Building Activity Indicators

Building activity indicators are economic reports or indexes that provide 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.

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, in 2017, construction spending accounted for almost 6.5 percent of the overall U.S. economy, 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

To illustrate how the strength of building activity indicators tends to mirror the condition of the U.S. economy, here are several examples of recent 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. Also in May, 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. The month prior, in 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.