Builders in U.S. Gain Confidence as New York Factories Slump

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Homebuilders’ confidence in the U.S. climbed in August to the highest level in almost a decade, while manufacturing in one region slumped.

The National Association of Home Builders/Wells Fargo sentiment gauge rose to 61, the highest since November 2005, from 60 the prior two months, figures from the Washington-based group showed on Monday. Readings greater than 50 mean more respondents report good market conditions. The Federal Reserve Bank of New York’s Empire State factory index plunged to minus 14.9 in August, the lowest level since April 2009.

A strong job market and historically low mortgage rates will probably keep boosting demand for residential real estate, ensuring home building will contribute to economic growth. Gains in construction will be needed to help make up for any slowdown in manufacturing as factories contend with a strong dollar and bloated inventories.

“Housing will certainly be a contributor to U.S. growth this year,” said Jennifer Lee, a senior economist in Toronto for BMO Capital Markets, which correctly projected the homebuilder sentiment index. “I take the New York report with a grain of salt,” she said. “Other indicators show manufacturing is still coming along nicely.”

Stocks rose, with homebuilders pacing the advance. The Standard & Poor’s 500 Index climbed 0.5 percent to 2,102.44 at the close in New York.

Sales, Traffic

The builders’ index showed measures of current single-family home sales and prospective buyer traffic advanced.

“Today’s report is consistent with our forecast for a gradual strengthening of the single-family housing sector in 2015,” David Crowe, chief economist at NAHB, said in a statement. “Job and economic gains should keep the market moving forward at a modest pace throughout the rest of the year.”

The group’s measure of the six-month sales outlook held at an almost 10-year high.

Builder confidence climbed in three regions, with only the Northeast suffering a setback.

The New York Fed’s factory index dropped from 3.9 in July. Readings less than zero signal contraction.

A rising dollar that makes American goods more expensive for customers overseas is hurting exports, leaving factories with too many goods in stock. At the same time, New York manufacturers were the most optimistic about the future than at any time in the past four months, a sign the slowdown is likely to be short-lived.

New York Manufacturing

Stock-index futures dropped at first following the report. Manufacturing in New York accounts for about 3 percent of the U.S. total, according to figures from the National Association of Manufacturers in Washington. Factory output, in turn, makes up about 12 percent of nation’s gross domestic product.

An August slowdown in production would come as a marked shift from the prior month when U.S. factory output climbed 0.8 percent, the most since November, according to Fed data last week. It was paced by the highest level of automobile assembly since 1978.

The New York index is the month’s first gauge of the state of manufacturing and some analysts view it as an indicator of other regional measures including one from the Philadelphia Fed due Aug. 20. They all pave the way for the national numbers from the Institute for Supply Management that will come out on Sept. 1.

Little Correlation

If the Empire State index “correlated with any important measure of manufacturing activity, then a decline of this magnitude could be a troubling signal for national manufacturing conditions,” John Ryding and Conrad DeQuadros of RDQ Economics in New York, wrote in a research note. “However, it doesn’t correlate significantly with the ISM and we do not take this drop as a sign of trouble.”

Ryding and DeQuadros added: “We are putting this report in the category of far more noise than signal.”

Gains in employment are bolstering home purchases. Payrolls grew in July by 215,000 workers following a 231,000 advance the prior month, and the jobless rate held at a seven-year low of 5.3 percent.

Borrowing costs remain relatively low. The average 30-year, fixed-rate mortgage was 3.94 percent in the week ended Aug. 13, close to the level at the start of 2015 and below last year’s high of 4.53 percent reached in early January 2014, according to data from Freddie Mac in McLean, Virginia.

Fed Views

Fed policy makers are considering raising interest rates for the first time since 2006. Some prospective homebuyers may be spurred to move ahead with their purchasing plans as the rate rise looms. Seventy-seven percent of forecasters in a Bloomberg survey taken Aug. 7-12 said the Fed will raise its main policy rate next month.

A Commerce Department report due on Tuesday may show housing starts increased to a 1.18 million annualized pace in July from 1.17 million the prior month, according to the median forecast in a Bloomberg survey. That would be the second-highest level since November 2007.

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