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Announced job cuts on pace for the second lowest reading since 2000

Brent Nyitray, Sr Real Estate Analyst

Challenger, Gray, and Christmas keep tabs on announced job cuts as a way to predict future employment numbers

Challenger, Gray, and Christmas is a Chicago-based outplacement firm, which 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 said, announcements of mass layoffs do affect consumer confidence, which drives new home sales.

Analysts will use the Challenger and Gray data a number of different ways. First, these announcements will tell analysts which industries are experiencing growth, and which are experiencing declines. Second, they can look at the geographic concentration of job cuts and know which areas are likely to experience lower demand and increasing credit losses.

The Challenger and Gray report isn’t really a market-mover, but it is a good data point to use and can also help generate trade ideas.

Highlights of the report

Planned job cuts increased 8% in June, but have been generally trending downward. As a matter of fact, job cuts are on track to have the second-lowest annual total since 2000. The real estate sector (especially the homebuilders) is on an upswing, which is increasing demand for workers. In fact, KB Home (KBH) and Lennar (LEN) both mentioned on their second quarter earnings conference calls that they were having a difficult time finding skilled labor.

President Obama recently delayed the employer mandate for Obamacare by a year. The fears of companies substituting part time workers for full time workers was mentioned in the report and will be something to watch. Friday’s jobs report also noted a large increase in part time workers who would rather be working full time, which suggests that these fears are real.

Implications for the homebuilders

The homebuilders are highly sensitive to the labor market and consumer confidence. KB Home on its latest earnings release even said that consumer confidence is a bigger driver of their business than interest rates. Food for thought.

The homebuilders on a December fiscal year like Toll Brothers (TOL), Standard Pacific (SPF), and D.R. Horton (DHI) will be announcing second quarter earnings later this month. Analysts will be asking the builders if the increase in interest rates is putting off potential buyers. Certainly the improving labor market will make things easier. While both Lennar and KB Home said that the increase in rates is causing a “sense of urgency” with potential buyers, rates have moved even higher since then.

If KB’s observation is correct, then watch the consumer sentiment indices and not the 10 year yield to get a read on how things are shaping up for the builders.

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