Someone asked me the other day about housing starts and what they mean and after reading that starts are up 18% in the third quarter (Q3 in investment lingo) in Canada, I figured now was a good time to tackle it.
In an economy, there's something called a business cycle. The measures or indicators used in determining the progress of a cycle come in three forms: leading, coincident and lagging.
Housing starts fall under the leading category. While not infallible, leading indicators generally "peak and trough" before the overall economy and are observed to anticipate the direction of a cycle.
Why are housing starts a leading indicator? Can you think of bigger purchase people make? Buying a house is its own "stimulus package." Think of it. Think of all the things you need to buy for your new home. The goods and services required cut right across the retail landscape. It can be a way of measuring the health of consumer confidence as they tend to precede other big ticket purchases like cars and appliances. That's why starts are an important indicator.
Other leading indicators include: new durable orders, shipment/inventories, movements and changes in profits and stock prices, spot commodity prices (demand for raw materials) and average hours worked per week.
Statistics Canada measures leading indicators through a composite of 10 leading indicators into one index.
Coincident indicators, for their part, are those that which move or change more or less at the same time as the overall economy and include: GPD, retail sales and personal income. Last are lagging indicators and they change after the overall economy and they include equipment and capital spending - for example business and credit loans, the unemployment rate and inflation.
As for my blog, I anticipate the overall direction and mood of society. That's why you must all read.
In my mind anyway.
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