Empire State Manufacturing Rebounds
Industrial Data Suggest The Economy Slowed In December (Part 2 of 5)
New York manufacturing activity
The “Empire State Manufacturing Survey” is put out by the New York Federal Reserve. The survey covers a wide range of economic indicators—from general business conditions to new orders, shipments, unfilled orders, delivery times, inventories, prices paid and received, headcount, and average workweek. It also asks businesses to provide a six-month outlook.
Like most surveys issued by the Fed, it employs a diffusion index methodology. It asks respondents whether a certain metric is getting better, getting worse, or staying the same. The index value is the percentage of respondents who say the metric is getting better minus the percentage who say it’s getting worse.
A rebound after a negative December
The General Business Conditions Index shows that manufacturing has rebounded. Of those surveyed, 33% reported better conditions. A minority 23% of respondents reported worse conditions. The net result was 10%. That’s an increase from last month’s negative report. Overall, the index has been reasonably strong. September had the highest reading in over four years.
The headline General Business Conditions Survey wasn’t the report’s only highlight. New orders and shipments both rose. Employment was up but is still negative. We saw another increase in employment plans. Most employers plan to hold pat with employees, but 38% plan to add to payroll, while only 6% plan to trim payroll.
Implications for homebuilders
Overall, it’s an encouraging report for the builders. Employment growth continues to head in the right direction, and job and wage growth is the most important driver of new home purchases. Historically, home prices have correlated strongly with wage growth. In fact, until the bubble years, the median home price to median income ratio was in a tight 3.2x to 3.6x range.
Toll Brothers (TOL), Lennar (LEN), and KB Home (KBH) recently reported earnings, and all pretty much said that price increases have become difficult at this point. Until wage growth picks up, we probably won’t see much in the way of further home price appreciation. This means lower margins for the builders going forward.
The silver lining is that builders are beginning to focus on the first-time homebuyer, who is coming back to the market at long last. The builder best suited to serving the first-time homebuyer is probably D.R. Horton (DHI).
An alternate way to invest in the sector would be through the SPDR S&P Homebuilders ETF (XHB).
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