Industrial Data Suggest The Economy Slowed In December (Part 5 of 5)
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 as a result of 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 toward onshore production.
Production falls in December
Industrial production decreased 0.1% in December, compared to a 1.3% increase in November. Consumer goods and non-industrial supplies fell, while materials and construction supplies increased by a lot. This suggests the homebuilding sector is beginning to stock up on materials for 2015.
Implications for homebuilders
The increase in construction materials is an indication that builders intend to pump out more volume this year as opposed to raising the top line by increasing prices. Toll Brothers (TOL) has noted that it’s become difficult to raise prices at the luxury end. At the lower price points, both KB Home (KBH) and Lennar (LEN) reported the same thing on their fourth-quarter earnings conference calls.
This might portend a move to lower price points, which means targeting the first-time homebuyer. The builder best positioned to address this market is D.R. Horton (DHI)—although investors should be cautious because D.R. Horton has a lot of Texas exposure, and Texas will be vulnerable as energy prices fall.
An alternate way to invest in the sector would be through the SPDR S&P Homebuilder ETF (XHB).
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