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Leading Economic Index rebounds in July, good for homebuilders

Brent Nyitray, CFA

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 an amalgam 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.

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The Index of Leading Economic Indicators increases in July

After a flat June, the index increased to 0.6 in July. Overall, the index shows an economy that’s slowly mending. Ken Goldstein, economist at the Conference Board, said, “The improvement in the LEI and the pick up in the six-month growth rate suggest better economic and job growth in the second half of 2013. However, the biggest uncertainties remain the pace of business spending and the impact of slower global growth on U.S. exports.”

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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 builders 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), KB Home (KBH), Toll Brothers (TOL), Standard Pacific (SPF), 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. The shortage of skilled workers could negatively affect margins as business expands. Homebuilder first quarter earnings were generally good, which supports the reading from the Conference Board.

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