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Why the Empire State Manufacturing Survey has dipped in November

Brent Nyitray, CFA, MBA

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.

Index decreases to just about neutrality

The general business conditions index slipped 4 points, and closed at -2.2 (23.2% of respondents reported better conditions, while 25.4% reported worse conditions—so the net result is -2.2%), 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 13 points to -5.5, and the shipments index dropped 14 points to -0.5. While this report isn’t a blowout by any stretch, it does show that the weakness from late spring and early summer was transitory. The expectations for future business conditions fell slightly, to 37.5. The employment outlook improved.

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 homebuilders.

The increase in consumer sentiment is starting to drive more business for homebuilders like Lennar (LEN), Ryland (RYL), Meritage (MTH), KB Home (KBH), Toll Brothers (TOL), and NVR Homes (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.

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