TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Mixed messages. It’s hot out there, and so is the debate over whether the economy is strong enough to absorb an interest rate hike. We look at the sometimes conflicting data and the argument.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Sentiment surges. Why home builders are feeling much, much better about their business.
MATHISEN: Staying on track. As more products travel by rail, one company is investing a lot of cash to upgrade the outdated system. The first part of our week-long series “The Big Fix” examines what’s being done to rebuild America’s aging infrastructure.
All that and more tonight on NIGHTLY BUSINESS REPORT for Monday, August 17th.
HERERA: Good evening, everyone, and welcome.
The Federal Reserve conundrum, as more economic data is released, the data-dependent Central Bank may be getting more mixed messages. Just today, an important gauge of manufacturing activity, the New York Fed’s Empire State survey, tumbled to its lowest level since 2009. But then another report on home builder sentiment hit its highest level in nearly a decade.
And with manufacturing and housing, two very important pillars of the economy, the debate within the market over when the Central Bank will act isn’t going away anytime soon.
Steve Liesman has the story.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: As temperatures rise in August, the debate over the Fed raising rates in December is reaching a new level.
SRI KUMAR, SRI-KUMAR GLOBAL STRATEGIES PRESIDENT: If the Fed goes ahead and increases interest rates nevertheless, you’re looking at a significant correction in U.S. equity markets and pushing the U.S. economy back into recession.
LIESMAN: There are plenty of reasons why the Fed should stand pat and not hike. China’s devaluation of the yuan, and plummeting oil prices mean inflation will likely be running further below the 2 percent inflation target in the months ahead. And yet —
MICHELLE GIRARD, RBS CHIEF U.S. ECONOMIST: We’ve seen the economy gaining momentum in the second quarter, and we think that will carry over in the second half of the year.
LIESMAN: Second quarter growth has been marked up substantially. It’s now forecast to be revised above 3 percent. Consumer and business spending looks strong enough to power growth near 2.5 percent in the current quarter. Job growth continues to run above 200,000.
LARRY LINDSEY, FORMER FEDERAL RESERVE GOVERNOR: If you come down from Mars today and looked at the level of the economy, you would say, gosh, you know, we’re way behind the curve.
LIESMAN: It’s a quandary the Fed faces ending QE. The growth in job numbers are moving in the right direction for a hike. The inflation numbers seem to go the wrong way, down nearly every time the Fed considers raising rates.
We’ll get a fresh read on inflation this Wednesday, along with the minutes of the Fed’s July meeting.
But the big event that could shake policy, Chinese devaluation and the plunge in oil happened in just the past couple weeks. Still, some Fed watchers believe Fed chair Janet Yellen will look through those events and stay on track to hike.
DREW MATUS, UBS DEPUTY CHIEF U.S. ECONOMIST: I think it will happen. I think the Fed is kind of — finally had enough in terms of keeping it at zero. I think everything we’re seeing now is a result of the fact that the Fed is off sides.
LIESMAN: The August heat is likely to pass, but the raging debate over the first Fed rate hike could simmer right up to the September 16th meeting.
For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.
MATHISEN: More now on that home builder report we were just talking about. The National Association of Homebuilders said the industry is feeling much better about its business, much better, the best it’s felt, in fact, in a decade.
Diana Olick takes a look at what’s behind the surge in sentiment.
DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Consumer confidence in the housing market is, well, building. At least according to Mid-Atlantic home builder Dan Ryan.
DAN RYAN, DAN RYAN BUILDERS: I think our customers are getting over the shock factor of the worst housing recession in history. I think it’s finally starting to wear off.
OLICK: And that has builders themselves feeling better. A monthly sentiment index from the National Association of Homebuilders rose to its highest level in nearly a decade this month. Builders are feeling better about current sales and buyer traffic.
DUBRAVKO LAKOS-BUJAS, JPMORGAN: Demand has been picking up because of, again, tightening job market, employment rate continues to decline, expectation of wage growth, consumer confidence remains elevated.
OLICK: But failed expectations for the next six months, which had been rising the most, stalled. That may be on fears of rising interest rates, although rates are still near historic lows.
LAKOS-BUJAS: It is a risk, but it’s a fairly contained risk at this point in time.
OLICK: Builders also cited continuing issues with land and labor.
RYAN: We are getting pressure on the labor and material side. Our materials are going up. Our labor prices are going up. And I don’t think that’s a bad thing. But we are going to have to continue to raise prices, and we do it in very small increments.
OLICK: Builder confidence may be better, but single-family housing starts which used to move in tandem with sentiment are still well below normal levels. Sales of newly-built homes have also been bumpy this year as builders raised prices and focused on higher-end models.
Some builders say they’re going to rein in prices in the second half of this year, but most say they still have pricing power, that’s because all housing supplies, both new and old, is still tight and demand is only getting stronger.
For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.
HERERA: As Steve Liesman reported just a short a while ago, the recent drop in oil prices is one of the reasons why some say the Federal Reserve should stand pat on interest rates in September. Low oil prices mean inflation will likely run below the central bank’s target level. Well, today, crude slide continued near its 6 1/2-year low.
Since June, oil has lost about a third of its value. And according to a proprietary CNBC survey, many traders and energy fund managers think the prices could go even lower.
Jackie DeAngelis breaks down the results.
JACKIE DEANGELIS, NIGHTLY BUSINESS REPORT CORRESPONDENT: With oil prices touching levels not seen in more than six years, market participants are wondering just how low oil will go.
Exclusive survey that polled analysts, traders and major energy fund investors revealed a shift in expectations to the down side. For the short term, September and October, almost two-thirds of respondents say they expect prices to range between $30 and $40 a barrel, indicating that the bottom is not in yet for WTI. For Brent, 70 percent feel $40 to $50 is a realistic near term target.
Of those polled, feelings are split on how crude will finish the year. More than half think the commodity will fall between $30 and $50 for WTI, and $40 to $60 for Brent. That’s lower than previously thought.
ANTHONY GRISANTI, GRAZ ENERGY PRESIDENT: Right now, we’re going into a seasonal factor where refineries have to turn around and make the fall products, gasoline, heating oil, things like that. So, you’re going to see less demand at the refinery level for crude oil. So, you’re going to see supplies start to build again. And that will put pressure on prices. I don’t think that pressure will be relieved until we see the summer driving season which actually starts in the spring of 2016.
DEANGELIS: When asked what factors will impact crude prices the most, the majority of respondents said supply. Just behind them, the dollar, and 10 percent said that technicals will drive crude prices.
GRISANTI: Supply right now, the world produces about 2 1/2 to 3 million barrels a day more than it uses. So, we need to get that under control for prices to rise. Demand isn’t going to rise 2 million barrels a day between now and 2016. So the only way to get crude oil prices higher is to reduce the supply.
DEANGELIS: With respect to U.S. supply, 60 percent still feel production will flat line or even rise. And if they’re right, that’s probably the most important variable that will support low prices.
For NIGHTLY BUSINESS REPORT, I’m Jackie DeAngelis.
HERERA: And just today, the federal government gave Royal Dutch Shell permission to drill for oil in the Arctic Ocean off the coast of Alaska. That approval will allow Shell to drill deeper for oil than it ever has before.
MATHISEN: On Wall Street, it was a tug-of-war kind of day. Shares started the day lower on that weak manufacturing report. And energy shares also sandbagged the Dow. But that strong homebuilder number took hold and propelled stocks higher.
By the close, the Dow Jones industrial average was up 67 to 17,545. NASDAQ climbed 43, and the S&P 500 gained ten.
HERERA: Sara Johnson joins us now to talk more about the mixed readings on the economy and what that might mean for the Fed in its upcoming September meeting. She’s an economist and senior director of research at IHS (NYSE:IHS) Global Insight.
Good to see you, Sara. Welcome.
SARA JOHNSON, IHS (NYSE:IHS) GLOBAL INSIGHT ECONOMIST & SR. DIRECTOR, RESEARCH: Thank you.
HERERA: Why don’t we start with today’s data? Did any of it seem so compelling, that it might move the Fed one way or another?
JOHNSON: No, I think the focus of the Fed will be on the labor market indicators, and July’s strong employment report is one more reason to go ahead and start raising interest rates in September.
MATHISEN: Are you at all concerned? Do you think the Federal Reserve is concerned about what’s been going on over in China? Do you think that is just a marginal influencer, or a major one?
JOHNSON: It is an influencer. Not a major one. But I think what’s happening in China with the slowdown in growth reflects a broader concern about overall sluggish demand in the global economy, and the deflation in commodity prices.
HERERA: So, where do you see GDP finally ending up as we go into the fall? How strong is this economy?
JOHNSON: We’re projecting 2.1 percent growth in real GDP for the third quarter, and a shade over 3 percent in the fourth quarter. But the third quarter result is held back by an inventory cycle. Essentially, there are two headwinds to the economy. One is the strength of the dollar, affecting global trade, and the second is the fact that we had an unsustainably high rate of inventory buildup during the first half. And that will lead to a correction in the third quarter and beyond.
MATHISEN: What do you expect on the dollar? It’s basically been from sort of a dollar — I’m thinking in terms of the euro — basically $1.04 up to $1.11 recently. Are we in a trading range or do you expect a breakout one way or the other?
JOHNSON: I would expect that once the Federal Reserve raises interest rates, we would move towards the low end of that range, but not below it. Markets really have anticipated the first fed hike for a long time, and so as a result, its economic impact should not be severe.
HERERA: Sara, thank you very much. Sara Johnson with IHS (NYSE:IHS) Global Insight.
MATHISEN: Federal Reserve Bank of Dallas has picked Robert Kaplan to be its next president. Kaplan, a professor at the Harvard Business School, former Goldman Sachs (NYSE:GS) banker, takes his post on September 8th, just as the Fed nears the critical time to raise the interest rate.
Kaplan succeeds Richard Fisher, who retired in March. Fisher was an outspoken policy hawk.
HERERA: Hurt by a cutback in consumer spending and a slump in exports. Japan’s economy shrank in the second quarter. Japan’s gross domestic product fell at an annualized rate of 1.6 percent. It’s the country’s first such setback since a short but painful recession last year. Most analysts believe Japan’s economy will return to growth in the current quarter.
MATHISEN: Still ahead, remember that IRS breach we reported back in May? It turns out it was much larger than first thought. We’ll give you the details.
MATHISEN: A potentially concerning news for taxpayers. The Internal Revenue Service said the cyber attack first disclosed back in May was much more extensive than previously reported. With more than 300,000 taxpayer accounts potentially affected and more than 600,000 breaches attempted.
Eamon Javers has been following the story for us from Washington. Eamon, bring us up to date here. What do we know — what we do know about who the hackers might be, and what do we know about the information they’ve got and how they’re going to use it?
EAMON JAVERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, what we know as of right now, Tyler, is that it looks like about 220,000 additional people have been affected by this hack, suspicion really centers on Russian criminal gangs for now. But the IRS has not said definitively actually whodunit.
And the way the hack worked is clever, actually. What the hackers did was they used information they had already gotten from previous hacks about taxpayers, and then went to the IRS’s own Web site and queried the IRS’s Web site for tax return information for those taxpayers from back years.
And the presumption here is ultimately using that back year data the criminals might be able to do something a little more nefarious with that information, Tyler.
HERERA: You know, is this worse than some of the hacks that we’ve seen on companies in the private sector? One thinks of Target (NYSE:TGT) and others.
JAVERS: Yes, it’s not worse numerically. Obviously, you know, we’ve seen hacks that affected millions of people. Here, we’re just talking about hundreds of thousands.
But there is something about the idea of your tax return information getting hacked. It kind of gives people the heebie-jeebies. I mean, this is a scary concept that your information, your most sensitive financial information could now be in the hands of Russian criminals. What they might do with it ultimately is the fear here.
Now, what the IRS thinks is going to happen here is that these criminals will use this information to file bogus returns and then collect bogus refund checks from the IRS, and pocket that money and make off with it. So ultimately, the victim here is likely to be the federal government, not those taxpayers. But still, to be caught up in this can be really very scary.
MATHISEN: Absolutely. Eamon Javers, thank you very much.
JAVERS: You bet.
MATHISEN: Eamon reporting from Washington.
HERERA: Some of the nation’s big box retailers report earnings this week. Walmart and Home Depot (NYSE:HD), both Dow components, will release their results before the opening bell rings tomorrow. It’s not just their numbers that matter, but also what they say about the health of the consumer.
Courtney Reagan tells us what to look for from the New York Stock Exchange.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: We may get a better idea about the state of the American consumer as some of the nation’s biggest retailer report second quarter earnings this week.
CHARLIE O’SHEA, MOODY’S V.P. RETAIL ANALYST: It really sets the stage for the second half of the year. And you’ll get some early indication of how the back-to-school season has gone.
REAGAN: Two Dow components lead things off. Home Depot (NYSE:HD) is expected to get a boost from the rebounding housing sector, and Walmart, which feels short of earnings expectations in the first quarter, blaming higher labor costs, because it’s begun to boost pay and a stronger dollar. Walmart is looking for continued growth in U.S. same store sales, while also ramping up its online business.
O’SHEA: They’re spending a lot of money online, moving a lot of customers out of the brick-and-mortar stores into the online channel which we think is a positive. We’re also going to want to take a hard look at how the small format stores are doing, the neighborhood markets. We think that’s a big area of growth for Walmart.
REAGAN: Also tomorrow, we’ll hear from Dick’s Sporting Goods (NYSE:DKS) and T.J.Maxx.
On Thursday, Sears (NASDAQ:SHLD) is scheduled to report, as well as the Gap (NYSE:GPS). And on Friday, we’ll get second quarter results from Footlocker (NYSE:FL).
It’s not just the quarterly results that will be watched, though. A rising dollar for some of the bigger names which do a lot of international business like Walmart and Gap (NYSE:GPS), during the first half of the year, but with China devaluing its currency last week, Chinese imports coming into the United States should be a bit cheaper, which might serve to lift the retail outlook going into the second half of the year.
Fed watchers will also be looking for signs of confidence in the retail sector moving forward. The thought is, if the labor market is stronger, and if consumers are beginning to spend more money, that could lead to higher price inflation, something the Fed says has been missing from its equation that it needs in order to raise rates.
I’m Courtney Reagan for NIGHTLY BUSINESS REPORT, in New York.
MATHISEN: The shopping channel QVC did some shopping of its own and that is where we begin tonight’s “Market Focus”.
Zulily, the online retailer known for flash sales is being purchased by Liberty Interactive’s QVC Network for more than $2 billion. And the CEO of QVC says the two companies have a lot in company.
(BEGIN VIDEO CLIP)
MIKE GEORGE, QVC CEO: I’ve been talking to our team at QVC about Zulily for the last couple of years. I’ve used them as a role model for someone taking a new approach to the web. We’re both companies that are trying to create inspiration, create the joy of discovery, to bring customers back every day with new ideas to add value to their lives.
(END VIDEO CLIP)
MATHISEN: Shares of Zulily jumped 49 percent to close at $18.74. Liberty interactive shares fell more than 1 percent to $29.80.
The pump and valve maker Pentair (NYSE:PNR) has agreed to buy privately held fastener maker Erico Global for $1.8 billion. The deal expected to expand Pentair’s foothold in the commercial and industrial sectors and comes just weeks after the activist investor Nelson Peltz took a stake in the company. Shares of Pentair (NYSE:PNR) grew slightly to finish at $62.60.
And Estee Lauder reported a decline in sales for the first time in three quarters and gave soft earnings guidance for the current quarter in the fiscal year. Cosmetic maker which owns brands like Clinique, Mac and Bobby Brown said its results were hurt by the stronger dollar. The stock fell almost 7 percent to $82.80.
HERERA: Luxury hotel owner Strategic Hotels and Resorts is exploring a possible sale. The real estate investment trust said it has hired JPMorgan (NYSE:JPM) as its adviser. That sent shares of Strategic Hotels up over 2 percent to $14.22.
U.S. Steel is closing an Alabama plant which will affect about 1,100 workers. The company says the shutdown is needed to improve the efficiency of its rolled steel business unit. Shares of U.S. Steel down over 1 percent today to $19 even per share.
And retailer Urban Outfitters (NASDAQ:URBN) reported record sales and beat analyst earnings estimates. The company was helped by results that its namesake brand saw strong demand for its free people line of clothing. That helped send shares initially higher in after-hours training. In the regular session, shares fell slightly to $32.32.
MATHISEN: Amazon (NASDAQ:AMZN) shares rose slightly following a front-page article in “The New York Times (NYSE:NYT)” this weekend that portrayed the company as a harsh and demanding place to work. That was the good part. The article described Amazon (NASDAQ:AMZN) which recently overtook Walmart as the biggest retailer in terms of market value as a successful but ruthless company, where workers are pushed to extremes, back-stabbing is encouraged, and where managers show little sympathy for employees suffering from illness or other loss.
CEO Jeff Bezos sent a widely distributed memo to staff refuted the piece, saying, quote, “The article doesn’t describe the Amazon (NASDAQ:AMZN) I know, or the caring Amazonians I work with every day. I strongly believe anyone working in a company that really is like the one described in ‘The New York Times’ would be crazy to stay. I know I would leave such a company.”
Today the stock rose less than 1 percent.
HERERA: Disney (NYSE:DIS) is bringing the force to California and Florida. The company detailing an ambitious plan to integrate “Star Wars” into its theme parks. On Friday, we told you such a plan was possible, and one of the ways that Disney (NYSE:DIS) could make more money off the popular franchise.
Tonight, Julia Boorstin has details on what Disney (NYSE:DIS) plans to do, and what it might mean for its bottom line.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: For the first time ever, “Star Wars” fans will be able to visit a galaxy far, far away.
Disney’s CEO Bob Iger announcing two new star-themed lands building in the parks in Anaheim and Orlando.
BOB IGER, DISNEY CEO: We’re creating a jaw-dropping new world that represents our largest single themed land expansion ever.
(CHEERS AND APPLAUSE)
BOORSTIN: With two 14-acre parks in the works, no opening date announced yet. Both will feature rides based on ‘The Force Awakens”, as well as flight in the Millennium Falcon. Plus, they’ll feature Mos Eisley cantinas.
In the meantime, to freshen the “Star Wars” in the parks before the new land opens, Disney’s updating its popular Jedi training academy. This new multi-billion-dollar investment in “Star Wars” and the U.S. parks shows Disney (NYSE:DIS) making the most of its $4 billion acquisition of Lucas Films back in 2012.
And the investment highlights the growth potential at the U.S. theme parks. FBR analyst Barton Crockett said the new lands will give Disney (NYSE:DIS) leverage to raise prices, adding up to a double-digit growth opportunity in the launch year. He also said it puts even more pressure than ever on the next “Star Wars” movie opening December 18th, to be a huge hit.
BARTON CROCKETT, FBR CAPITAL MARKETS: I’ll be really nervously reading the first reviews that come out of the “Star Wars” movie, because you don’t want all the capital going into it and have the movie turn out to be a stinker.
BOORSTIN: After spending billions of dollars to build a new Shanghai park is opening next year, shifting focus to the U.S. parks will help Disney (NYSE:DIS) stay ahead of Universal (NYSE:UVV) who has poured billions of dollars into new rides, including Harry Potter.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.
MATHISEN: Coming up, more goods being transported by rail over old and outdated tracks. But that’s starting to change. Tonight, we look at some of what’s being done to fix our aging infrastructure in the first part of our series “The Big Fix.”
HERERA: Here’s a look at what to watch for tomorrow. As we reported earlier, Dow component Home Depot (NYSE:HD) and Walmart will release their quarterly results. And more home construction data is on tap. The Commerce Department will release housing starts before the opening bell. And that’s a little of what to watch for Tuesday.
MATHISEN: The National Labor Relations Board said northwestern university football players cannot form the nation’s first college athlete’s union. The NLRB did not address whether football players are school employees, instead it ruled that the prospect of union and nonunion teams could throw off the competitive balance in college football. The ruling only applies to private schools.
HERERA: Fixing America’s infrastructure. The American Society of Civil Engineers says trillions of dollars need to be spent just to maintain or modestly upgrade everything from roads to bridges. So, all this week, we’ll examine some of the major infrastructure issues facing this country and some possible solutions.
We begin our series called “The Big Fix” with a look at the overcrowded rail system. Tonight, Morgan Brennan takes us to a CSX (NYSE:CSX) terminal in Baltimore, Ohio, where a company is making a big investment in the network so it can haul more intermodal containers, the ones that can transport goods by either ship, truck or rail.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: It’s a big car to the future, freight rail, with intermodal volumes up by more than a third since 2009. But much of the infrastructure has remained stuck in the past. That’s changing.
How do you quadruple capacity in a century-old freight rail tunnel extending one mile under the heart of Washington, D.C.? That’s exactly what CSX (NYSE:CSX) plans to do with the Virginia avenue tunnel — one part of the $850 million national gateway initiative, between CSX (NYSE:CSX) and seven states.
LOUIS RENJEL, CSX (NYSE:CSX) VP: When we finish this tunnel, we’ll be able to move 280 trucks on a single train. So, that’s a lot of highway congestion that we’re going to alleviate.
BRENNAN: It’s all part of an 11-year multi-phase undertaking to move more freight between the East Coast ports and the Midwest.
CSX (NYSE:CSX) is double tracking existing routes to allow two trains at the same time, and increasing clearance on bridges and tunnels to fit trains double the cargo.
Once complete in late 2018, CSX (NYSE:CSX) is betting the work will result in a conversion of more than 14 billion truck miles to rail. And help save 2 billion gallons of fuel in the process.
CHRISTIAN WETHERBEE, CITIGROUP ANALYST: Intermodal has been a strong growth area for the railroad. And it continues to be over the very long run when you think about the United States transportation infrastructure. The rails really are well-positioned to continue to take market share off of the trucks and onto the rails.
BRENNAN: Another freight railroad sees dollar signs as well. Last year, Union Pacific (NYSE:UNP) completed a $400 million intermodal facility in New Mexico, to move more containers between L.A. area ports Texas and the Midwest.
BNSF and Norfolk Southern (NYSE:SO) had investments underway as well, as freight railroads pour money into this part of their business, they’re already starting to see results. CSX (NYSE:CSX) reported a five percent increase in intermodal volumes in its latest earnings report. It was a bright spot in an otherwise lackluster second quarter.
For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan in North Baltimore, Ohio.
HERERA: Our “Big Fix” series continues tomorrow with a look at what’s being done to update our energy infrastructure, and all of those old and outdated transmission lines.
That’s a big job to say the least.
MATHISEN: A lot.
HERERA: All right. That does it for NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks so much for watching.
MATHISEN: And I’m Tyler Mathisen. Thanks for me as well. Have a great evening, everyone. And we hope to see you back here tomorrow night.