The Institute of Supply Management index assesses the state of manufacturing in the New York City Metropolitan Area
The Institute of Supply Management (ISM) New York Purchasing Manager’s Index (PMI) is similar to the ISM PMI , however, it covers the New York City area. The ISM PMI 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.
Manufacturing activity eased somewhat in May and the outlook became more cloudy
The index of overall activity fell to 54.4 in May from 58.3 in April. Since the beginning of the year, the index has been rather volatile, although it has been above the nationwide index. Employment and purchases drove the decline. Prices paid increased, as did expected demand; revenues fell. As seems to be a theme with some of the regional Fed indices, we are seeing signs of possible margin compression as input prices increase but finished goods do not. A skilled worker shortage was mentioned as one of the bigger impediments to business.
Optimism for the future increased, as the six month outlook increased from 64 to 67. This seems to indicate that manufacturers consider this slow patch to be temporary.
Every month, the survey asks a question, and this month it asked about the profit outlook for the rest of 2013. 10% expected an acceleration in profit growth, 44% expected a deceleration in profit growth, 23% expected no growth, and 8% expected profits to decline.
Implications for home builders
Overall, the report shows manufacturing in the New York metropolitan area growing at a modest pace. The report is certainly more positive than some of the other regional PMI indices we have seen. The drop in employment is certainly discouraging, although the increase in optimism for the future could mean employment will start increasing again.
Overall increases in business activity and the consumption is starting to drive more business for home builders, like Lennar (LEN), KB Homes (KBH), Meritage (MTH), NVR and Ryland (RYL). 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. That said, the report noted that raw material prices are falling, and home builders generally reported pricing power and margin expansion. An uptick in raw material pricing or labor costs could negatively affect home builders, but so far they have yet to appear.