TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Picking up momentum. The economy grew in the second quarter, just not as fast as many expected. But is it just enough for the Fed to move on interest rates?
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Brace yourselves. Why one energy expert says oil prices could hit $30 a barrel by late summer.
MATHISEN: And crash test dummies. The new questions being raised about the nation`s best-selling vehicle.
All that and more tonight on NIGHTLY BUSINESS REPORT for Thursday, July 30th.
HERERA: Good evening, everyone.
The economy seems to be getting its act together. Economic activity this spring and summer is picking up, after a brutal winter that has caused growth to pretty much come to a standstill.
The Commerce Department says that the Gross Domestic Product, the broadest amount of the activity, expanded at a rate of 3.2 percent in the second quarter. Although the number wasn`t as strong as many expected or had hoped, consumer spending, which makes up the majority of economic activity was strong.
But even though the report was slightly below expectations, Steve Liesman tells us why it may be enough to seal the deal for a possible rate hike in September.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The government saying today there was more growth than it first reported in the first quarter and less growth than the market expected in the second, leading to a bit stronger growth in the first half overall. First quarter GDP revised up to 0.6 percent. It was originally reported to be negative.
The second quarter came in at 2.3 percent for a decent but unspectacular bounce back.
And there was more inflation than initially forecast — something that the Federal Reserve has been seeking.
So, many economists say the data is sufficient to seal the deal for September rate hike from the Fed.
PETER BOOCKVAR, LINDSEY GROUP: I think they want to go, but I think if they do go, they`re going to explain to the market very clearly that this is not the beginning of a very consistent rate hike cycle. They`re going to be, again, very data-dependent.
LIESMAN: Lots of data to come before the Fed meets in September — another GDP revision, and a couple of jobs and inflation reports that will ultimately determine if there`s a hike.
MICHAEL FEROLI, JPMORGAN U.S. ECONOMIST: We get a strong number next Friday. I think September is looking increasingly likely. I thought the statement we saw yesterday showed the Fed opening the door to September and all we need to get through that door is two good jobs numbers.
LIESMAN: The Bureau of Economic Analysis announced its regular annual revisions of the past three years and also a correction to how it seasonally adjusts the data, following a series of CNBC stories raising questions about the GDP reports.
The revision meant the big scare in the first quarter of 2014, when it looked like the economy could plunge into recession, was mostly revised away from a 2.1 percent decline to a more manageable 0.9 percent fall.
Overall, the government revised down GDP over the three years ending in
2014 by a modest 3/10 of a percent, but it also took the first steps of changing the way it calculates GDP to account for anomalies and the quarterly pattern of growth, changes that could mean smoother data and less anxiety among investors in the future.
For NIGHTLY BUSINESS REPORT, I`m Steve Liesman.
MATHISEN: The energy industry is a big part of the economy and one that had been a major job creator, but the tide is turning and now more than a few of those jobs are vanishing. A prolonged slump in the price of crude is forcing companies to lay off workers.
Today, West Texas group fell to $48.52 a barrel. It`s down nearly 20 percent over just the past month. And some of the world`s biggest energy companies report earnings, many aren`t optimistic that prices will rebound any time soon.
Jackie DeAngelis takes a closer at the caution signs popping up in the energy industry.
JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: A big week for energy — the market dealing with not only volatility in crude prices but a slew of earnings to consider as well.
ConocoPhillips (NYSE:COP), the largest independent oil and gas company in the U.S. out with results this morning. On its face, a beat on earnings, but estimates that have been dramatically reduced in an environment of low oil prices.
Reading between the lines, the outlook is hazy. The company telling investors it will cut capital spending this year by half a billion dollars, and CEO Ryan Lance (NASDAQ:LNCE) is saying the company is preparing for lower, more volatile prices.
PETER AMANDIO, CHICAGO ENERGIES: I think the energy companies are front running themselves with bad news right now. We have a lot of bear sentiment in the market with China, with what may be coming forward with Iran. So why not have it in the market now so if it does happen, maybe it won`t be as bad.
DEANGELIS: And it`s not just Conoco forecasting headwinds. Just this week, more job cuts to reduce costs. The layoffs which initially focused on blue collar workers now widening to engineers and scientists. Fifteen hundred more jobs at Chevron (NYSE:CVX) to save another $1 billion. And 6,500 jobs slashed at Royal Dutch Shell after its profits fell sharply on lower oil and gas prices. To add insult to injury, oil servicers Halliburton (NYSE:HAL) and Baker Hughes (NYSE:BHI) reiterating cautious outlooks for the second half of the year.
Tomorrow, we`ll get reports from two bellwether energy companies, Chevron (NYSE:CVX) and ExxonMobil (NYSE:XOM). How far do they think oil prices may slide, how will they guide the market and what are they doing to weather the storm?
AMANDIO: It looks like we could go up a little bit but when you look at the long-term charts, it looks very much like it did in December and it looks like we could head to the downside once again.
DEANGELIS: Where oil goes from here is anyone`s guess. Oversupplied, the potential for Iranian products to flood the market, and dollars remain in downside pressure. But slight declines in U.S. production and Saudi Arabia`s plan to make slight production cuts after the summer could be the start of what could tip the scale the other way.
For NIGHTLY BUSINESS REPORT, I`m Jackie DeAngelis.
HERERA: Occidental Petroleum (NYSE:OXY) saw its quarterly profit dropped 85 percent on those lower crude prices. Revenue also fell sharply. The energy exploration and production company says its capital spending will continue to decline throughout the year if oil prices continue their slide.
MATHISEN: We are halfway through earning season, hard to believe, and some big themes have emerged. But as Dominic Chu tells us, the energy sector is sandbagging overall results.
DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: We`re over the hump.
As of earlier today, nearly two-thirds of the S&P 500 companies have reported earnings. The majority of the companies that have reported have beaten average analysts` profit expectations.
According to numbers compiled by Thomson Reuters (NYSE:TRI) IBES, if all remaining companies in the index match analyst expectations, we`ll see profits grow by 1 percent over the same period last year.
Now, before earnings season started, the expectation was for a 3 percent drop. The bad news, though, is coming from the revenue side of the reports. We`re currently on phase to see what could be a 3.5 percent drop in sales over the same time last year. That has some traders and investors worried, although others do feel more optimistic.
RICHARD MADIGAN, JPMORGAN PRIVATE BANK: We feel good about the U.S.
earning season. If you look through reported companies so far, we`re looking at 3 percent to 4 percent growth across the S&P. Markets have expected that number to be negative 3 percent to 4 percent and X energy, something like plus 11 percent. So, it`s slow and steady like the economy.
CHU: Energy is going to be a big focus for many in the coming weeks and months. It`s no surprise that the sector could be one of the biggest drags on growth given the sharp drop in oil prices. And that`s leading a lot of stock pickers to be much more conservative about buying into the recent weakness in those stocks.
DAVID SPIKA, GuideStone Capital Management Global Investment Strategist: The energy sector today does not appear to be a particularly attractive area to invest because of the uncertainty about oil prices. Ultimately, we`re going to need more information about growth rates in the emerging market, particularly China, which is a big part of the demand for oil prices.
CHU: With oil giants like ExxonMobil (NYSE:XOM) and Chevron (NYSE:CVX) on deck to report earnings, a lot of attention will be paid to what they have to say about the industry. And because both companies have operations ranging from exploration and production all the way to refining and selling gasoline, they could provide some more clarity about the energy industry outlook.
For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.
HERERA: So, let`s turn now to our two guests for more about the slump in the energy sector and whether or not it will hurt growth here in the U.S.
We have Gus Faucher joining us, senior economist at PNC Financial Services Group, and here in the studio, John Kilduff, founding partner of Again Capital.
Welcome, gentlemen. Nice to have you here.
JOHN KILDUFF, AGAIN CAPITAL FOUNDING PARTNER: Good evening.
HERERA: Gus, let me start with you. How serious do you view the slump in energy and the resulting job cuts that we`re starting to see? And what do you think the ultimate impact will be on economic growth?
GUS FAUCHER, PNC: Well, I think that the downturn in energy prices is having a negative impact object the U.S. economy right now. We saw that in the second quarter GDP numbers with a big decline in investments.
hat being said, I think it`s going to be a positive over the longer run.
The U.S. is still an energy importing nation. I think consumers are going to be spending the savings that they are getting from lower gasoline prices and non-energy businesses are going to see higher profits.
So, I think overall, it`s a net positive. It`s just we get a hit up front and then we get the benefits from it later. So, I think the second half of this year will be better.
MATHISEN: John, you heard Jackie DeAngelis just say that where oil prices go from here is anybody`s guess. You`re anybody. What`s your guess?
MATHISEN: What`s your guess?
KILDUFF: And leave anybody packing.
MATHISEN: Go ahead.
KILDUFF: My guess is that they continue lower, Tyler. And I think we`re going to first challenge the lows from March but ultimately settle down around the low 30s.
MATHISEN: Do you agree with, Gus, though, that on net that will be a positive for the American economy, despite the dislocation that it will cause in the short term?
KILDUFF: Absolutely. And I think probably more enthusiastic about the net, maybe than Gus is in terms of the overall impact. You know, 80 percent of our crude oil consumption is for transportation. This is lowering transportation costs for shippers, for airlines, for the cruise ships, for mom and pop going to their jobs, and part of what we`ve been seeing is this huge — these gains in employment have generated terrific gasoline. So, it`s working its way to the system.
HERERA: So, Gus, where does that put us in terms of what the Fed does? I mean, I know they are watching the employment cost index. They are looking for higher wages and a little bit of inflation. Yet, at the same time, you have oil prices which have been heading lower which, at one point, people were calling disinflationary.
FAUCHER: That`s right. Certainly, that is something that the Fed is watching. What they are going to be looking for is, are the lower energy prices passing through the broader inflation into core inflation which excludes food and energy? The Fed is expecting that to pick up as wage growth accelerates.
But if we see core inflation start to slow, that could cause the fed to slow on rate hike. We`re still expecting it this September but it depends on what happens to the labor market and inflation over the next couple of months.
MATHISEN: Was — did you think, Gus, that today`s number on the gross domestic product, what was it, 3.2 percent, was kind of a goldilocks number, not too hot, not too cold for the Fed?
FAUCHER: You know, I think the Fed would like to see a bit stronger growth. I mean, you throw in the first quarter growth was only 1.5 percent in the first half of this year. That`s below what the Fed would like to see. That being said, I do think we`ll see stronger growth in the second half and I think that should be enough for the Fed to raise rates, either in September or December.
HERERA: The other factor we haven`t talked about, John, is China and the plunge in its market. The result in consumer confidence hit. But China uses a lot of energy and a lot of oil. What is the impact on the oil markets from that?
KILDUFF: It`s big. I always refer to China as the swing demand center.
We talk about Saudi Arabia, the swing producer of oil, they are the key to really holding up energy prices.
There`s been a lot of discounting of this stock market swoon. I see — you see how big the measures are being taken by the Chinese government tells me it`s a serious problem. I think it`s a serious problem, because of what you just said, consumer confidence there, the ability of consumers to buy cars. A lot of them put their money into the stock market.
KILDUFF: And now, it`s vaporized.
So, if we see car sales, we already retreat, that will be a big hit.
MATHISEN: Quick answer if I might, John. If oil does go to $30, is that going to run a lot of weaker performers in this industry out of business and will that ripple through to the high-yield bond market?
KILDUFF: There`s a day of reckoning coming, Tyler. I think they pulled every trick out of their bag of tricks to keep themselves going. Their borrowing base, as it`s called, the banks are not going to be able to lend against what the oil that`s in the ground any longer, and they`re going to call a lot of loans. There`s going to be a lot of defaults. There`s going to be a lot of consolidation. Yes, stay tuned.
HERERA: All right. On that rather sobering note, Gus, thank you so much.
John, thank you as always.
MATHISEN: Well, stocks ended the trading day little change was investors digested a mixed bag of earnings and that read on GDP. The blue chip average rebounded from a nearly 100-point drop as Procter & Gamble (NYSE:PG) weighed on the index early, but we`ll have more on that in a moment.
By the close, the Dow Jones Industrial Average fell just 5 points to 17,745. NASDAQ was the standout. It was up 17. S&P 500 up 0.06 points.
HERERA: And Procter & Gamble (NYSE:PG) is easily the worst performing stock in the Dow Jones Industrial Average today after the company reported a stunning 40 percent drop in profits from the same period a year ago. That sent shares south by about 4 percent in today`s session. P&G gets about two-thirds of its sales from outside the U.S. and it`s facing the same issue that other multinationals are, currency headwinds.
But it`s not just the strong dollars that`s hitting its bottom line.
HERERA: It`s been a difficult stretch for the world`s largest consumer products maker. Procter & Gamble (NYSE:PG), maker of products you know, like Tide, Bounty paper towels and Gillette razors reported its sixth straight quarter of falling sales, and its outlook did little to inspire confidence. The sharp drop in revenue highlights the challenges the company faces and how difficult it`s been to find growth in this economy.
One major obstacle, currency moves. Take Russia, for example. The devaluation of the ruble forced the company to increase prices as a way to maintain profitability. But that came at a cost. It turned off Russian consumers and pressured sales.
And the same thing happened in other markets as P&G hiked prices to offset the stronger dollar.
JON MOELLER, PROCTER & GAMBLE CEO: Revenues a little bit under, but we`ve had to make a choice between optimizing revenue and optimizing earnings, particularly in some pretty tough markets like Russia, we`ve made the latter choice and that shows up as well.
HERERA: The quarterly results come at a pivotal time for P&G as it sheds tens of billions of dollars worth of brands and installs a new CEO. The drastic move to become more nimble will in theory allow the company to find the growth that it`s been looking for.
During today`s call, executives assured shareholders that incoming CEO David Taylor is equipped to execute the slim-down strategy, focusing on 10 categories with 65 different brands. But the new strategy does come with concerns, concerns that outgoing CEO A.G. Lafley gave a very simple answer to.
A.G. LAFLEY, PROCTER & GAMBLE: If it`s not working, we`ll change. We will make acquisitions in a year or two ahead. We will probably have another divestiture or two in the year ahead. But we`ll change. If we can`t compete in a business after 20 years, after five years, after 10 years, we`ll get out of the business.
HERERA: The makeover started earlier this month when the company announced that it planned on selling its beauty brand, including Clairol and CoverGirl to Coty.
But investors will be watching closely to see if the new CEO David Taylor can find that growth that shareholders have been looking for.
HERERA: Shares of Procter & Gamble (NYSE:PG) have been lagging the market, as we said. The stock is down roughly 15 percent this year while the Dow Jones Industrial Average is flat.
MATHISEN: Still ahead, America`s truck. How concerned should drivers be about the result of the new F-150 crash test?
MATHISEN: The Senate voting to pass a short-term highway funding fix to avoid a cutoff at the peak of the summer construction season, to keep the highway trust fund running for another three months, preventing a halt to end road and bridge work that would have happened at midnight tomorrow.
The 91-4 vote sends the measure to President Obama`s desk.
HERERA: And the Obama administration wants the Supreme Court to hear a case that challenges the legal definition of insider trading. Last year, a federal court overturned two insider trading convictions and set a higher standard for proving the crime. The government says the ruling could hurt market participants and it wants the Supreme Court to take a second look.
MATHISEN: Perhaps surprisingly more homeowners in this growing economy are still drowning in debt. This despite a rise in home prices and that improving economy. According to a new report from RealtyTrac, almost 7.5 million borrowers were still underwater on their mortgages at the end of June, meaning they owe more on their loans than their house is worth.
That`s a slight increase from the first quarter of this year.
HERERA: LinkedIn (NYSE:LNKD) turns in a strong quarter, and that`s where we begin tonight`s “Market Focus”.
The social network for professionals saw its revenues pop more than 30 percent and earnings grew faster than expected. Its best performing division was its recruiting unit. Shares popped in initial after-hours trading, before falling back. Before the close, the stock was off 2 percent to $227.15.
Shares of arthritis drug and cost-cutting helped Amgen (NASDAQ:AMGN) post an earnings beat. The biotech company also hiking its full-year earnings and revenue forecast. Shares rose right after the close. The stock finished the regular session up a fraction to $171.69.
And, Cigna, which just agreed to sell itself to Anthem, reported better- than-expected second quarter earnings. Medical services use was low, which helped the insurer keep costs down and the firm saw customer growth. The company`s deal with Anthem would combine two of the largest insurers, and as the CEO explains, expand its offerings.
(BEGIN VIDEO CLIP)
DAVID CORDANI, CIGNA (NYSE:CI) CEO: The key to our transaction is the companies are quite complementary. So, in general, we operate in different businesses.
For example, about $20 billion or over half of our revenue are in businesses that Anthem is not in. So, one is a complementary nature.
(END VIDEO CLIP)
HERERA: Shares were off 1 percent to $143.90.
Another company pointing fingers at the stronger dollar. Colgate-Palmolive (NYSE:CL) saw its profit slip, but it managed to meet expectations. This is the toothpaste maker`s fourth straight quarter of sales declines. Shares fell
1 percent to $68.02.
MATHISEN: Well, you need toothpaste after you eat some of Mondelez`s products. It hiked its revenue target as its results came in strong. They make Oreo cookies, by the way, said its ability to hike prices helped bolster the top line, despite the same currency headwinds that buffeted other companies. Shares popped 5 percent to $45.27.
Some good news for Avon. The beauty products firm reported another quarter of sales declines, but it managed to turn a profit for the first time in years. Also, Avon declared a dividend of 6 cents a share. The stock rose about 2.5 percent to $5.51.
And Starwood beat consensus on both fronts. The hotel chain says a revamping of its cost structure helped results. Separately, according to press reports, the company is in talks with potential bidders including Intercontinental Hotels and Wyndham about a possible sale. Shares slipped
5 percent to $78.20.
The Truck maker OshKosh reported a double-digit drop in quarterly profit, blaming, what else, the U.S. dollar. And on that, the firm cut its full year earnings forecast. Shares tumbled more than 7 percent to $36.05.
HERERA: New crash tests are raising questions about the bestselling vehicle in the U.S., Ford`s F-150 pickup truck. The Insurance Institute for Highway Safety says the truck is safe.
But as Phil LeBeau reports, fixing it after a crash could be costly.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s a mixed review of a popular pickup truck. The Insurance Institute for Highway Safety Crash tested two versions of Ford`s F-150. The SuperCrew model got all good marks, while the extended cab edition was good in all tests except for a small overlap collision where experts rated it marginal, citing potential injuries to a driver.
DAVID ZUBY, IIHS: The extended cab is still a safe vehicle. But for those people shopping for the safest vehicle, they should put their emphasis on the CrewCab. It clearly provides better protection in a wider variety of frontal crashes than the extended cab version.
LEBEAU: Ford says it is modifying the 2016 F-150 extended cab to insure it gets the best safety ratings possible.
With high-strength aluminum panels, the new F-150`s durability and cost of repairs have come under scrutiny. IIHS says fixing the aluminum truck after a low speed crash is 26 percent more expensive compared to the same repair of a steel panel F-150, primarily because repairs take longer and are more expensive.
ZUBY: They may end up having to pay a slightly higher insurance rate because the data would suggest that it`s going to cost more to repair the vehicle when they`re in a crash.
LEBEAU: Ford believes the IIHS is wrong, saying, “When you look at real world repair cost, not staged repair costs, for the 2015 F-150, they are comparable to or less than other full-sized pickups.
It`s unclear how much these crash tests might impact F-150 sales. It`s been the best-selling vehicle in the U.S. for more than 30 years and it has a very loyal ownership base.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Chicago.
HERERA: Still ahead, drone traffic control. What some big companies and NASA are doing to help the drone industry lift off.
MATHISEN: Here`s what to watch for tomorrow; in addition to earnings from Exxon and Chevron (NYSE:CVX), the employment cost index which measures labor expenses is out. Also, look for the Chicago Purchasing Managers Index, that`s an important economic data point from those wild and crazy guys at the Chicago PMI. Rounding it out, a report on consumer sentiment.
And that is what to watch Friday.
HERERA: Two very different companies could soon start trading.
SoulCycle, a company that offers high-end cycling class, has filed to go public. The fitness chain plans to raise up to $100 million in its offering. It also appointed a new CEO.
Pet supplier retailer Petco could also become a public company soon.
According to reports, the company has been in talks with investment banks for its own IPO. This would be the third time listing its stock on the market since the 1990s.
MATHISEN: Facebook (NASDAQ:FB) is making a big bet on drones. The company built its first full-scale drone to provide Internet access to remote parts of the world, and it plans to test it in the U.S. later this year.
But what does the future of the drone business look like?
NASA hosting a forum in Silicon Valley to explore the prospects and challenges.
And Jane Wells has our report tonight.
JANE WELLS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Amazon (NASDAQ:AMZN) wants drones to deliver packages. Facebook (NASDAQ:FB) is building one to provide Internet access in remote places. Cisco (NASDAQ:CSCO) wants to network all of them.
HELDER ANTUNES, CISCO CORPORATE INNOVATION: So, all of this is going to require connectivity, networking, security, and in essence, it`s going to require technology that enables these devices to talk to each other.
WELLS: However, the FAA has yet to come up with rules for allowing drones to fly in domestic air space, and those doing so right now have to get an exemption. At the same time, private drone owners are creating havoc, interfering with firefighting efforts in California, clearly some sort of air traffic control system needs to be created and that is exactly what companies were mapping out at NASA`s Ames Research Center in Silicon Valley.
PARIMAL KOPARDEKAR, NASA: Another way to look at it, instead of driving a car, you need a lane and stop signs and such to keep things flowing efficient as well as safe.
WELLS: Amazon (NASDAQ:AMZN) has proposed a Skyway with different lanes for different drones based on their sophistication and purpose, including a no-fly zone to separate them from manned aircraft above. Mini drones would need to be able to communicate with each other and have technology like collision avoidance systems.
Companies like Airware are trying to come up with operating systems across several drone platforms and it`s raised $40 million in funding from some of Silicon Valley`s biggest names.
JESSE KALLMAN, AIRWARE: Some of those investors are Andreessen Horowitz, Kleiner Perkins, Google (NASDAQ:GOOG) Ventures.
WELLS: This is not to say there won`t be room for hobbyists to fly their unmanned machines but they will need to follow rules.
BRIAN WYNNE: We have people who are non-aviators that have access to devices that fly in the air space, and we`re trying to educate them about that.
WELLS: The drone industry claims that it could generate $82 billion in value in the U.S. over the next decade and employ 100,000 people. That`s assuming it can get its act together, develop a management system for drones, and the FAA can finally approve some rules.
For NIGHTLY BUSINESS REPORT, Jane Wells, Los Angeles.
HERERA: And that does it for NIGHTLY BUSINESS REPORT tonight. I`m Sue Herera. Thanks for joining us.
MATHISEN: And I`m Tyler Mathisen. Thanks from me as well. Have a great evening, everybody. And we will see you back here tomorrow.
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