Yesterday I introduced you to an equation that described the Gross Domestic Product (GDP) in terms of Consumer Expenditures (C), Investment (I), Government Spending (G), and the difference between exports and imports of goods and services (X - M). I told you yesterday that, whenever the occasion presented itself, I would explain how the indicators discussed in the daily articles relate to the terms in the GDP equation. Well, today is my first chance to do that. The indicators for today are related to the Investment (I) term in the equation.

As used in the GDP equation, Investment refers to the sum of three different economic elements:

1. Change in Business Inventories---the stocks of materials and goods held by manufacturers, wholesalers and retailers.
2. Nonresidential Fixed Investment---business acquisitions of structures and equipment.
3. Residential Construction---the building of single-family and multiple-occupant residence units.

It is the last of these three, Residential Construction, that we will discuss today.

This morning, the Bureau of the Census of the Commerce Department released its report on housing starts and building permits for the month of September. Privately owned housing starts in September were at a seasonally adjusted annual rate of 1,390,000---virtually unchanged from a revised rate for August of 1,392,000. Both of these readings are down 2.86% from the five-month peak of 1,432,000 reached in July.

The seasonally adjusted annual rate of housing units authorized by building permits in September was 1,389,000. This is 1.54% higher than the revised August rate of 1,368,000. The building permits rate has been either up or unchanged every month since March.

As I pointed out last month, Housing Starts and Building Permits are both excellent leading indicators of the state of the economy. They both tend to peak or bottom before peaks and valleys in the GDP. The Department of Commerce gave the nod to the Permits indicator when it was designing its Composite Index of Leading Economic Indicators (LEI). Building Permits was chosen as one of the eleven indicators feeding into the composite index.

What are these two indicators telling us? Housing Starts have peaked and are movings sideways. By itself, Housing Starts seems to be indicating a temporary slowdown in economic activity. But, Building Permits---the Commerce Department's leading indicator of choice for the housing market---has been in an uptrend for the past six months. Based on the performance of the Permits indicator, It appears that Residential Construction will continue to make an increasingly positive contribution to the GDP.

Merlin was sitting around last night talking to a couple of his eight cats, and the one with the rheumy eyes and crooked tail told him that there would be no important economic news releases tomorrow. So, tomorrow Merlin will be taking a Sorcerer's in-service training day. But, he'll be back again next week with more fantastic Foolish facts about the economy.

Byline: Lafferty (MF Merlin)