Content for June 22, 2001 from the Indiana Business Research Center, IU Kelley School of Business

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Building permits are not always a good economic indicator

Monthly building permits often are watched as a way of judging a region’s economic health. But in many cases, says the Indiana Business Research Center, building permits are not a good indicator.

Building permits are reported inconsistently from place to place. Sometimes a permit is issued and the structure gets built much later or not at all. And many parts of Indiana do not make official building permit reports at all. So the data can be pretty unreliable.

The Indiana Business Research Center, a part of the Kelley School of Business at Indiana University, offers the following example. Take a look at recent history in the Evansville metropolitan area. Compare the trend in reported building permits to the trend in the unemployment rate, as shown on the chart.

During the year 2000, the trend in monthly building permits was mostly down. Fewer and fewer permits were reported. At the same time, the unemployment rate was improving. If you used the decline in building permits to forecast slower construction activity and therefore higher unemployment, you would have been disappointed. Judging from the falling unemployment rate, economic conditions in Evansville seem to have brightened during 2000, even though the building permit reports indicated a slowing.

Evansville’s unemployment rate did bounce up slightly during the first quarter of 2001, but some increase is normal for the first part of the year. Overall, we can’t find much useful correlation between building permit reports and the unemployment rate. As an economic indicator, any trend in building permits must be viewed with skepticism.

IBRC

June 22, 2001