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Manufacturing Activity Continues to Chug Along

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An increase in manufacturing production 

Manufacturing production numbers are released monthly by the Federal Reserve. The numbers are contained in the industrial production and capacity utilization statistical release.

The report breaks down manufacturing production into durable goods and non-durable goods. The US economy is experiencing a bit of a manufacturing renaissance because cheap energy costs have offset the cheap labor arbitrage that contributed so much to offshoring. Also, manufacturers are realizing that extended supply chains are extremely vulnerable.

Manufacturing Production

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Manufacturing jobs are extremely important to the US economy. Most of the recent job growth 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 types of jobs you want to see if you want longer-term prosperity.

Highlights of the report

Manufacturing output increased 0.2% in October, which was flat with September. Durable goods production increased 0.1% in October. That’s up 4.6% on a year-over-year basis. Auto parts declined. However, autos can be volatile and they had a big July. Non-durables increased 0.3%.

Implications for homebuilders

Overall, September’s report shows that the manufacturing sector continues to improve. But we’re a long way from a strong manufacturing sector like the one we had in the 1990s—let alone from the glory days of US manufacturing in the 1950s through the 1970s.

The story for the US economy going forward should be the impact of cheap energy on the manufacturing sector. Cheap energy in the US has offset Asia’s cheap-labor advantage. We’re seeing energy-intensive industries relocate back to the US. This will do wonders for the employment picture. It will provide good-paying middle-class jobs—which this country desperately needs.

As manufacturing employment increases, it will benefit homebuilders like Lennar Corporation (LEN), D.R. Horton, Inc. (DHI), Toll Brothers Inc. (TOL), and PulteGroup, Inc. (PHM). It will increase the demand for starter homes—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.

But there’s a tremendous amount of pent-up demand. Household formation numbers have been extremely low since the Great Recession started. Just the unwinding of that phenomenon alone will drive homebuilder earnings for quite some time.

Another way to invest in the sector is through the SPDR S&P Homebuilder ETF (XHB).

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