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Why a manufacturing renaissance is good for homebuilder stocks

Brent Nyitray, CFA, MBA

Why investors should follow November's manufacturing data (Part 1 of 5)

Why follow industrial and manufacturing data?

This series focuses on industrial and manufacturing releases that will affect the real estate sector. Since homebuilders are highly cyclical, housing analysts watch manufacturing data closely.

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 off-shoring. Plus, manufacturers are realizing that extended supply chains are extremely vulnerable.

Manufacturing jobs are extremely important to the U.S. economy, as much of the job growth recently 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 type of jobs you want to see if you want longer-term prosperity.

Highlights of the report

Manufacturing output increased 0.6% after increasing 0.5% in October. July’s numbers are looking like a transitory drop from an otherwise improving manufacturing sector. The output for durable goods increased 2.2% in November and all components increased at least 1%. Autos largely explained the increase. Non-durable goods increased 1.3%

Implications for income inequality

Overall, this shows the manufacturing sector continues to improve, but 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, the 1950s through the 1970s. That said, manufacturing jobs are a key to lifting the middle class and creating demand. As manufacturing relocates to the U.S., we are likely to see increased demand for skilled trades, but it’s an open question whether this will do much for unskilled labor. At the margin, it will certainly help, but it probably won’t mean a repeat of the glory days of unskilled labor—from the 1940s through the 1970s.

Implications for homebuilders

That said, as manufacturing employment increases, it will benefit homebuilders like Lennar (LEN), KB Home (KBH), Toll Brothers (TOL), PulteGroup (PHM), and Meritage (MTH) 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, as 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.

This series will look at five important manufacturing reports

  • Manufacturing production (Part 1)
  • Business inventories (Part 2)
  • Empire State Manufacturing (Part 3)
  • Industrial production (Part 4)
  • Capacity utilization (Part 5)

Continue to Part 2

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