Must-know: Manufacturing is breaking out in New York state

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Must-know: Key industrial data for June (Part 2 of 5)

(Continued from Part 1)

The Empire State Manufacturing Survey is a barometer of the  economic conditions in New York state

The survey is put out by the New York 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 workweek. It also asks businesses for their six-month outlook. It’s a relatively comprehensive survey of business conditions, but it concentrates on New York state, which is a small subset of the population. Like most of the Fed surveys, it employs a diffusion index methodology, asking respondents whether a certain metric is getting better, getting worse, or staying the same. The index value is the percent of respondents who say the metric is getting better less the percent who say it’s getting worse.

Great report all around, with a big increase in orders

The General Business Conditions Index maintained last month’s gain and closed at +25.6. 40.6% of respondents reported better conditions, while 15% reported worse conditions—so the net result is 25.6%. This was an increase from last month, and the highest reading in over four years. The headline general business conditions survey wasn’t the only highlight of the report. The New Orders Index was flat and shipments increased. Employment was up seven points. The outlook was positive as well, with 27% expecting to expand payroll, while only 10% expected to have fewer employees in six months. Overall, the plans for employment continue to head in the right direction.

Implications for homebuilders

The report shows that the economy is kicking into second gear. Firms are generally optimistic about the future. Consumer sentiment is driven first and foremost by jobs. Nothing in this report indicates that employment conditions will worsen materially. Employers expect the average workweek to increase. Plans for increased capital expenditures rose slightly. Overall, the report is modestly positive for homebuilders.

The increase in manufacturing activity will drive job creation, which will drive more business for homebuilders like Lennar (LEN), D.R. Horton (DHI), PulteGroup (PHM), and Toll Brothers (TOL). Right now, the luxury end of the market is doing its best, but increasing manufacturing jobs will help the builders that serve the lower end of the market. This will mean a huge overall economic benefit. An alternate way to invest in the sector would be through the S&P SPDR Homebuilder ETF (XHB).

Continue to Part 3

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