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Empire State Manufacturing Survey decelerates, but still positive

Brent Nyitray, Sr Real Estate Analyst

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.

(Read more: Bernanke’s comments send mortgage rates screaming higher)

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

The general business conditions index fell about a point, and closed at +8.2 (30% reported better conditions, while 22% reported worse conditions—so the net result is 8.2%), which was a slight drop from last month. The headline general business conditions survey was the highlight of the report. The New Orders index slipped 4 points to 0.3, and the shipments index fell 7 points to 1.5. Last month’s internal weakness and May’s dip in the index is looking transitory. The employment outlook improved and the six-month outlook brightened as well.

Every month, the Empire State Manufacturing Survey goes in depth on some business theme or statistic. Last month, it concerned the Affordable Care Act. This month, it asked businesses to compare the first half of 2013 with the first half of 2012. Businesses reported that sales had increased 3%, and more firms had tweaked their sales expectations downward than upward. Employment is flat, while firms had on balance expected to hire workers. Planned employment expansion and capacity expansion plans have been trimmed back.

(Read more: Mortgage rates fall slightly)

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 get materially worse. One worrying sign is that plans for future employment fell slightly, but they were still non-negative. 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 the homebuilders.

The increase in consumer sentiment is starting to drive more business for homebuilders like Ryland (RYL), Meritage (MTH), 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.

(Read more: Real Estate Price Appreciation widely dispersed by location)

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