Transcript: Nightly Business Report – October 4, 2016

NBR-ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: Shop til you drop. Americans are expected to spend a lot of money this holiday season. Will consumers power the economy in the months ahead?

Hack attack? Johnson & Johnson (NYSE:JNJ) warns diabetic patients that its insulin pumps are vulnerable.

Dinner, disrupted. The big tech companies are reshaping the Silicon Valley restaurant scene, and not everyone is happy about it.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, October 4th.

Good evening, everyone. I’m Sue Herera. Tyler Mathisen is on assignment tonight.

We begin with the consumer, the engine of the U.S. economy. Spending accounts for nearly three quarters of U.S. activity, and it has powered the economy for most of the year. But recently, there have been signs spending may be slowing, or at least taking a breather.

Today, that notion was put on the back-burner when a retail trade group issued an upbeat forecast and said it expects Americans to spend a lot this holiday season — the most important time of the year for the industry.

Courtney Reagan has the details.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: You may just be warming up the pumpkin spice latte season, but it’s time to start thinking about the holidays. Sure, there’s an election unlike any other and potential rate hike between now and Christmas, but neither Donald Trump, Hillary Clinton or Janet Yellen are wearing their scrooge suits in consumer’s mind.

The National Retail Federation is out with its holiday sales forecast, projecting a 3.6 percent increase over last year. Stronger than last year’s 3 percent growth, which was below estimates, because December temperatures in the 60s in much of the country hit retailers hard.

The group’s chief economist is more bullish this year because the fundamentals are better. More Americans are working. Net worth and incomes are up. And last year, the Chinese currency devaluation shocked investor confidence. We haven’t had an event like that this season.

From the NRF’s perspective, political unrest be darned, Santa is bullish.

But not everyone is ready to predict a guaranteed holiday home run this year.

ED YRUMA, KEYBACK CAPITAL MARKETS MANAGING DIR.: Certainly, the economic data would indicate that the consumers are in a really good place right now. So, where the disconnect is, is where the consumer spending, which has been a little bit weak in recent months. So, certainly, the election could be a part of the overhang with the consumer, or watch and see if maybe as those clouds lift if the consumer doesn’t get out and spend again.

REAGAN: Still, the retail lobby group isn’t alone in its optimistic forecast. RetailNext, AlixPartners, Deloitte, and Kantar Retail projects total holiday sales to improve somewhere between 3.2 and 4 percent. That’s pretty strong and a lot better than GDP growth.

While upwards of 85 percent of retail sales still come from physical stores, the online shopping influence is growing. Online only holiday sales are expected to continue their exponential growth trend. Similar to years past, consumers are looking for the best merchandise at great prices. And for online shoppers, free, fast shipping and near returns is a near requirement.

Accounting company analyst Oliver Chen thinks shoppers are in for great bargains this year.

OLIVER CHEN, COWEN & CO. SR. RETAIL ANALYST: We like names like Ross Stores (NASDAQ:ROST). We also think department stores could be in a good position here because of better inventory trends in terms of tighter management of inventory, as well as good demand and better weather. We like Nordstrom (NYSE:JWN). We have a neutral rating on Macy’s (NYSE:M), however we acknowledge that sales trend could be good.

REAGAN: Chen also says beauty and ath leisure trends will help Ulta and Lululemon to be gift-giving destinations this holiday season.

For NIGHTLY BUSINESS REPORT, I’m Courtney Reagan.

(END VIDEOTAPE)

HERERA: Scott Hoyt joins us now to talk more about what he is expecting from the consumer in the months ahead. He is senior director of consumer economics at Moody’s (NYSE:MCO) Analytics.

Welcome, Scott. Nice to have you here.

SCOTT HOYT, MOODY’S ANALYTICS: Nice to be here, Sue.

HERERA: Courtney laid out some of the basics, but we did have some worrisome data back in August. Was that a one-off? And is the consumer going to be the driving force for the economy as we enter into the holiday season?

HOYT: Yes. We do think that was a one-off. It was largely driven by a temporary decline in vehicle sales, which as you said, pick back up, and we do think consumers are going to continue to drive the economy as we go forward.

HERERA: What kind of a holiday season will it be? Do you think that we will see a lot of discounting? Consumers are pretty much used to the fact that they’re going to get good bargains.

HOYT: Yes. I’m not sure how much it will be discounting and how much it will just be the fact that prices aren’t rising very much, or in some cases declining. But I think consumers will get good bargains this year.

HERERA: What about energy prices? We did see a pickup in consumer spending when energy prices turned south. But that’s changed considerably. How big a factor will that be?

HOYT: I think that will just be a small factor. I mean, energy prices are rising, but they’re only really inching up. They’re not moving up rapidly. And seasonally, prices tend to be soft this time of year anyway.

So, barring some unexpected event, we don’t think energy prices are going to be a big factor for consumers this holiday season.

HERERA: Other people feel as though the election, even though, obviously, it comes before the holiday season, but regardless of who wins the White House, that that may be a disrupter, if you will, for consumer spending. Do you view it that way or not?

HOYT: We think that’s unlikely. Past elections have not disrupted spending. While this one is different, so it’s something we need to watch for, that’s not our — our assumption is that it won’t be disruptive.

HERERA: All right. We’ll leave it there. Scott, thank you.

Scott Hoyt with Moody’s (NYSE:MCO) Analytics.

HOYT: You’re welcome.

HERERA: And that upbeat spending outlook was not enough to lift stocks as a rising dollar pressured equities. Investors were also focused on comments from Richmond Fed President Jeffrey Lacker who said there is a strong case to raise interest rates and keep inflation under control. As a result, the Dow Jones Industrial Average lost 85 points to 18,168. The NASDAQ was down 11, and the S&P 500 dropped 10.

The international monetary fund cut its growth forecast for the U.S. and said the world economy is moving sideways. The agency said the U.S. and Europe have both been hampered by weak productivity growth, aging populations, and income gains that have for the most part gone to the highest earners. The IMF also said the isolationist trend could likely depress growth further.

Believe it or not, earnings season is almost upon us and this quarter could possibly bring an end to a troubling trend.

Bob Pisani explains why quarterly results may be at a turning point.

(BEGIN VIDEOTAPE)

BOB PISANI, NIGHTLY BUSINESS REPORT CORRESPONDENT: The earnings recession may be about to end. Now, here’s why. On the surface, the news is kind of gloomy. The third quarter earnings for the S&P 500 are set to decline 0.5 percent compared to the same period a year ago. This will be the fifth consecutive quarter of earnings decline for the S&P 500. It would be the worst showing since 2007/2009. But this is the good news. There’s a good chance that all of this could possibly change.

So that’s because revenue growth is turning positive. Revenue growth, that’s top line growth, is really the key to earnings growth. Revenue growth tends to lead earnings growth.

Now, revenue growth is very broad-based right now. Nine of the 11 sectors expecting growth with notable gains expected from several big sectors, consumer discretionary, that’s like retail stocks and home builders, health care, as well as technology.

Now, several sectors are leading the revenue growth story starting with technology. That’s because all the companies that make semi-conductors, Broadcom (NASDAQ:BRCM), Intel (NASDAQ:INTC), Micron, Nvidia, Xilinx (NASDAQ:XLNX), they’re all beneficiaries of the need for new memory chips in the phones we’re buying and virtual reality devices we’re buying, as well the drive for chips that use less energy and are less draining on batteries. Then there is cloud technology and the relentless need to store data. All of this requires bigger, better and faster chips.

It’s not just technology with stronger revenue gains overall. Several healthcare sectors will also have strong gain. So, for example, pharmaceuticals like Bristol-Myers and HMOs like Aetna (NYSE:AET) and Cigna are also set to report very strong revenue gains.

Now, what about energy? Oil and gas companies are still the biggest drag on earnings and revenues. But with oil closer to $50 than $40, even oil companies may have a much better fourth quarter than anticipated.

For NIGHTLY BUSINESS REPORT, I’m Bob Pisani at the New York Stock Exchange.

(END VIDEOTAPE)

HERERA: Hurricane Matthew’s fierce winds and rain pummeled Haiti, the poorest country in the western hemisphere. Now as that storm makes its way north, the governor of South Carolina is calling for an evacuation of coastal communities starting tomorrow, and preparations are under way in Florida, where Governor Rick Scott declared a state of emergency.

(BEGIN VIDEO CLIP)

GOV. RICK SCOTT (R), FLORIDA: Protecting life is our number priority. If Matthew directly impacts Florida, there will be massive destruction that we haven’t seen in years. This is a deadly storm approaching our coast. I cannot stress that enough.

(END VIDEO CLIP)

HERERA: And take a look at this amazing picture. Today, NASA released powerful images of Hurricane Matthew taken from the International Space Station.

So, joining us now to help put Hurricane Matthew’s impact on the U.S. into context is Dan Leonard, senior meteorologist at the Weather Company.

Dan, nice to have you here. Good to see again.

DAN LEONARD, THE WEATHER COMPANY SR. METEOROLOGIST: Hi, Sue.

HERERA: This is obviously a monster storm, and you say one of the things that will be a story here is the fact that it’s not going to come ashore in the traditional sense.

LEONARD: Yes. This is what really makes Matthew the most interesting storm that I’ve dealt with in a long time, Sue. And that’s the fact that it doesn’t look like it’s going to make a traditional landfall.

Now, if you think of traditional landfalling hurricanes they sort of come on shore in a specific point and you have a lot of damage right at that landfall point and then less damage on the outside, sort of further away from the eye. This time around, it looks like Matthew may actually skirt the coast or just stay just offshore of the coast from Florida all the way through the Carolinas.

If that, in fact, happens, you won’t have the pinpoint really strong damage that you get with an eye that comes on shore, but what you will get is a lot of moderate to extensive damage over a long stretch of shoreline from anywhere from West Palm Beach all the way up through North Carolina. This is a very interesting and perhaps very devastating storm for the Southeast, Sue.

HERERA: Now, economically, too, I mean, we — it’s being compared to Hurricane Floyd, which did an enormous amount of monetary damage. What can you glean from Matthew at this point? If anything?

LEONARD: It’s too early to say this will be a Floyd repeat. Certainly, the potential is there. What we have to really worry about at this point is whether there will be any additional strengthen. Right now, it’s a category 4 and looks like it will maintain at least category 3 status, as it approaches Florida on Thursday. Obviously, a category 4 would be much more impactful than a category 2 or 3.

So, I think that’s really the wild card right now at this point. And how much damage there will be. But I will say this — this does look like it’s going to be significant amount of damage, whether or not we get to that Floyd level or not, I’m not quite sure yet. But, yes, there is the possibility that we will get there, Sue.

HERERA: All right. We will be watching it very closely as you will be, Dan. Thank you very much. Dan Leonard with the Weather Company.

Still ahead, why there’s one issue in particular that small business owners are focused on this election.

(MUSIC)

HERERA: Senator David Vitter says that Wells Fargo (NYSE:WFC) and that fake account scandal has impacted about 10,000 small business owners. According to Reuters, Senator Vitter wrote a letter to CEO John Stumpf demanding a full accounting of small business owners affected by what he called fraudulent activity.

Safety regulators have launched an investigation into the safety of brakes on certain F-150 pickup trucks, the top-selling vehicle in the U.S. Owners of some 2015 and 2016 model years have described a, quote, “sudden and complete loss of braking.” The investigation covers about 280,000 pickup trucks.

And a warning from Johnson & Johnson (NYSE:JNJ) to users of one of its insulin pumps. It could be vulnerable to a hack.

Meg Tirrell has more on the latest medical device facing a cyber security threat.

(BEGIN VIDEOTAPE)

MEG TIRRELL, NIGHTLY BUSINESS REPORT CORRESPONDENT: More than 100,000 people with diabetics recently got a strange letter from Johnson & Johnson (NYSE:JNJ). The health care giant was warning them about a cyber security risk with one of its insulin pumps. The one-touch ping insulin pump system comes with a remote control to enable delivery of insulin.

J&J says nobody has been harmed in this way, but that it is possible someone could hack into the device and control insulin delivery.

JAY RADCLIFFE, RAPID7 SR. SECURITY CONSULTANT: We need to give users and patients the information so that way they can determine if it’s too risky for them or if it’s not risky for them.

TIRRELL: Jay Radcliffe is the research who made the discovery, while he works in cyber security at firm Rapid7, his work on the insulin pump was a side project. He’s diabetic, and it was his pump on which he did the research.

RADCLIFFE: This is just out of my own personal curiosity about how these devices work and how safe they are for my own personal use as a diabetic.

TIRRELL: J&J says the probability of unauthorized access to the one touch ping system is extremely low. Someone trying to hack in would have to be within 25 feet of the person wearing the device and have extremely specialized skills, not to mention, harmful intention.

The company says there are ways to mitigate the risk. Turning off the radio frequency feature, limiting how much insulin can be delivered at once and setting a vibrating alert system. The device is eight years old. Newer systems, J&J says, have encryption technology that would be harder to hack. It says this issue doesn’t exist in its other products.

But cyber security in medical devices is a growing area of focus. The Food and Drug Administration issued guidance to manufacturers in January. And in August, a security firm MedSec teamed with short seller Muddy Waters (NYSE:WAT) and issued a report on hard devices made by St. Jude Medical (NYSE:STJ). Alleged the devices could be hacked in ways that makes them malfunction or lose battery power. The FDA has said it’s investigating.

St. Jude disputes the claim, citing an external report and has sued both Muddy Waters (NYSE:WAT) and MedSec.

As for Radcliffe, he doesn’t use that pump any more but he said that’s not because of his findings.

RADCLIFFE: Johnson & Johnson (NYSE:JNJ) and Rapid7 worked very hard at testing out these mitigation strategies and testing out these solutions that we published, especial turning off the radio frequency portion works 100 percent at eliminating the risk.

TIRRELL: For NIGHTLY BUSINESS REPORT, I’m Meg Tirrell.

(END VIDEOTAPE)

HERERA: Olive Garden bucks the trend of slumping restaurants and that’s where we begin tonight’s market focus.

Restaurant chain operator Darden posted better than expected earnings raised its guidance thanks to the Olive Garden’s eighth consecutive quarter of same-store growth. Darden is also buying back up to $500 million worth of shares. Darden — shares of Darden were up just a fraction at $61.72.

Sears (NASDAQ:SHLD) has reportedly attracting interest for its craftsman tool business. Bloomberg says Stanley, Black and Decker and Techtronic industries have reportedly made some bids. The winning offer, which is due by the end of the month, maybe as high as $2 billion. Sears (NASDAQ:SHLD) rose nearly 6 1/2 percent to $12.10.

Google (NASDAQ:GOOG) unveiled its new flagship smartphones, the Pixel and Pixel XL. The phones replace Google’s prior smartphone venture called the Nexus, and directly take on Apple’s iPhone. Shares of Google’s parent Alphabet were up a fraction to $802.79.

And Yahoo (NASDAQ:YHOO)! reportedly scanned hundred of millions of its users’ incoming e-mails for U.S. intelligence officials. Reuters says the tech giant built a custom software program to search the e-mails to comply with the classified U.S. government demands. It could be the first time a U.S. Internet company agreed to a government request to certain all incoming mail. Yahoo (NASDAQ:YHOO)! shares were up a nickel to $43.18.

As the two vice presidential candidates get ready for their first and only debate, small business owners are focused on healthcare and policy, and what changes if any may be ahead, and how that might impact their livelihood.

Kate Rogers (NYSE:ROG) reports.

(BEGIN VIDEOTAPE)

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: With just over a month ago until the November elections, small business owners like Pedro Alfonso are wondering what a new administration might mean for the nation’s healthcare system. Alfonso is CEO of Washington, D.C.-based Dynamics Concepts Inc., an infrastructure services firm. He’s long offered insurance to his staff of more than 300, but says the Affordable Care Act spiked costs.

PEDRO ALFONSO, DYNAMIC CONCEPTS INC. CEO: We’ve had a increase in costs that jumped last year. So, we have been impacted from all angles when it comes to Affordable Care Act. For right now, for the next decade, we’re taking the hit.

ROGERS: He’s also sought consulting help, implemented a new accounting system and even hired a new worker to help navigate the law’s complexities. While he doesn’t support a full repeal of the law as Republican nominee Donald Trump has proposed, it’s unclear what Democratic nominee Hillary Clinton’s plan to strengthen Obamacare’s protections might mean for costs.

ALFONSO: As a small business owner, as an American that cares about our employees, we want them to have good health care. We want healthy employees. So, Affordable Care Act has good intentions, you know? But there’s costs and there’s the benefits of those costs. And we just, as a small business owner, we just want a balance.

ROGERS: Alfonso isn’t alone. According to the National Federation of Independent Business, healthcare is the number one issue for small companies this year, with 70 percent citing costs as their top concern.

Now, separate data from the National Small Business Association finds that 42 percent of small companies say they have even contacted lawmakers about health care cost.

In Tucson, Arizona, Bake Shaffer has also been hit with higher costs due to the employer mandate which kicked in for the nation’s smallest businesses this year. He runs a dry cleaning and laundry business with 52 full-time workers. Under the law, any business with more than 50 full-time employees working more than 30 hours a week have to offer coverage or face penalties of up to $2,000 per worker, per year.

But beyond costs, Shaffer says he wants to know what’s ahead so he can better plan and compete.

BAKE SHAFFER, SHAFFER DRY CLEANING AND LAUNDRY: I don’t know how to plan for ACA, because I don’t k what’s going to happen. I don’t know what’s going to happen in Washington that’s going to change things. I don’t know what’ going to happen in the insurance marketplaces that’s going to change things. And I’m going to have to react to that instantaneously, and I just hope that I will be able to do so.

ROGERS: Both businesses say they’re still undecided evaluating candidates’ plans and searching for more detail as November 8th edges closer and closer.

For NIGHTLY BUSINESS REPORT, I’m Kate Rogers (NYSE:ROG).

(END VIDEOTAPE)

HERERA: Coming up, new menu? How tech companies disrupted, literally, the Silicon Valley restaurant industry.

(MUSIC)

HERERA: Facebook’s foray into the world of e-commerce did not go as planned. As we reported yesterday, Facebook’s new marketplace is a platform that lets users buy and sell goods with other nearby users. It’s seen as a potential competitor to eBay (NASDAQ:EBAY) and Craigslist.

But as Julia Boorstin reports, Facebook’s marketplace quickly became a black market.

(BEGIN VIDEOTAPE)

JULIA BOORSTIN, NIGHTLY BUSINESS REPORT CORRESPONDENT: Within hours of Facebook (NASDAQ:FB) launching its marketplace feature, people were selling everything from drugs and guns to animals and sex. Criticism of these types of offerings exploding on Twitter and Facebook (NASDAQ:FB) itself.

GENE MUNSTER, PIPER JAFFRAY ANALYST: It’s shocking that a company that has — as in tune to what’s going on on its platform as Facebook (NASDAQ:FB) to have those kind of issues come up as a big surprise. I think it’s an oversight on a filter, and likely to be quickly corrected.

BOORSTIN: The feature is designed for Facebook’s 1.7 billion users to sell items to each other within the app. Facebook (NASDAQ:FB) saying 450 million people already visit buy and sell groups each month.

Facebook (NASDAQ:FB) apologizing for the elicit items, saying a technical issue prevented the identification of posts that violated company policies.

Saying, quote, “We are working to fix the problem and will be closely monitoring our systems to ensure we are properly identifying and removing violations before giving more people access to marketplace.

But Facebook’s marketplace has drawn criticism for the fact it doesn’t have a secure payment system or start ratings like eBay (NASDAQ:EBAY) does, and security experts warn that it doesn’t facilitate delivery, which could mean in-person meetings with unvetted sellers.

Now, analysts are watching to see whether it poses a threat to eBay (NASDAQ:EBAY) and Craigslist and what it says Facebook’s ability to innovate.

MUNSTER: I would see it as incremental. It’s not necessary. What’s necessary is for them to really nail the monetization advertising around Instagram, the video piece of it, continuing to competitive with Snapchat, tapping into bots and messaging with WhatsApp and building VR and mixed reality with Oculus. Those are the real foundations of the company.

BOORSTIN: This isn’t Facebook’s first try with marketplace. It first launched something very similar back in 2007, but it never took off. Instead, Facebook (NASDAQ:FB) shifted the feature over to groups, allowing people to post items for sale.

We’ll see what Facebook (NASDAQ:FB) learned from that experience, and this latest technical misstep to make marketplace work this time.

For NIGHTLY BUSINESS REPORT, I’m Julia Boorstin in Los Angeles.

(END VIDEOTAPE)

HERERA: Silicon Valley restaurants may be the latest casualty of tech companies driving up housing costs, and driving out middle to low-income workers. Restaurant owners say not only are their rents skyrocketing, they’re also losing their top talent in the kitchen to big tech companies.

Aditi Roy tells us how the industry is being squeezed.

(BEGIN VIDEOTAPE)

ADITI ROY, NIGHTLY BUSINESS REPORT CORRESPONDENT: Corridor Cafe is a brand new restaurant in the heart of downtown San Francisco. Nestled among tech companies, its big windows and stylish atmosphere beckon deep-pocketed workers passing by.

But owner Ryan Cole still gets worried about staying in business.

RYAN COLE, HI NEIGHBOR RESTAURANT GROUP: Remember the first time we lost a cook, it was probably about three years ago. We lost a cook to Apple (NASDAQ:AAPL).

ROY: That was the first time he lost a cook to a big tech company.

COLE: The next time it’s Twitter. The next time is a new startup.

ROY: In all, he’s lost four cooks in three years to tech companies like Google (NASDAQ:GOOG) or Facebook (NASDAQ:FB), with on-campus dining options, offering his staff higher salaries, better hours and more enticing perks.

He’s not the only one. Restaurateurs across the Bay Area are feeling the squeeze from tech giants that are approaching their talent, driving up rent, and making it more expensive for restaurant to stay in business and their staff to live nearby.

For every employee who leaves, it costs Cole thousands of dollars to replace them from placing help wanted ads to training.

COLE: It doesn’t count the overtime when you’re paying $24, $26 an hour for overtime for a cook because you don’t have people to work. It doesn’t take your mental sanity as an owner of trying to keep up with what’s going on. And for any guest that walks out of here unhappy, that’s the kicker. That’s really — it’s impossible to quantify.

In Palo Alto alone, 70,000 square feet of restaurant and retail space was lost to office space between 2008 to 2015.

ROY: Cole is fighting back. By operating his business like a startup, offering employees perks like free gym memberships to Amazon (NASDAQ:AMZN) gift cards. He says it’s keeping his staff around a bit longer, but it’s not a cure-all.

COLE: Less people are going to culinary school, less people looking to get into the profession and that has to do with the tech option. If you’re interested in food, you could work for Munchery or Sprig or Blue Apron or Twitter. There’s a lot of options where you don’t have to work nights, weekends. You get holidays, you get vacation. You get comparable pay.

ROY: He says some restaurants are having their chefs serve so they can get tips. Other restaurants are changing around their recipes so line cooks can do less. But despite their efforts, the root of the problem isn’t going away.

For NIGHTLY BUSINESS REPORT, I’m Aditi Roy, San Francisco.

(END VIDEOTAPE)

HERERA: And finally tonight, the richest Americans. The 400 people on Forbes annual list are worth a combined record setting $2.4 trillion.

Microsoft (NASDAQ:MSFT) co-founder Bill Gates retained the top spot for the 23rd consecutive year. His net worth, $81 billion. Amazon (NASDAQ:AMZN) founder Jeff Bezos is number two, moving past Warren Buffett. He’s worth $67 billion. Warren Buffett himself at number three at $65 billion.

Republican presidential candidate, Donald Trump, is in 156th place, with an estimated net worth of more than $3.5 billion, down $800 million from last year.

On that note, that will do it for NIGHTLY BUSINESS REPORT for tonight. I’m Sue Herera. Thanks for joining us. Have a great evening, and we’ll see you right back here tomorrow night.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by CQRC Transcriptions, LLC. Updates may be posted at a later date. The views of our guests and commentators are their own and do not necessarily represent the views of Nightly Business Report, or CNBC, Inc. Information presented on Nightly Business Report is not and should not be considered as investment advice. (c) 2016 CNBC, Inc.

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