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Analyzing August's key industrial economic data

Part 5
Analyzing August's key industrial economic data (Part 5 of 5)

Manufacturing production increases 0.7%, good for homebuilders

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 ProductionEnlarge Graph

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 0.7% after falling 0.4% in July. July’s numbers are looking like a transitory drop from an otherwise improving manufacturing sector. The output for durable goods increased 1.2% in August after falling 0.6% in July. Autos largely explained the increase. Most other sectors increased 1% to 1.7%. Primary metals fell.

Non-durable goods increased slightly, by 0.1% – in August. Apparel was the biggest gainer, while petroleum-based goods fell.

Implications for homebuilders

The data was released against the backdrop of Larry Summers withdrawing his name for the next Federal Reserve Chairman, so it’s hard to divine what the market actually thought about the data. Overall, it 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, 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.

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