Why increasing leading economic indicators are good for Lennar

Market Realist

The Conference Board Leading Economic Index is a forward-looking index mainly used to identify turning points in the economy

The index of Leading Economic Indicators (LEI) is a business cycle indicator. It’s based on 11 different economic statistics: average workweek, initial jobless claims, new orders, building permits, unfilled durable goods, commodity prices, consumer expectations, stock prices, and money supply. Since it’s a combination of previously released indices, it isn’t really a market-moving release. This index can be volatile, so analysts tend to identify three-month trends as an indication that the economy is moving into another part of the business cycle.

The Index of Leading Economic Indicators improves in February

After increasing by 1.0 in January, the Index of Leading Economic Indicators rose by 0.4 to end at +0.5. Overall, the index indicates an economy that’s accelerating. Asset prices and interest rates were positive, offset by weakness in consumer expectations about the economy.

“While the CEI shows the pace of economic activity remained slow at the start of 2014, the trend in the LEI remains quite positive,” said Ken Goldstein, economist at The Conference Board. “The biggest challenge continues to be weak consumer demand, pinned down by weak wage growth. These conditions were still in evidence the first two months of the year, but will likely improve as spring arrives.”

Implications for homebuilders

Overall, the report shows the economy is still expanding moderately, and that the labor market should start improving. While sentiment is generally improving, the overall economy is one of slow growth, which is worrisome for increasing employment. Jobs are the most important economic statistic for homebuilders, and they need to see an increase in job growth to get some activity from the first-time homebuyer.

Overall increases in consumer sentiment, however modest, are starting to drive more business for homebuilders like Lennar (LEN), PulteGroup (PHM), Toll Brothers (TOL), and D.R. Horton (DHI). 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. Homebuilder earnings are starting, and both Lennar (LEN) and KB Home (KBH) reported good numbers and backlogs, which bodes well for revenues going forward. Investors who are interested in trading the homebuilding sector as a whole should look at the S&P SPDR Homebuilder ETF (XHB).

To find out more about investing in homebuilder stocks and ETFs, check out Market Realist’s Real Estate page.

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