Job Cuts Ticked down in February: Gauging the Homebuilder Impact
Why the February Jobs Report Matters for REITs and Builders
Challenger, Gray & Christmas keeps tabs on announced job cuts as a way to predict future employment numbers
Challenger, Gray & Christmas is a Chicago-based outplacement firm that keeps track of announced job cuts. This means that when a company announces it will lay off workers, that announcement goes into the index. Often, these cuts never happen. That being said, announcements of mass layoffs do affect consumer confidence, which drives new home sales.
Analysts will use the Challenger, Gray & Christmas data in a number of different ways. First, these announcements tell analysts which industries are experiencing growth and which are experiencing declines. Second, analysts can look at the geographic concentration of job cuts and know the areas that are likely to experience lower demand and increasing credit losses.
The Challenger, Gray & Christmas report isn’t really a market-mover, but it’s a good data point for investors to use and can also help generate trade ideas.
Highlights of the report
Planned job cuts rose 22% in February year-over-year and were down 18% from January. That being said, December 2015′s number was the lowest in years. Generally, announced job cuts have been trending downward as the economy improves. The real estate sector—especially homebuilders—is on an upswing, which is increasing demand for workers. In fact, KB Home (KBH) and Lennar (LEN) both mentioned on their earnings conference calls that they were having a difficult time finding skilled labor. On the other hand, energy has been cutting jobs as low oil prices depress profitability, particularly in the fracking exploration and production companies.
Implications for homebuilders
Homebuilders like Lennar (LEN), PulteGroup (PHM), D.R. Horton (DHI), and Toll Brothers (TOL) are highly sensitive to the labor market and consumer confidence. In fact, consumer sentiment is a bigger factor for the builders than interest rates. An alternative to buying single stocks would be to buy the S&P SPDR Homebuilder ETF (XHB).
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