Leading indicator: Building permits
We’re entering a new chapter of my passion in the market as I have recently been very interested (as part of my studies) into everything macro-economic. Trading the real way.m
I’ve recently been exposed to multiple leading indicator such as the ISM (PMI) and many other confirming indicators. Today we’re going to look at the most interesting one of the bunch.
Building permits
With a correlation coefficient of 0.38 the chart below looks interesting when compared to percentage growth (YoY) of the U.S. GDP. The building permits authorised show me how well an economy is doing as factors associated with building have important economic activities such as employment and loans to buy (and construct) residential and commercial properties.
If you’re a constructor looking to build a residential property, you’re basically telling the rest that you have faith in these properties being occupied. The bank in the meantime will also provide loans for the constructor to build and for the consumer (mortgage) to purchase.
On top of that, it will also provide employment to both parties. The chart below really shows you how willing banks are to give loans, that’s all which comes to it. I will write another blog about this, but in the modern economy fractional reserve banking does not exist. The only reason why a private bank would not give a loan is if they think that it will not be paid back.
There is always more to this data. If you look good enough on-line, through the website of the Federal Reserve, you’re also able to drill down in certain sectors. If there is a bigger upsurge of commercial building permits, it would indicate that business are expanding or that new business are being established. If there is a rise in building permit for more warehouses it could mean that commerce will increase in the coming years. It is still a leading indicator.