Why FX Traders Need to Understand Building Permits
Building permits, also known as the census bureau’s monthly report on building permits. Is a leading indicator of economic growth. Building permits is a part of the U.S. housing sector providing us with multiple economic signals on whether the U.S. economy will grow or slow.
This monthly report stems from the U.S. housing starts report, used to predict GDP growth. Building permits is the number one most misunderstood economic release in the U.S., even professional traders and veteran economists miss out important signals the data provides.
The source to this data can be found at: www.census.gov/construction/bps/uspermits.html.
The U.S. housing starts report also includes the number for housing completions. Each permit has a different definition, and include an order in which they occur when a new house/ project is built.
Building permit authorized briefly means that the building (residential home) has received its plans and permission by the local state planning department. The reason it’s a leading driver is because it can predict possible future house completions, thus more investments, jobs and wages being circulated in the economy. The housing start is a co-incident driver, this is the phase before completion, this is where the foundations of the building have been constructed and the project has started. Housing completion is basically, the structure and interior has been completed and the house itself is finished and on the market. This is a lagging indicator because it provides no insight on possible future growth and rather reacts towards current demand in the market.
Why is a bunch of construction information important to us as traders? Firstly, it’s a very important survey which tells us several things. One of them being, whether developers of the projects are bullish or bearish on the prospects of future home sales. The more applications for building permits means an expectation of future home sales, additionally the permits cost between 500-1000$ per home so they indicate if developers are confident in the future of the economy.
Secondly, the demand for housing from the U.S. consumer can be predicted, changes in the building permits can lead to eventual changes in consumer sentiment and spending. E.g. if building permits are very high, U.S. consumers are looking to buy houses in the future, therefore dipping into consumer spending and sentiment.
Finally, which many traders miss out is, it gives an idea of the supply of loans in the economy. Since developers don’t finance projects with 100% equity or cash, what they do is use a mix of equity, cash and debt. Additionally, consumers in the U.S. don’t buy houses for cash, they buy them with debt (mortgages). This creates a barometer on the health of the economy and the debt market, therefore giving an idea whether the monetary base is going to be inflationary (expand) or deflationary (contract).
Throughout the historic data, extremely low levels of permits meant that there was an extremely tight lending environment. Therefore, as speculators we predict a looser monetary policy (lower interest rates) and increased money supply from the central authority.
What we're doing is predicting inflation on the extremes, resulting in a short in the currency bias. Extremely high levels of permits, meant that there was an extremely loose lending environment, as the speculators we predict at the extreme there will be a tighter monetary policy (higher interest rates) and decreased money supply. Therefore, we predict deflation, creating a long currency bias in our overall trading idea.
Overall, what we should have learnt from the building permits numbers is that it tells us the liquidity and health of the U.S. banking sector, the potential for change in consumer spending habits and therefore the inflation outlook in predicting currency direction.