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The Leading Economic Index shows acceleration for homebuilders

Brent Nyitray, CFA, MBA

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 (the 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 increases in July

June was revised upward from 0.3 to 0.6, and July came in at a strong 0.9. Overall, the index shows an economy that’s accelerating. Asset prices and interest rates were positive, offset by weakness in consumer expectations about the economy.

“The pace of economic activity remained reasonably strong in July,” said Ken Goldstein, economist at The Conference Board. “Although retail sales were a little disappointing, hiring and industrial activity improved. July’s increase in the LEI, coupled with its accelerating growth trend, points to stronger economic growth over the coming months.”

Ever since President Obama mentioned a “recovery summer” early in his tenure, the term has become a bit of a running joke. The economy remained tepid. This summer, however, we may actually see a recovery.

Implications for homebuilders

Overall, the report shows that the economy is still expanding moderately and that the labor market should start improving. Sentiment is generally improving. But the overall economy is growing slowly, which is worrisome for increasing employment.

Jobs are the most important economic statistic for homebuilders. 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), D.R. Horton (DHI), Toll Brothers (TOL), and PulteGroup (PHM). 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 can negatively affect margins as business expands.

Homebuilder earnings have been generally good, which supports the reading from the Conference Board. An alternate way to invest in the homebuilding sector would be through the S&P SPDR Homebuilder ETF (XHB).

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