Building Activity Indicators

What Are Building Activity Indicators?

Building activity indicators are economic reports or indexes that provide analysts and investors with information about the present and projected level of demand for residential, commercial, and industrial construction.

Commercial and industrial building activity includes the construction of hotels, office buildings, multi-family residences, schools, hospitals, and other institutional buildings. Residential activity includes new housing permits for single-family homes or multi-unit dwellings.

Understanding Building Activity Indicators

Building activity indicators provide critical insights about the health of the broad economy, largely because the level of construction activity plays such a key role in how the overall economy performs. In fact, construction spending accounts for around 4% percent of the overall U.S. economy in any given year, as measured by gross domestic product (GDP).

If businesses are investing in new construction, it typically signals that economic growth is strong or on the road to recovery. On the other hand, weak building activity may spell trouble for the economy

Building activity indicators are statistics that monitor such data as building permits issued, construction of buildings during a particular period, construction spending, the number of construction workers, and even the number of buildings demolished. All of these data points may provide valuable insights about where the economy is headed, at least during the short term.

Another well-received feature of business activity indicators is their timeliness. Most are published monthly, giving users a jump on the more broad quarterly economic measures such as gross domestic product, or GDP.

There are multiple gauges of building activity. Some indicators are issued by the federal or state governments, while others are published by construction industry associations and agencies. One popular measure is the Architecture Billings Index. This leading economic indicator polls architecture firms about whether their billing activity increased, declined, or remained flat in the previous month. Trends in architecture billings can often reveal what is likely to happen with spending levels on construction nine to 12 months in the future.

Other popular indicators of building activity include the U.S. Census Bureau's New Residential Construction Index and its New Residential Sales Index.

Some Popular Indicators

There are several indicators of building activity:

• New housing starts: The number of new residential construction projects that begin during any particular month.
• New home sales: Measures sales of newly built homes.
• Pending home sales: The Pending Home Sales Index (PHSI) is an index created by the National Association of REALTORS (NAR) that tracks home sales where a contract is signed, but the transaction has not yet closed.
• Architectural Billings Index: A leading economic indicator of demand for non-residential construction activity. 
• Construction spending: Measures the amount of spending on new construction.
• NAHB/Wells Fargo Housing Market Index: Based on a monthly survey of members belonging to the National Association of Home Builders (NAHB). 
• U.S. Census New Residential Construction & Sales Indices: The U.S. Census Bureau puts out a monthly report on new domestic construction spending activity, by dollar value, in the country. The report gives a breakdown of residential and nonresidential spending, as well as by private and public spending. 

While an important housing market indicator, measures of existing home sales do not inform us about new construction activity.

Example of Building Activity

To illustrate how the strength of building activity indicators tends to mirror the condition of the U.S. economy, here are several historical examples using construction-related data.

For instance, in May 2018 U.S. housing starts, which measure the number of new residential construction projects that have begun in a given month, reached an 11-year high at the time. Also, in May of that year, construction spending hit its highest point since January 2016. Meanwhile, the Architectural Billings Index scored 52.8 in May; any score above 50 shows an increase in billings.

So was the overall U.S. economy strong in May, echoing the robust performance of the building activity indicators above? Yes, but it’s important to keep in mind that these are monthly indicators. In the previous month, April 2018, many building activity indicators were negative. Don’t just use one month to gauge the direction of the economy. Follow the trend, while keeping in mind that past performance is not always an indicator of future results.