Income and Wages
Economic Indicators • 10 min
Shelter is one of the fundamental needs of humans to survive. From the earliest era when homes were built with branches and stones, the mankind advanced to a point in which it can construct buildings anywhere anytime and designate them as residences, offices, schools, factories, and hospitals. However, the advancement of the construction technologies is yet to eliminate the necessity of human power and a wide array of materials. Thus, it still has a strong effect on the pillars of the economy and often attracts governmental, commercial, and individual investments. High demand, relatively easy supply, and limited lands forced the governments to regulate the housing market by adopting a permission-basis model.
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A building permit is official permission to initiate a new construction project, provided by the governmental department of building or the building regulators. The Building Permits report gathers the data on all new construction permissions granted for residential buildings, housing units, commercial buildings, and warehouses within a specific time period. Building Permits report is released by the U.S. Census Bureau on a monthly basis. The Bureau conducts a survey among 9,000 permit issuers and publishes the data on the 18th working day following the end of the focused month. It also performs an annual survey among 11,000 permit-issuing authorities. Comparing the figures to previous data, we can infer the changes in the demand for new buildings. Information revealed in the Building Permits reports show the trends in the real estate market and the construction industry. Projects in these sectors are usually large-scale, long-term, and high in value. Therefore, they have a significant impact on the economic policy goals for Gross Domestic Product (GDP), inflation, and unemployment rate.
As a leading economic indicator, the Building Permits report measures the current demand in the real estate market and estimates the future performance of the construction industry. It is designed to gauge the strength of the national housing market and the state of the economy in general. The housing market is an important reference to understand the geographic targets of large-scale investments. As the report contains both nation-wide and location-specific information, it enables pinpointing which local regions are fuelling the economy, and which are dragging it down. Using this information, the government can spread the expansion to surrounding areas or other locations or stimulate the local economies by redirecting government investments as needed. The wide-reaching nature of the construction industry also allows the Fed and the analysts to infer the progress of the private sectors. For instance, the U.S. building permits started declining strongly in 2006, hinting an upcoming economic stagnation. It began as a subprime mortgage crisis and developed into the full-blown crisis, which will be marked as the Great Recession in history. This trend continued until 2009 when the global economy started to recover from the crisis.
The real estate market is considered as an important indicator of consumer and business confidence. When the consumers are feeling financially secure and have confidence in the economy, they are more inclined to get loans and purchase residences either as a new home or an investment. If they are not just secure but also prospering, they would prefer detached houses which are usually more expensive than regular residential units. High consumer confidence indicates a downtrend in unemployment and a growing economic demand which could accelerate inflation.
An increase in the number of permit applications for commercial buildings and warehouses indicate that the private business sector is expanding. When the rate of new business openings exceeds the capacity of available office spaces, more commercial buildings are needed to accommodate them. Similarly, the demand for warehouses rises when the production rates of manufacturers grow beyond the storage capacity provided by existing facilities. The business world’s confidence in the economy translates into higher volume of relatively risky investments, which would increase the GDP growth potential.
The construction industry is one of the prominent drivers of the national economy. Constructions usually require a large workforce and employ both skilled and unskilled workers. It also has a high industrial consumption rate in a wide range of raw materials such as concrete, bricks, and sand. Therefore, each construction project generates activity in several industries like mining, excavation, transportation, utilities, and more.
Construction projects are large by nature. They contribute to national employment in large numbers and for long durations, which pulls the unemployment rate down significantly. Furthermore, they create a massive demand for industrial production sectors and stimulate their growth. However, building permits do not necessarily indicate that construction will start immediately. Most projects receive permission ahead of their planned beginning, New projects which enter the actual construction process are reported in the Housing Starts data.
Analysts use the Building Permits data in conjunction with other prominent housing market indicators such as Housing Starts, Construction Spending, New Home Sales, and Existing Home Sales. A harmonised analysis allows drawing conclusions on the growth or stagnation of the housing market.
Along with its utility in macroeconomic analysis, the Building Permits reports are also important market events for news trading strategies in the financial markets. As a leading indicator of the economy’s progress towards monetary policy goals, it informs both the Fed’s interest rate decisions and the market sentiment towards the stocks of construction-related companies. Therefore, it can create trendsetting volatility in the hours after the release and generate multiple opportunities with high risk/return ratio.
Let’s say the U.S. economy just got out of a stagnant period and the Building Permits report is going to be released. If the forecast is higher than the previous, it would signify that analysts are expecting to see that the economy has started to recover. If the forecast is similar to or lower than the previous result, the markets are still unsure whether the economy is regaining momentum. When the report is published, if the results meet or exceed the expectations, the satisfaction of the market would drive USD higher. The stocks of construction-related industries, such as utilities and mining would also rise. However, worse-than-expected figures can cause market turmoil and create the opposite movement, elevating safe-haven assets like Gold instead.
The housing market is one of the locomotives of the economy and gives early clues about the direction it will be heading in the near future. Its strong influence on other industries and monetary policy goals makes its primary indicator, the Building Permits, an important measure to keep under surveillance. Once you employ AvaTrade’s comprehensive trading toolkit, you will trade the Building Permits with confidence.
The Building Permits report sheds light on the performance of one of the most important economic sectors. Now that you know what it shows and how its constituents affect macroeconomic conditions, and equipped with advanced trading tools, it’s time you permit yourself to build new peaks to your portfolio!
A building permit is an official document issued by local governments to allow for new construction or remodelling. They are meant to ensure that all local zoning laws and standards are followed. In the case of new construction projects, the numbers are also followed as an indicator of the strength of the US economy. When times are good and the economy is growing it is expected that the number of building permits will be growing since businesses and individuals have the free capital necessary to purchase new buildings and homes.
Not all building projects require a building permit, but new construction definitely does. Without a building permit there’s no way to ensure that the quality of the build is up to standards, or that it meets the legal codes in place for construction. Without the proper approvals a home cannot be sold, and in the event of a fire or other property destruction the insurance company wouldn’t pay on a policy if the home had work done without a permit that turned out to be the cause of the destruction. Plus, the number of building permits gives an indication of the strength of the economy.
While the most obvious influence of the building permits numbers is the number of new homes being built, there are other underlying factors that traders consider when the building permits data is released. For example, rising numbers of building permits means more construction workers are needed, which could lower the unemployment rate, and could also help lift average wages. In addition, all new homes need to be outfitted with appliances, so a rising number of building permits means appliance and furniture makers should be doing quite well for months to come as the new homeowners’ purchase couches, refrigerators, washing machines and the like for their new home.
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