TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Not there yet. But minutes from the last Federal Reserve meeting show the central bank maybe getting closer to its first interest rate hike in nearly a decade.
SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Playing with fire. The economic hit California’s economy is taking as the land stays dry and the fires rage.
MATHISEN: Outdated and overcrowded. Our nation’s airports have been neglected for decades. Tonight, our series, “The Big Fix” explores how all that flyer frustration can be alleviated.
All that and more on NIGHTLY BUSINESS REPORT for Wednesday, August 19th.
HERERA: Good evening, everyone, and welcome.
Call it the land of confusion. The Federal Reserve says it’s inching closer to its first interest rate hike in nearly a decade, but it’s not quite there yet. In the minutes from its last meeting, policy makers at the central bank made it clear that they still want to see further gains in the job market and more evidence of inflation.
Just today, the Labor Department said consumer prices rose just 0.1 percent in July. So while the Fed didn’t say a hike is coming in September, it didn’t say it’s not. And there in lies the confusion which played out in the markets midday.
So, mark your calendars. The next meeting is only a month away. When the fed does hike rates, and it will at some point, it will impact everyone who has a savings account, wants to take a home mortgage, a car loan or has money in the stock market.
Steve Liesman has more on those not so straight-forward minutes.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: A controversial, even confusing set of minutes from the Federal Reserve’s July meeting came out in which the markets could be seen as a dovish or indicating less chance of a first rate hike in September. But economists and some Fed observer saw them as neutral or even slightly hawkish. The Fed said in its minutes that most of the members of the board judged the conditions for a hike had not yet been achieved.
However, they said the conditions for that first hike in nine years, quote, “were approaching.” Some said the conditions were met or would be met shortly. A prompt start to raising rates would seem to bring confidence from the Fed in the economy.
DAN HECKMAN: We think if the Fed doesn’t raise rates in September, it sends a negative signal that perhaps they know something about the economy being weaker than what it really is.
LIESMAN: Now, there were objections from some Fed officials, especially inflation. They said the inflation data was not progressing towards a 2 percent target, and the Fed staff revised down that inflation target.
Some participants see downward risk to inflation coming from lower oil prices, lower commodity prices and a stronger dollar. Most on the board saw those effects, especially from energy on the dollar as temporary. A lot of talk about China there where the spillover did raise some concerns, and the Chinese stock market was seen having little impact on Chinese growth.
The one issue, though, was whether or not there was a material economics slowdown in China. That they thought posed risk to the U.S. outlook.
LARRY MCDONALD, SOCIETE GENERALE SENIOR DIRECTOR: The Chinese slowdown is impacting many markets around the world. And that is presenting a risk to the U.S. and it’s presenting a risk to the Feds’ September 8 rate hike.
LIESMAN: Looking at the two-year note where the yield fell down to 65 basis points from over 70. That clearly suggested the market, the bond market saw the Federal Reserve potentially taking a pass on that September rate hike.
For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.
MATHISEN: The president of the Federal Reserve Bank of Minneapolis said a rate hike would be a step in the wrong direction. Narayana Kocherlakota says he’s concerned about inflation or really the absence of it, and that the central bank should wait until next year to start raising its benchmark rate from near zero.
HERERA: So let’s turn to David Kelly for more of his perspective on the Fed and the economy. He is chief local strategist at J.P. Morgan Funds.
Good to see you, David.
DAVID KELLY, J.P. MORGAN FUNDS CHIEF GLOBAL STRATEGIST: Good to be here.
HERERA: How did you interpret the Fed’s minutes? It is interesting because they do reference China. These minutes do not reflect the devaluation that occurred in the Chinese currency.
KELLY: That’s right. These minutes really weren’t that surprising. Once we got to read them all, of course, they were released early. But once you actually read through them all, they’re exactly consistent with the statement the Federal Reserve released. I don’t think there is actually any information here. And I think also, there is a focus at the Federal Reserve on domestic economic conditions.
So, if you look at commodity prices falling, if you look at problems in China, the question you have to ask yourself is, does this make the U.S. economy weaker? And so far, the answer is no. So, you know, after watching it, reading these minutes, it doesn’t change my view. There’s — you know, if we get a decent employment report in August, for August in early September, I think the Fed will raise rates in September.
MATHISEN: And you think that’s an appropriate move.
KELLY: Oh, yes, it is. I mean, you know, we can’t wait for perfection. This economy is a permanently C-plus student. It never out really excels. And so, you know, waiting for to it get an “A” is just — is pointless.
I think the economy is strong enough. The unemployment rate is low enough that we should not have the easiest monetary policy in a century in place. It’s time to get back to normal.
HERERA: What about the lack of inflation, though, David?
KELLY: Well, obviously, we got low commodity prices affecting inflation. We’ve also got low wages.
But research that we’ve been doing on wage growth suggests some of the problem is actually demographic, is that a lot of older workers are retiring and when they retire, they have much higher wage rates than younger workers. And if you take that into account, you’ve also taken into account the temporary account of lower oil prices on the year over year basis. That’s part of what’s holding it down.
So, wage growth is still slow. Productivity is very slow also. But I think wage growth will pick up over the next year as this labor market tightens even further.
HERERA: David, you’ve written recently that you think the odds of an upward breakout for stocks are relatively low, but you also think the odds for a correction for stocks are relatively low. Would you explain your thinking?
KELLY: Yes. I think because the valuations, because everybody sort of remembers being burned in the 2000s by the bear market, I think it’s hard for people to get very excited about stocks. At the same time, I don’t expect a big falloff until you have either an economic recession or stocks are palpably expensive relative to everything else.
And the problem for those who are thinking we’re going to have a big correction here or bear market is where are you going to put the money? You take it out for a week or two, and you put it in cash. You put in the bond market, but you’re not getting any return.
So, so long as the economy feels OK, you’re going to look at the bottom of that correction and put the money back into the market. So, it’s a little frustrating for people who want big moves in markets, but I don’t really see a reason for a big move either way right now.
HERERA: All right. David, we’ll leave it there. Thank you.
David Kelly with J.P. Morgan Funds.
MATHISEN: Well, it was anything but a quiet day on Wall Street. Stocks saw steep declines most of the session, then recovered after those Fed minutes were released, only to fall again. By the closing bell, the Dow Jones Industrials dropped 162 points to 17,348. It has been down as much as 229 points. NASDAQ fell 40. The S&P 500 was off 17.
Energy stocks, some of the biggest losers as oil prices tumbled more than 4 percent to finish at $40.80. That’s a 6 1/2 year low. Stockpiles unexpectedly rose last week to kept inventories at 80-year highs.
HERERA: And those declining crude prices may be reflective of a much broader global slowdown.
And today, as Bob Pisani reports from the New York Stock Exchange, the markets got more evidence that that weakness is real.
BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: It was another 1-2 punch for the markets. And that’s without the Fed minutes. The Europe and the U.S. were both weak at the open on further concerns on China weakness. Even though the mainland Chinese markets were up, Hong Kong was down and the traders believe Hong Kong is a more accurate gauge of the Chinese economy than the mainland markets.
There were other signs of the global slowdown was very real. Glencore is one of the biggest commodity trading firms in the world. It dropped 9 percent in London after announcing that the cash flow in the first half of the year was down about 30 percent from the same period last year. Ouch.
The stock began trading in 2011. It hit an historic low today. It’s been down 40 percent since the slide began in June of this year.
And, by the way, June is when the slide in China began. It’s all related, of course.
Elsewhere, Metso, a small Finnish company that manufactures mining equipment announced overnight it was closing one of its plants in York, Pennsylvania, that’s been operating since the early 1900s. The company said there were permanent changes occurring in the mining business.
Then, at 10:30 a.m., the weekly crude oil inventory showed a large rise in inventories, a big surge in imports, all drop the new lows. Again, the commodity stock complex fell apart, again taking broader market down with it.
For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.
MATHISEN: Oil and the industry that make up a large part of Canada’s economy and what happens Canada matters to the U.S., since Canada is our largest trading partner, $300 billion a year flows north of the border. So, if Canada slows, American companies doing business there will slacken as well.
Dierdre Bosa reports from Vancouver, on a major global economy that is on the edge of recession.
DIERDRE BOSA, NIGHTLY BUSINESS REPORT CORRESPONDENT: Canada was once the darling of advanced economies but the global oil price rout, commodities collapse, and China slowdown has put the resource-dependent country on the verge of a recession at a time when the U.S. is recovering. A 24, or 24-pack of beer is now more expensive than a barrel of oil here in Canada.
The Canadian benchmark fell below $30 a barrel this week, its lowest price since 2008. Analysts say that is heaping more pain on to the economy.
The reality that oil prices may stay low for more than a year is starting to sink in, and it’s affecting other areas of the economy. Business investment has taken a hit, trade data is falling and a recent survey national survey shows that many Canadians feel less financially secure than they did a year ago. Many say they are scaling back on big purchases and trips to the U.S.
UNIDENTIFIED MALE: This year, I would say bonuses are going down. Salaries are almost the same. The prices of food and everything is going up.
UNIDENTIFIED FEMALE: My daughters who work in the industry of the restaurant, they see less and less people coming in.
UNIDENTIFIED FEMALE: I have cut back on a lot of luxury items that I once thought were necessary. So, now, I have to rethink and reprioritize exactly what needs to be purchased anywhere I can cut back.
BOSA: In Calgary, the heart of Canada’s oil patch, home prices have plunged 25 percent in year to date.
SAM COREA, RE/MAX REAL ESTATE: When the oil dropped in prices here, a lot of my high end buyers were instantly on hold. My first quarter sales were down 86 percent, which is an unprecedented amount, as I’ve been selling real estate for over 20 years.
BOSA: There are also fears that China’s slowdown could hurt investment and real estate markets and other parts of the country like Vancouver, where Chinese money has fueled the economy and red hot home prices.
Canada’s next GDP read will be released on September 1st and will show whether the economy is officially in a recession.
For NIGHTLY BUSINESS REPORT, I’m Dierdre Bosa, Vancouver, Canada.
HERERA: And still ahead, the billions at stake for California, the world’s eighth largest economy, as wildfires rage and the record drought persists.
MATHISEN: The worst fire season in years is plaguing the west and nowhere has the economist been greater than in the Golden State, now blackened by blazes and browned by drought.
MATHISEN: The pictures are breathtaking, but the economic cost of more than 100 western wildfires will truly take your breath away.
UNIDENTIFIED FEMALE: Yes, I had a lot of stuff. The stuff wasn’t that important.
MATHISEN: Seven million acres have burned so far this year, an area larger than the state of Vermont, almost double the amount for all of last year. For the first time in almost a decade, active military are joining the National Guard to fight wildfires. The cost to government, state, local, and mostly federal, not to mention the economic loss, easily tops more than $2 billion so far this year.
The U.S. Forest Service which bears the brunt of firefighting responsibility now devotes more than half its total budget to fighting fires, up from 16 percent just 20 years ago.
Smoke from those fires clouds the skies hundreds of miles away. But even where there is no smoke, there’s another kind of fire. Now four years running, California’s drought will cause almost $2 billion in agricultural losses this year, including more than 10,000 seasonal farm jobs that have literally dried up.
JAY LUND: Each year the drought becomes a little bit worse for the same hydrology. The amount of water this year is a little less than what it was last year. The reservoirs are a little lower, the ground levels are a little bit lower.
MATHISEN: When that happens, land can be fallowed. This year the amount of fallowed ground is 20 percent higher than last year. To make up for the lack of rain, farmers are pumping more water out of the state’s underground aquifers.
But those aquifers shown in green as they appeared back in 2002 have been drying up. Even if wet weather comes from a growing El Nino this winter, the run-off could cause flooding. Droughts are nothing new meantime to California but maybe what is new is the mindset of Californians.
KEVIN KLOWDEN, MLKEN INSTITUTE CALIFORNIA: Normally, people’s behavior gradually reverts back to type over time. The question is, will that change this time? And there are now indications that that is a yes. That it will change. Water has been so close to being free for almost everybody in the state that nobody really thinks of it as a scarce resource. That’s changing.
MATHISEN: In California, the drought is hitting livestock, corn, cotton and wheat the hardest. Farmers looking to preserve higher margin fruits and nuts that California is better known for seem to be adapting a little better.
HERERA: California is also home to Hollywood and much of the entertainment industry. And there and across the country, actors are voting this week on their future and the future of their union, as more and more viewing shifts from traditional well-paid TV to streaming.
Julia Boorstin has the behind-the-scenes drama of this Hollywood labor fight.
JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Over 160,000 actors and other professionals represented by SAG-AFTRA are voting on leadership, as the entertainment industry faces a digital transformation.
JONATHAN HANDEL, ATTORNEY, HOLLYWOOD REPORTER CONTRIBUTING EDITOR: If you pay $40 a month for your cable or skinny bundle, rather than $100, that’s less money ultimately that goes to the actors, the writers, the directors and others.
BOORSTIN: It’s a battle between the White Shadow, actor Ken Howard, and TV’s most famous home improvement mom, Patricia Richardson. Howard let a merger of the two unions SAG and AFTRA three years ago. He says he’s delivered tangible results, over $800 million in contract gains.
Star of the original “90210”, Gabrielle Carteris is his executive vice president.
GABRIELLE CARTERIS, SAG/AFTRA EXECUTIVE V.P. ACTION: For all of us, our focus has been is how do we attack the future? The changing — we see this landscape coming upon us and we’re not prepared. So, Ken, I think, has done an incredible job about really dealing with where we are now in the industry and how it’s changing.
BOORSTIN: Richardson says he’ll secure higher payment for actors for lower budget digital shows which typically pay a fraction of TV fees when shows are reruns, threatening mainstay of actors’ paychecks called residuals.
Hollywood writers have seen their royalties from new media exceed those from the TV network, says Handel. There’s no measure for how actors pie is split, but the digital slice is the future.
HANDEL: The question for actors is, even as the money grows, are the moneys being distributed among so many more people and more jobs that for each given job, an actor might not be seeing as much.
BOORSTIN: Richardson says despite the combined union scale, it does not have as much power as it should, saying she’ll play hard ball in negotiations with Hollywood studios, particularly for digital pay. Richardson says the union has left a lot of money on the table. Quote, “In the end, the studios made billions, while SAG actor members were left with pennies. We hope to avoid repeating the mistakes of the past.”
Carteris counters —
CARTERIS: We really brought stability. So, I think what’s happening, it is very important for negotiations. If our employers see stability, they see the power of who we are.
BOORSTIN: Ballots are due Thursday morning with a count expected by Thursday night.
For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.
MATHISEN: Lowe’s reported earnings that were, well, low. And that’s where we begin tonight’s “Market Focus.”
The home improvement retailer profits that were weaker than expected. Revenues, though, were strong as customers bought big ticket items, like appliances and outdoor gear. Lowe’s finished the day nearly 2 percent higher at $74.37.
Target (NYSE:TGT) raised its full year guidance for the second time this year, topped estimates for profit and revenue. The retail cited stronger demand for clothing and goods for the home. The company also benefited intensive cost-cutting internally. Target (NYSE:TGT) ended the day up a little bit at $80.87.
Meanwhile, the office supplier Staples (NASDAQ:SPLS) reported second quarter earnings that were roughly in line with analyst estimates. The company saw a decrease in foot traffic and a decline in sales as it continues to close stores and cut costs. Shares of Staples (NASDAQ:SPLS) down a bit to $14.12.
HERERA: Hormel Foods (NYSE:HRL) known for its Spam products, among other things, reported stronger than expected quarterly results and raised its full year guidance. This also comes as it deals with the avian food outbreak affecting its turkey business. Other segments such as deli meats and peanut butter saw sales improved. Hormel finished the day up over 1 percent at $61.22.
American Eagle Outfitters (NYSE:AEO) is forecasting a slowdown in sales growth despite reporting better than expected earnings and revenue for the second quarter. Investors didn’t like the sales forecast, though, when the stock fell more than 7 percent to $16.90, its biggest one-day stock decline in almost nine months.
Beverage giant Coca-Cola (NYSE:KO) taking a minority stake in organic juice marker Suja Life. The terms not disclosed but it is part of Coke’s broader strategy to diversify its products as consumers turn away from soda towards healthier alternatives. Coke shares fell more than 1 percent to $40.78.
MATHISEN: Well, consumers just aren’t opting for healthier beverages, they are making fundamental shifts in their spending. Since the Great Recession, priorities have changed. And because consumer spending is the engine that drives economic growth, investors and businesses are taking note.
Courtney Reagan reports.
COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: From housing to health care, automobiles and apparel, how much consumers spend and where they choose to spend it makes a difference. And data suggests that post-recession, consumer spending habits have permanently changed.
SARAH QUINLAN, MASTERTCARD SVP, GROUP HEAD MARKET INSIGHTS: The great news is that consumer is back and she is spending like no tomorrow. But the unique thing is she is spending experientially. And what I mean by that is that she is spending on hotels, on restaurants, on taking holidays.
REAGAN: Retail sales are growing, but not at the same rate across categories. According to MasterCard (NYSE:MA) spending polls, spending at restaurants is off the charts. And that’s not all, spending is up on travel, airlines and hotels are the beneficiaries as consumers opt to accumulate memories than accumulating stuff.
But consumers are making large purchases. “Thomson Reuters (NYSE:TRI)” data shows home furnishings and home improvement sales have been outpacing overall retail sales. Also evident in Home Depot (NYSE:HD) and Lowe’s earnings. Home goods also currently a strong category for Macy’s (NYSE:M) and JCPenney.
Auto makers, too, are seeing the best level since before the recession. The shift in spending has been occurring slowly over time, making analysts question whether it’s just a blip in the data. But government data shows savings rates continue to hold up, perhaps making consumers feel better about the amount of spending they’re willing to do, while still taking into careful consideration the value they place on every purchase.
QUINLAN: What we’re really seeing, things that people prize — dining out, et cetera, we see huge value for money purchases where people are willing to increase what they’re willing to pay for the same goods. In other areas, where they’re not feeling the value as much is apparel, because they’re not wanting it as much. And therefore, you see that increased discounting and promotions.
REAGAN: But sometimes even discounts aren’t enough. Government data shows the consumer has fallen out of love with buying new clothes. That shift has hit department stores hard. MasterCard (NYSE:MA) spending polls reveal sales growth at department stores in the last five years is actually negative. But one glimmer hope for apparel sales lies with small businesses, where consumers are willing to spend more on unique and curated items, pushing small business apparel sales growth up a surprising 6 percent in the last two years.
For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.
MATHISEN: Coming up, flying can be a headache but there is a solution to alleviate the frustration of overcrowded airports. Our series “The Big Fix” continues next.
HERERA: And here’s a look at what to watch for tomorrow. Existing home sales will tell us whether the housing market momentum continued in July. Jobless claims will give us another read on the labor market and we’ll also hear from two Federal Reserve officials. That’s some of what to watch for Thursday.
MATHISEN: Buried in today’s consumer price data, this little factoid — air fares have dropped 5.6 percent, the most in any month over the past 20 years. A major reason, the lag time in the way airlines factor in lower fuel prices. Also, as passenger traffic has risen, airlines have been slowly adding more capacity, that is expected to continue pushing air prices down even more.
HERERA: Well, airfares may have dropped but the crowds at the airports aren’t. They’re growing. And if you fly a lot, you’re very likely familiar with long lines and inconveniences. But getting a new airport built or even upgraded doesn’t happen very often.
And as Phil LeBeau reports in our series, “The Big Fix”, the need for new terminals is growing, along with those crowds.
PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Who says flying is fun? At many airports, there are rundown terminals and seemingly constant delays due to congestion. No wonder many agreed with Vice President Joe Biden when he blasted the condition of New York’s LaGuardia Airport.
JOSEPH BIDEN, VICE PRESIDENT OF THE UNITED STATES: If I took you blindfolded and took you to LaGuardia Airport in New York, you must think, I must be in some third world country. I’m not joking.
LEBEAU: Some airports like JFK in New York, are upgrading with brighter, refurbished terminals. Ft. Lauderdale built a new concourse so the airport can handle even more flights.
And last month, the vice president and New York Governor Andrew Cuomo announced plans to tear down LaGuardia and completely rebuild it.
GOV. ANDREW CUOMO (D), NEW YORK: Best of all, it is not a plan, it’s not a sketch, it’s not a dream, it’s not a vision. It is actually happening.
LEBEAU: It has already happened in Denver where the city built a new airport 20 years ago. Since then, people flying through Denver has increased 72 percent.
More importantly, DIA has the space to double in size and add up to six more runways in the future if needed.
KIM DAY, DENVER INTL. AIRPORT CEO: There is no question that 53 square miles gives us an advantage over LaGuardia, over LAX, over all quite honest, all of the capsulated gateway airports. In fact, that is the future of this airport.
LEBEAU: So, why aren’t more cities rebuilding or adding brand new airports? First, it is expensive. And either raising new taxes or spending billions of dollars is a tough sell politically. Second, many existing airports are landlocked. They have little room for expansion and adding new runways.
And critics say, money shouldn’t be spent refurbishing terminals. It should go to improving traffic flow, so there are fewer delays and less congestion.
MICHAEL BOYD, THE BOYD GROUP CHAIRMAN: We need airports where people are going to go. That means we have to have efficient airports. If we make our current system efficient, we’re going to have a better system.
LEBEAU: Taking the headache out of flying by improving airports and getting in the air.
Phil LeBeau, NIGHTLY BUSINESS REPORT, Denver.
HERERA: Our series, “The Big Fix”, continues tomorrow with a look at our crumbling water infrastructure from pipes to dams and what’s being done to make sure homes and businesses get the water that they need.
Look forward to that, right?
MATHISEN: Yes, it would be interesting.
HERERA: It’s been a great series.
That does it for NIGHTLY BUSINESS REPORT tonight. I’m Sue Herera. Thanks for watching.
MATHISEN: And thanks for me as well. I’m Tyler Mathisen. Have a great evening, everybody. And we hope to see you back here tomorrow night.