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New York manufacturing activity decreases from a multi-year high

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New York manufacturing activity

The Empire State Manufacturing Survey is put out by the New York Fed. It 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 six-month outlook. It’s a relatively comprehensive survey of business conditions, but it concentrates on New York state— a small subset of the population.

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Like most of the Fed surveys, it employs a diffusion index methodology. It asks respondents whether a certain metric is getting better, getting worse, or staying the same. The index value is the percent of respondents who say the metric is getting better minus the percent who say it’s getting worse.

Great report all around, with a big increase in orders

The General Business Conditions Index showed that manufacturing continued to expand in New York, but at a slower rate than the month before. 31.4% of respondents reported better conditions, while 16.7% reported worse conditions—the net result was 14.7%. This was a decrease from last month. Last month had the highest reading in over four years.

The headline General Business Conditions survey wasn’t the only highlight of the report. The New Orders Index slipped, but shipments increased. Employment was down three points. The outlook was positive as well, with 31% expecting to expand payroll. Only 8% expected to have fewer employees in six months. Overall, the plans for employment continue to head in the right direction.

Implications for homebuilders

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The report shows that the economy is kicking into second gear. Firms are generally optimistic about the future. Consumer sentiment is driven first and foremost by jobs. Nothing in this report indicates that employment conditions will worsen materially. Employers expect the average workweek to increase. Plans for increased capital expenditures increased slightly. Overall, the report is modestly positive for homebuilders.

The increase in manufacturing activity will drive job creation. This will drive more business for homebuilders like Lennar (LEN), D.R. Horton (DHI), PulteGroup (PHM), and Toll Brothers (TOL). Right now, the luxury end of the market is doing its best. However, increasing manufacturing jobs will help the builders that serve the lower end of the market. Overall, this will mean a huge economic benefit. An alternate way to invest in the sector would be through the S&P SPDR Homebuilder ETF (XHB).

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