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Construction Supply Production Increases In December

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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 summary.

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.

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Highlights of the report

Manufacturing output increased 0.3% in December. This was a big decrease from November’s upward-revised reading of 1.3%. A weather-related drop in utilities depressed consumer goods and business supplies, so that isn’t necessarily a sign of weakness. That said, it is a drop-off from November’s torrid pace.

Implications for homebuilders

Construction supplies increased 1.4% in December, a standout number. This might portend a more vibrant building season in 2015. The homebuilding sector, as measured by the SPDR S&P Homebuilders ETF (XHB), has had a little starch taken out of it after negative guidance from Lennar (LEN) and KB Home (KBH), which reported last week.

Price increases are going to be harder to achieve, and costs are increasing. Certainly, margins are going to be weaker going forward, but the hope is that the builders will make up for it in volume. As the market shifts from the luxury end to the lower price points, activity should increase. You can sell a lot more starter homes than McMansions.

The people most affected by the Manufacturing Production and Industrial Production reports are the middle class—people who are buying homes at the lower price points. Increasing activity here will help the builders at the lower end of the spectrum, particularly PulteGroup (PHM) and D.R. Horton (DHI).

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