About That Surge In Building Permits

Yesterday, the media spin went into full overdrive as the most recent housing data was released on starts and permits. The following is Econoday's summary:

"Don't let the headline fool you, the housing starts & permits report points to solid strength for the housing sector. Starts came in at a 1.036 million rate in May which is down 11.1 percent from the April rate but the April rate, which was already one for the record books, is now revised higher to 1.165 million for, and this is no misprint, a 22.1 percent gain from March. Sealing matters is another gigantic surge in permits, up 11.8 percent to 1.275 million following a 9.8 percent gain in April. Forecasters will be revising their second-quarter GDP estimates higher following today's report, not to mention their estimates for Thursday's index of leading economic indicators where permits are one of the components.

Permits are the leading indicator in the report, and the latest rate is the best since way back in August 2007. The gain is centered in the Northeast followed by the Midwest. Turning to starts, the monthly step back is split between all regions with the Northeast, in contrast to permits, showing the largest percentage decrease."

As usual, there is much more to the story than just the headline data point if we are to understand what is happening within the "real" economy. The following series of charts will hopefully dispel some of these misconceptions and faulty analysis.

Seasonal Adjustments Gone Haywire

The first issue is how the data is reported. Taking a number, annualizing it, and then seasonally adjusting it, distorts the actual data to a great degree from time to time. This is one of the reasons why the BEA is now trying to readjust the calculation of GDP due to "residual bias" in the seasonally adjusted data. The chart below shows the 12-month average of the NON-seasonally adjusted permits as compared to the NON-ANNUALIZED seasonally adjusted data.

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