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Must-know: Why did the Empire Manufacturing Index leap in May?

Brent Nyitray, CFA, MBA

The must-know key industrial data points for April 2014 (Part 2 of 5)

(Continued from Part 1)

The Empire State Manufacturing Survey is a barometer of New York State’s  economic conditions

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 six-month outlook. It’s a relatively comprehensive survey of business conditions, but it concentrates on the New York State, which is a small subset of the population. Like most of the 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.

Great report all around, with big increases in orders and shipments

The General Business Conditions Index rose a whopping 18 points and closed at +19 (37% of respondents reported better conditions, while 18% reported worse conditions—so the net result is 19%). This was an increase from last month. The headline general business conditions survey wasn’t the only highlight of the report. The New Orders Index rose 13 points, and employment rose. The outlook was rosy as well, with 29% expecting to expand payroll, while only 11% expected to have fewer employees in six months. Overall, the plans for employment continue to head in the right general direction.

Implications for homebuilders

So, 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 materially worsen. Employers expect the average workweek to increase. Plans for increased capital expenditures increased slightly. Overall, you may consider the report a modest positive for homebuilders.

The increase in manufacturing activity will drive job creation, which will drive more business for homebuilders like Lennar (LEN), D.R. Horton (DHI), PulteGroup (PHM), and Toll Brothers (TOL). Right now, the luxury end of the market is doing its best, but increasing manufacturing jobs will help the builders that serve the lower end of the market. This will mean a huge overall economic benefit. An alternate way to invest in the sector would be through the S&P SPDR Homebuilder ETF (XHB).

Continue to Part 3

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