Housing Starts and Personal Income as Economic Indicators

Introduction

This paper examines two key economic indicators: housing starts and personal income. Each indicator is defined, its current status is described, and historic data charts illustrate long-term trends for both measures.

Housing Starts: Definition and Current Status

U.S. housing starts figures reflect the number of residential units on which construction has begun during a specific time period. These figures are reported by the Bureau of the Census around the 16th of each month. Economists forecast housing starts by using the current month's permit data to predict actual starts, as building permits and building starts typically move in tandem. Housing starts are considered a leading indicator of the overall economy ("Housing starts," 2000).

A drop in mortgage rates is often followed by an increase in building permits and then starts. During turning points in the business cycle, financial markets watch this indicator closely. As one source explains, "Bond prices react negatively to strong housing start data because it is a signal of economic growth. When housing starts decline, bond market traders react favorably, pushing up prices and causing yields to fall. Equity markets, in contrast, are inspired by news of economic growth. Therefore, strong housing starts and permits generally lift stock prices" ("Housing starts," 2000). Housing starts in the United States were on a fairly steady rise beginning in 1992.

The chart below presents historic housing start data for the United States from 1959 through 2004. Notable peaks occurred in 1972 (2,356,600 units) and again in 1978 (2,020,300 units), followed by a significant trough in the early 1980s. A recovery began in 1992, with starts reaching 1,955,800 units by 2004 ("New privately owned," 2005).

Historic Trend in Housing Starts

Figure 1: Historic Housing Starts Data (units in thousands, 1959–2004)
Source: "New privately owned housing units started" (2005).

Personal Income: Definition and Current Status

Personal income reflects the total compensation that individuals receive, including "wages and salaries; proprietors' income; income from rents; dividends and interest; and transfer payments (Social Security, unemployment, and welfare benefits)" (Watkins, 2004). This figure is measured before any taxes are deducted. Once taxes are removed, the resulting figure is called disposable income. These figures are used in conjunction with consumption data to represent the population's savings rate.

The largest component of personal income is wages and salaries received through employment. Because personal income data is released following the employment report, it can usually be estimated with reasonable accuracy using payroll and earnings data. For this reason, personal income figures do not necessarily reveal new or unexpected economic conditions on their own (Watkins, 2004). However, when used in conjunction with consumption data to determine savings rates, personal income is a useful economic indicator. Personal income in the United States rose steadily over the course of the 15 years preceding 2005.

Conclusion

Both housing starts and personal income serve as valuable tools for interpreting the health of the U.S. economy. Housing starts function as a leading indicator that signals shifts in economic momentum and influences bond and equity markets alike. Personal income, when analyzed alongside consumption data, provides insight into household savings behavior and overall economic well-being. Historic data for both indicators demonstrate broad upward trends over the decades covered, reflecting general economic expansion in the United States through 2004.