Why the strong Empire State Manufacturing survey helps homebuilders

Market Realist

Why these key industrial report updates signal a sea change (Part 5 of 5)

(Continued from Part 4)

The Empire State Manufacturing Survey is a barometer of 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 outlook six months out. 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 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.

Index increases and approaches “normalcy” while internals improve markedly from last month

The general business conditions index rose ten points, and closed at +12.5 (34.8% of respondents reported better conditions, while 22.3% reported worse conditions—so the net result is 12.5%). This was an improvement from last month. The headline general business conditions survey wasn’t the only highlight of the report. The New Orders index rose 12.7 points, to 11, and the shipments index jumped 10 points, to 15.5. Employment rose 12 points. The outlook was rosy as well, with 29% expecting to expand payroll, while only 8.5% expect to have fewer employees in six months. Overall, this was the best report in six months.

Every month, the survey includes a special report, focusing on some facet of business. This month, it concerned hiring expectations. Currently, 35% of manufacturers and 40% of service firms expect to increase headcount over the next year. This is much more positive than the same time a year ago, when the survey asked the same questions. The biggest issue holding back hiring was sales growth, but healthcare costs also played a role.

Implications for homebuilders

Overall, the report shows the economy is still expanding moderately, and firms are generally optimistic about the future. Consumer sentiment is driven first and foremost by jobs, and nothing in this report indicates that employment conditions will materially worsen. Employers expect the average workweek to increase, and plans for increased capital expenditures increased slightly. Overall, you could consider the report a modest positive for homebuilders.

The increase in manufacturing activity will drive job creation, which will drive more business for homebuilders like Ryland (RYL), Meritage (MTH), KB Home (KBH), Toll Brothers (TOL), and NVR (NVR). Right now, the luxury end of the market is doing 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.

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