Definition: In his book 'Investment Timing and Business Cycle', Jon Gregory Taylor noted that "financial markets tend to focus on more timely indicators such as Housing Starts and Building Permits; New Single-Family Home Sales and Existing Home Sales." Building permits is one of the 10 components of global key leading indicators and it has been a reliable sign of economic trend. This certainly comes across as no surprise as a whooping 40% of a typical American budget goes towards downpayment of a house.
Bernard Baumohl agreed in his book 'The Secrets of Economic Indicators', "Excluding one brief instance, there has never been a recession in the U.S. at a time when the housing sector stood strong." The author go on to state that the only one time the economy collapse despite robust housing market was in 2001, during when the recession is short-lived and mild. Since all home building and remodeling works require building permits, housing activity can be monitored just by looking at the volume of building permits issued within a fixed period.
Housing, or most precisely building permits serve as a reliable economy marker due to its sensitivity to interest rate, which is another leading economic indicator in its own right. Almost all building projects require advance applications of building permits. In this sense, the volume of building permits can forecast the housing performance in near future. Such are the reason why experts regard homebuilding as one of the most accurate leading indicators of economy direction.
Keeping tab on building permits can serve as an early indicator of economic flow by one to three months. This is because housing is a sector that creates bigger ripples in the economy canvas since its outcomes effect other sectors such as steel, timber, employment, manufacturing and so on, which Baumohl called 'the multiplier effects'. He went on to illustrate this scenario, "by one estimate, for every 1,000 single-family homes under construction, some 2,500 full-time jobs and nearly $100 million in wages are generated." On a further level, the housing industry also effects retail growth for household goods such as electronics and furnitures. This is why the home construction industry can be a powerful sign of economic health although it only made up about 5% of the total GDP.
A consistent decline in the housing sector and issuance of building permits is a strong sign of a weakening economy , and possibly a recession. During better times, the opposite is true as the economy is booming and people are willing to spend money in upgrading their homes and purchase new properties. "As fewer factories and warehouses are built, it suggests that underlying demand on the business side of the economy is also weakening," said Chaimaine Buskas, a senior economics strategist for TD Securities.
Information about building permits issuance and volume is released every month at 8.30 a.m. Eastern Time on www.census.gov. The statistic for current month will be available two to three weeks into the following month.