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Must-know: Manufacturing production increases in June

Brent Nyitray, CFA, MBA

Must-know: Key industrial data for June (Part 3 of 5)

(Continued from Part 2)

Manufacturing production is a subset of industrial production

Manufacturing production numbers are released monthly by the Federal Reserve and contained in the industrial production and capacity utilization statistical release. The report breaks down manufacturing production into durable goods and non-durable goods. The U.S. economy is experiencing a bit of a manufacturing renaissance, as cheap energy costs have offset the cheap labor arbitrage that contributed so much to offshoring. Also, manufacturers are realizing that extended supply chains are extremely vulnerable.

Manufacturing jobs are extremely important to the U.S. economy. Most of the recent job growth has come from part-time, low-paying service sector jobs—especially restaurant and retail jobs. These jobs certainly are better than nothing, but they aren’t the types of jobs you want to see if you want longer-term prosperity.

Highlights of the report

Manufacturing output increased 0.1% in June after rising 0.4% in May. Utility activity fell, while mining and natural resource output increased.

Implications for homebuilders

Overall, May’s report shows that the manufacturing sector continues to improve. However, we’re a long way from a strong manufacturing sector like we had in the 1990s—let alone in the glory days of U.S. manufacturing in the 1950s through the 1970s.

The story for the U.S. economy going forward should be the impact of cheap energy on the manufacturing sector. Cheap energy in the U.S. has offset Asia’s cheap labor advantage. We’re seeing energy-intensive industries relocate back to the U.S. This will do wonders for the employment picture and will provide good-paying middle-class jobs—which this country desperately needs.

As manufacturing employment increases, it will benefit homebuilders like Lennar (LEN), D.R. Horton (DHI), Toll Brothers (TOL), and PulteGroup (PHM), by increasing demand for starter homes, which is the sweet spot for blue-collar workers. The first-time homebuyer has struggled lately between increasing interest rates, student loan debt, and rising home prices. That said, there’s a tremendous amount of pent-up demand. Household formation numbers have been extremely low since the Great Recession began. Just the unwinding of that phenomenon will drive homebuilder earnings for quite some time. Another way to invest in the sector is through the S&P SPDR Homebuilder ETF (XHB).

Continue to Part 4

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