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 who say the metric is getting better less the percent that say it’s getting worse.
Index increases and approaches “normalcy,” and internals improve markedly from last month
The general business conditions index rose nine points, and closed at +9.5 (30% reported better conditions, while 20.5% reported worse conditions—so the net result is 9.5%), which was an increase from last month. The headline general business conditions survey was the highlight of the report. The New Orders index rose 10 points to 3.8, and the shipments index rose a whopping 21 points to 9.0. Last month’s internal weakness and May’s dip in the index is looking transitory. The six-month outlook brightened as well.
Every month, the Empire State Manufacturing Survey goes in depth on some economic statistic. This month, it focused on the effects of the Affordable Care Act (ACA), or Obamacare. During the month, the administration postponed the employer mandate for a year, but the survey noted no change between the responses submitted before the change and after. When asked whether they would make any changes in their health plans in response to ACA requirements, 75% said they would not. Further, 75% of respondents said they had made no changes to staffing levels in response to the ACA. While 85% said they expect the ACA to increase their healthcare costs, 30% said they would likely reduce other employee benefits as a result.
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 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 the homebuilders.
The increase in consumer sentiment is starting to drive more business for homebuilders like Ryland (RYL), Meritage (MTH), KB Home (KBH), Toll Brothers (TOL), and 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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