Kansas City Fed Manufacturing Index still good for homebuilders

Market Realist

The Kansas City Fed Manufacturing Survey is a barometer of economic conditions in the 11th district

The survey is put out by the Kansas City Fed and 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 work week. It also asks businesses for their outlook six months out. It focuses on the 10th Federal Reserve District, which includes Kansas, Missouri, Colorado, Oklahoma, Wyoming, and New Mexico. It’s similar to the other Fed Surveys, including the Empire State Manufacturing Survey and the Chicago Fed National Activity Index.

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Index improves again in August

The general business conditions index rose 2 points to +8, which is the second month in positive territory. Pretty much every component of the index rose, and employment moved into positive territory for the first time in six months. The indices for prices paid rose, indicating that pricing pressures may be picking up. Overall, this survey mirrors most of the surveys put out by the other Federal Reserve districts with the exception of employment. Most other districts are reporting modest employment growth and announcing that prices paid are increasing while prices received are not. This means their input prices are rising (the costs of raw materials, energy, et cetera) while the prices they can charge aren’t rising. This is a recipe for decreasing margins. This trend shows a picture of manufacturers that are reluctant to pass along price increases to consumers. Finally, expectations for six months out improved.

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Implications for homebuilders

Overall, the report shows that manufacturing activity is improving somewhat, although sentiment is still rather negative. Until producers can pass on increased costs to customers, employment will remain under pressure. The six-month outlook is encouraging, though.

The increase in consumer sentiment is starting to drive more business for homebuilders, like Lennar (LEN), Standard Pacific (SPF), KB Home (KBH), Toll Brothers (TOL), and NVR (NVR). Housing starts have been so low for so long that there’s some real pent-up demand that will unleash as the economy improves. The shortage of skilled workers could negatively affect margins as business expands. So far, homebuilders have reported increased sales and margins, so this has yet to affect them. That said, numerous builders expressed concern about skilled labor shortages on their earnings conference calls. One big difference: prices are rising in the homebuilding sector at long last.

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