the start of construction (PKB) activity. An increase in the number of building permits is a sign of increased activity in the future, as work could begin in a few weeks or months.
Recent building permits data
In April, the number of building permits issued was reported at 1.35 million, a decrease of 1.8% from the downward revised March reading of 1.37 million permits. The decrease in the April building permits is because of the decline in the volatile multi-sector housing, while the single-family housing permits remained stable. The number of building permits has a 3.0% weight in the Conference Board LEI, and this indicator had a net negative impact of 5% on the April LEI reading, as the total number of building permits have decreased.
Housing sector’s outlook
As per the National Association of Home Builders’ latest report, builders’ (REM) confidence increased by one point to 70 in April. Builders are reporting strong demand for the housing sector (PAVE) despite the increase in interest rates in recent months, and they expect the housing recovery to continue. In the next part of this series, we’ll analyze how the performance of the S&P 500 Index impacted the LEI in April.