Industrial production indicates economic activity
Industrial production is a good top-down macroeconomic indicator. It helps forecast the labor market, final demand, consumption, and inflation. While manufacturing is no longer the main driver of the US economy, it still influences the economy to a large degree—particularly for unskilled workers.
US manufacturing has undergone a bit of a renaissance lately due to cheap energy prices. While there’s still a difference between wages overseas and wages here, low natural gas prices are offsetting that difference. Also, as wages increase overseas, the cheap labor arbitrage—taking advantage of lower wages—is fading away.
Increases in industrial production usually signal increases in employment. Lower-skilled workers struggled since the financial crisis. This dampened aggregate demand and consumption. Things are finally starting to improve as construction jobs rebound and more companies start to move towards onshore production.
Production jumps in November
Industrial production increased 1.3% in November. October was revised upward to 0.1%. Business equipment increased by 1.2%. Consumer goods increased by 2.5%. Utilities increased 5.1%. Mining was down 0.1%. It increased big for the year.
Implications for homebuilders
Homebuilders are very sensitive to the economy. Any sort of slowdown can leave them with excess inventory. If home prices don’t rise, then builders are stuck with depreciating inventory that they have to maintain and finance. They will look at the production numbers and think that the economy is still expanding moderately. If anything, increased production forecasts an increase in hiring. This is definitely bullish, or positive, for the economy.
A recovery in the homebuilding market will mainly be driven by first-time homebuyers. They’re still struggling to find jobs. Until we see employment growth go back to normal, it isn’t likely that we’ll see the 1.5 million housing starts that are typical of an expansion. The market recently broke one million. Historically, this has been a very depressed level.
Homebuilders noted that the increases in interest rates and home prices started to hit demand, particularly at the lower price points. This is the first-time homebuyer market. Although the cost of renting is higher than the cost of owning, the first-time homebuyer still isn’t comfortable enough with the labor market to purchase a home. Increases in manufacturing employment will help settle this problem.
An alternate way to invest in the sector would be through the SPDR S&P Homebuilder ETF (XHB).
For more information and the latest updates, visit Market Realist’s Homebuilders page.