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ISM non-manufacturing index falls in April



The Institute of Supply Management non-manufacturing index assesses the state of non-manufacturing business in the United States.

The Institute of Supply Management (ISM) Purchasing Manager’s Index (PMI) is similar to the other regional PMI indices, however, it covers the entire country. It is the sister index to the ISM Manufacturing Purchasing Managers Index. The non-manufacturing ISM looks at various business indices, like new orders, production, employment, supplier deliveries, inventory, customer inventories, prices, backlog, exports and imports, and capital expenditures. A reading over 50 means that manufacturing is generally expanding.

Business activity eased somewhat in April and the outlook became more cloudy

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The index of overall activity fell in April for the second consecutive month but is still in expansionary territory. Employment and prices drove the decline, possibly due to lowered government spending. New orders fell while inventories increased. Backlog fell for the third consecutive month. Many participants noted that raw material pricing was increasing, while finished goods pricing was not, indicating margins are narrowing.

Implications for the home builders

Overall, the report shows the economy stuck in neutral. The drop in employment is certainly discouraging, although many are pointing to the sequester as the reason for the drop. If so, then the effect is going to be concentrated in Q2 and then dissipate. The tone of the report is generally neutral; the companies that do business with Washington appeared to be struggling the most, while the rest seemed to indicate that business is improving ever so slightly.

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Overall increases in business activity and consumption is starting to drive more business for home builders, like Lennar (LEN), KB Homes (KBH), Toll Brothers (TOL), and NVR. Housing starts have been so low for so long that there is some real pent-up demand that will become unleashed as the economy improves. This can create a virtuous circle in the economy as increasing demand raises prices, which re-ignites the wealth effect and increases consumption. The secular story for home builders is optimistic – household formation numbers will be a real wind at their backs.

On the other hand, the shortage of skilled workers could negatively affect margins as business expands. In fact, the ISM Survey noted manufacturers were seeing higher raw material pricing, without a corresponding increase in finished good pricing; home builders could be facing rising material and labor costs.


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