Transcript: Nightly Business Report – May 23, 2017

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

SUE HERERA, NIGHTLY BUSINESS REPORT ANCHOR: House hunting. Prices are high. Inventory is low. So, why aren’t builders benefiting from the meager supply of homes for sale?

(BEGIN VIDEO CLIP)

MICK MULVANEY, OMB DIRECTOR: You have to have compassion for folks who are receiving the federal funds but also you have to have compassion for the folks who are paying it.

(END VIDEO CLIP)

BILL GRIFFETH, NIGHTLY BUSINESS REPORT ANCHOR: Budget priorities. The White House calls for steep cuts in safety net programs and says it can balance the budget if the economy grows a lot more than it is now.

HERERA: Intensive care. Why Kentucky’s small business owners are in the crosshairs in the battle to overhaul health care.

Those stories and more tonight on NIGHTLY BUSINESS REPORT for Tuesday, May 23rd.

Good evening, everybody. I’m Sue Herera.

GRIFFETH: And I’m Bill Griffeth, in tonight again for Tyler Mathisen.

The one thing that the housing market needs is housing, a lot more homes. But there just aren’t enough existing properties to meet the demand for prospective homebuyers. So, you might then expect sales of newly constructed homes to be strong.

But that wasn’t the case in April. The Commerce Department reported this morning a nearly 11.5 percent decline in the sale of new single family homes, much lower than expected, and the biggest decline in two years.

Diana Olick explains why.

(BEGIN VIDEOTAPE)

DIANA OLICK, NIGHTLY BUSINESS REPORT CORRESPONDENT: April was not particularly pretty for the nation’s homebuilders. Sales of their properties dropped dramatically during the month and were essentially flat compared to a year ago. The builders should be benefiting from the meager supply of existing homes for sale, but there’s a problem — price.

The most housing demand is coming from those least able to afford it. Millennials may want to buy homes but the builders aren’t giving them the starter price homes they need. Builders claim they can’t afford to.

RICK SHARGA, TEN-K EXECUTIVE VP: Some of the regulatory issues put in by state and local governments, some of the capital constraints that the independent builders are facing, the labor shortages in a lot of markets, have all conspired to make this a very difficult recovery for new homebuilders.

OLICK: The median price of a new home sold in April did fall slightly but it was still about $90,000 higher than the median price of an existing home.

Builders are starting to roll out brands aimed at millennials with slightly lower price tags. But these are by no means low priced homes. They’re either smaller or stripped of amenities and they’re still a very small fraction of total home production. And production is still nowhere near normal levels.

For NIGHTLY BUSINESS REPORT, I’m Diana Olick in Washington.

(END VIDEOTAPE)

HERERA: Michelle Meyer joins us to talk about what’s troubling the housing market. She’s chief economist of Bank of America Merrill Lynch.

Michelle, welcome. Always nice to have you here.

MICHELLE MEYER, BANK OF AMERICA MERRILL LYNCH: Thank you. Good to be here.

HERERA: You know, they say it’s location, location, location in real estate.

MEYER: Yes.

HERERA: And in some parts of the country, this is the tightest housing market we’ve seen almost in history. Yet millennials who are trying to buy homes are getting priced out of the market. Talk to me about the imbalance, if you will, that’s in the housing market right now.

MEYER: Sure. I think you touched on it very well, which is that you have this supply/demand imbalance where demand has been growing, seemingly picking up along with household information, stronger income creation. Millennials, new households, need a place to live. So, they’re going to either rent or they’re going to own, but they need that supply.

And the challenge is, is that the pace of new construction to the market has been pretty slow. So, if you look at a good gauge of the balance, which would be the month supply figures of existing homes, we’re hovering now close to cycle lows again for the supply figures. And what that does is it puts upward pressure on home prices and it probably also puts upward pressure on rents.

GRIFFETH: Right. So, my question is a pretty simple one, probably naive. Why aren’t the builders building more? Are the — is the land too expensive? Is there just not enough land? What is going on?

MEYER: That is the big question. Unfortunately, there aren’t great answers. So, one, you touched on, availability of lots and land. And there certainly seems to have been this desire to move closer to urban centers, which means builders want to concentrate their construction closer to these big cities as well. And you start to face constraints in that respect.

The other constraint would be labor. So, a regular, almost complaint on the part of builders is that they are having a difficult time finding skilled labor. That also slows down the pace of construction. And then perhaps it’s also just the fact that the memories of the crisis are still influencing business decisions. So for builders to come out and build brand-new starter communities on the outskirts of the city, I’m not sure that they think that’s necessarily the best business decision.

HERERA: Yes. What about interest rates? I mean, in the past, history has said that when interest rates start to edge up as they are expected to do later in the year, people get off the fence and they will pay up if they have to, to get into a home at a relatively low interest rate before things move higher.

Is that still true this time around, do you think, or not?

MEYER: Well, you’re right. Historically, you have this kind of knee-jerk reaction where those on the fence looking for properties, they start to see rates move up and they try to lock in quickly and make that decision. But that is somewhat temporary, because then you have potential new entrants into the market, that are looking at the affordability a bit little differently, and saying, OK, well, rates are now maybe, you know, a hundred basis points higher than we first starting thinking about buying a house, and we can’t quite make the math work.

So, it’s kind of knee-jerk reaction that proves to be temporary. What’s interesting is in this cycle, because of the nature of this economic recovery, it’s been slow, rates have been persistently low, we haven’t really seen that major adjustment higher in rates.

HERERA: Right.

MEYER: So, I think there’s a lot of skepticism that it will come. So, people are kind of staying on the sidelines a bit more.

HERERA: Michelle, thank you as always. Michelle Meyer with Bank of America Merrill Lynch.

MEYER: Of course.

HERERA: And to read more about the need for newly built homes, head to our website, nbr.com.

GRIFFETH: On Wall Street, the Dow rose for the fourth straight day as financials help lift the overall market. Investors however kept one eye on developments in Manchester following that suicide bombing at the concert that killed more than 20 people. Late today, the British prime minister raised the terror level in England for that country.

The Dow when all was said and done gained 43 points to close at 20,937. NASDAQ added five. The S&P was up four points.

HERERA: In Washington, the White House sent its first complete budget proposal to Capitol Hill. The $4 trillion blueprint is for the next fiscal year. The Trump administration says the plan balances the budget in ten years while increasing spending for the military. To do that, it’s calling for major cuts to some safety net programs.

John Harwood is covering the story for us from Washington.

Good evening, John. What are some of the specific domestic programs that the White House is targeting?

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, the biggest one, Sue, is Medicaid. You remember that the Republican health care bill earlier, which has passed the House, not moved in the Senate, cut $800-and-some billion out of Medicaid. Part of that was reversing the expansion of Medicaid that occurred under Obamacare. But these cuts go much deeper than that.

And even though the American Health Care Act, the Trumpcare replacement, has not become law, they’ve assumed that and added some more Medicaid cuts on top of that in this budget. You’ve also got cuts in food stamps and welfare and significant cuts in disability benefits, $72 billion cut out of those.

GRIFFETH: John, what about the potential for the tax cuts that have been hoped for since the election? Are those built into the assumptions in this budget proposal?

HARWOOD: Well, yes. The tax cuts are built in in terms of their effect on expanding economic growth. But it is not clear that those will be widely accepted. And they also in this budget did not account for the cost of the tax cuts. Some people like former Treasury Secretary Larry Summers accused the administration of double counting.

Now, one of the challenges of course for the administration is President Trump has said his agenda is those working class voters who have been overlooked for years. But his tax plan, at least as he proposed it in the campaign, had huge benefits for people at the top.

I asked Steve Mnuchin today in an interview at the Peterson Fiscal Summit whether the administration would commit to a tax plan that doesn’t increase taxes for people at the top and only focuses on the middle. He would not commit.

(BEGIN VIDEO CLIP)

STEVEN MNUCHIN, TREASURY SECRETARY: The president’s objective is to create a middle income tax cut. We’re going to be working closely. But again, that’s our intent. I can’t pledge what the results will be since the results are going to be the combined effort of the administration, the House, and the Senate.

(END VIDEO CLIP)

HARWOOD: And, of course, in order to get to tax reform, Republicans have got to find a way to reach agreement on a 2018 budget. The president’s budget today starts that process. Only when health care is done and when that new budget passes can they begin action in earnest on tax reform, guys.

HERERA: So, I guess that begs the question, what’s next? What’s the budget path?

HARWOOD: Well, what they’ve got to do is, first of all, the House and Senate have to have a compromise budget outline. Now, you have criticism today of the Trump budget from both parties, Republicans as well. John McCain is saying dead on arrival.

So, they’ve got have to come up with something, whether it’s the Trump budget or their own. And that will allow them to have the special rules needed to speed it through without Democratic votes, a Republican-only tax plan.

HERERA: John Harwood in Washington — John, as always thank you.

GRIFFETH: As we reported, the Trump administration’s budget plan is based on upbeat growth forecasts. But how realistic are those forecasts?

Steve Liesman takes a look.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: The Trump administration coming under fire in its first budget release for growth projections that some say are too optimistic. Actually growth in 2015 and ’16 was just below 2 percent. Both the Congressional Budget Office and Wall Street economists think the next decade will be more of the same.

Not the Trump administration. It’s projecting 3 percent growth or 50 percent more than the other economists.

MULVANEY: The focus is sustained 3 percent economic growth. We have been attacked, stunningly, by some folks on the left, and even in the mainstream, who say that that’s an unreasonable assumption. You should stop and think how absurd that is, to think that 3 percent growth in an American economy is to some people an absurd assumption. It used to be normal.

LIESMAN: Criticism of these growth figures goes beyond just Democrats.

JIM NUSSLE, FORMER OMB DIRECTOR: Being at 1.9 as opposed to 3 is probably more realistic, unless — unless, there is some kind of big surprise and they pass all of this. But I think right now, that’s not the current trend, either politically or economically.

LIESMAN: Of course, no one knows what will happen in the future. The administration could end up being right. But it’s been the practice of most administrations to keep their forecasts within a tenth or two of CBO and the consensus Wall Street forecast, trying to avoid the charge of Pollyanna-like projections.

The president’s budget includes assumptions that his $3.6 trillion spending cuts will pass, along with his massive tax cut proposal. And so, it sees the deficit dropping down to zero in a decade. But if the growth doesn’t appear and taxes are cut, the Trump plan would be a recipe for much higher deficits.

For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.

(END VIDEOTAPE)

HERERA: The budget plan also aims to trim the national debt by selling off half of the nation’s emergency oil stockpile and the entire backup gasoline supply. That sale would be done over time. And according to estimates, it would generate more than $16 billion over the next decade.

The federal government has about 700 million barrels of oil to protect Americans from spiking gas prices. But over the past few years, the U.S. shale boom has dramatically changed the global energy landscape. Today, the price of oil settled above $51 a barrel.

GRIFFETH: Still ahead, a major ruling. Why a Supreme Court decision could affect business everywhere, but especially in Silicon Valley.

(MUSIC)

GRIFFETH: The Justice Department is suing Fiat Chrysler, alleging that some diesel pickup trucks and Jeep SUVs cheat on emissions tests. The lawsuit claims that more than 100,000 vehicles have software that enables them to emit lower amounts of pollutants during lab tests than would be normal otherwise.

Volkswagen was part of a similar probe you’ll recall that cost that automaker about $25 billion. But that involved many more cars. Fiat Chrysler says it is working to clarify some of the issues and that it is disappointed the lawsuit was filed. Shares of the company fell by 4 percent in today’s session.

HERERA: A controversial retirement rule will be allowed to move ahead. The so-called Fiduciary Rule requires advisers to act in the best interests of their clients and will go into effect next month as scheduled. In a “Wall Street Journal” op-ed, the labor secretary wrote that the date of implementation cannot be postponed simply because there is no principled legal basis to delay it.

The president had ordered a review of regulations that included the fiduciary rule. Advocates say that rule will help retirees. Critics say it could have unintended consequences.

GRIFFETH: Tech companies and app developers like Apple and Google are breathing a sigh of relief after the U.S. Supreme Court ruled yesterday to limit where patent lawsuits can be filed.

According to “The Washington Post,” this could be a major blow on so-called patent trolls and could have a significant effect on which companies and innovations thrive and which ones are sued, maybe into oblivion.

Brian Fung wrote about it for “The Washington Post”. He joins us tonight to talk about this.

Brian, thanks for joining us.

BRIAN FUNG, THE WASHINGTON POST: Thanks for having me.

GRIFFETH: As I understand it, when a company would bring a patent lawsuit, the plaintiff could choose the venue where the suit would be heard, and they most often chose portions of Texas and Delaware were considered more friendly to the plaintiffs there. The Supreme Court ruling changes this, but how does it change it?

FUNG: Yes. So, the Supreme Court ruling interprets the law such that a new patent lawsuit can only be filed in a jurisdiction where the company that’s on the receiving end of the lawsuit is actually incorporated. So, before, you know, patent lawsuits could be filed basically in any state because, you know, the law was interpreted such that the lawsuit can be filed in any state where the company that was on the receiving end of the lawsuit actually had business.

Now, those lawsuits are limited to only those states where the company is actually incorporated. And that could have the effect of actually limiting were patent lawsuits actually get filed, potentially giving smaller companies, defendants, a leg up against these patent lawsuits.

HERERA: This is especially important to technology companies, primarily because a lot of these, quote/unquote, patent trolls own a lot of separate patents. And Silicon Valley has been concerned and has been on the receiving end of a lot of these lawsuits.

FUNG: That’s right. So, to understand why this is a big deal for Silicon Valley, you have to talk about patent trolls, essentially companies that stockpile patents and don’t really do anything with them but simply make a living by finding companies that, you know, that it can then sue for infringement and then hoping that they settle for cash as opposed to taking the bluff and taking the company to court.

GRIFFETH: So, the simple reasoning is that now, with this ruling from the Supreme Court, it will become more expensive for the patent trolls to sue and it will be cheaper for the companies to defend themselves that are being sued. Is it that simple?

FUNG: That’s basically right. Essentially, what we’re seeing here is a shift of lawsuits away from jurisdictions that are historically viewed as being favorable to patent trolls and forcing them to file lawsuits in courts where, you know, they may not have as good of a chance or as good, you know, a chance of winning against the defendant. You know, ultimately, this could be a good thing for companies that require a lot of specialized innovation or have developed a lot of new technologies.

And, you know, this change means that they could potentially see their technologies flourish without the threat of patent litigation.

GRIFFETH: Brian Fung with “The Washington Post” — thank you very much.

FUNG: My pleasure.

HERERA: AutoZone posts an unexpected drop in same store sales, and that’s where we begin tonight’s “Market Focus”.

The car parts retailer cited a familiar reason for the decline, tax refund delays, which the company says caused customers to hold off on spending earlier in the quarter. And while sales did eventually pick up, it wasn’t enough to offset the weak start. Both profit and revenue were shy of estimates. Shares plunged more than 11 percent to $581.40.

Despite operating in a quarter it called challenging, DSW posted revenue that rose and beat expectations. The shoe retailer also topped same store sales estimates. But profit missed expectations as an acquisition and clearance activity hurt its results. DSW shares were off 8 percent to $16.21.

The luxury homebuilder Toll Brothers said it is experiencing the best spring selling season in more than a decade. The company said its saw an increase in home deliveries and orders, and that resulted in higher than expected earnings and revenue. Toll Brothers also said it expects to sell more homes this year than it previously thought. Shares still fell just a fraction to $37.78.

GRIFFETH: Wells Fargo downgraded a chip maker Xilinx to market perform form outperform, citing valuation concerns. The bank acknowledged that Xilinx will likely gain market share in the programmable device market, but said it is not convinced the company will hit street forecast this year because of its unimpressive sales outlook for 2018. Shares of Xilinx down 5 percent to $63.97 today.

Constellation Brands is reportedly eyeing a takeover of Jack Daniels maker Brown-Forman. According to CNBC, Constellation, which owns Corona and Modelo Beer among others, approached Brown-Forman about a deal that was turned down, with Brown-Forman saying it doesn’t want to sale. The report added that constellation is still interested in combining. Consolation Brands was off 4 percent. Brown-Forman initially surged on those reports but then fell by 6 percent to $53.38.

HERERA: A group linked to North Korea is likely behind the recent global ransomware attack. According to cybersecurity firm Symantec, that attack resembles that of a crime ring, not a government campaign. The suspected group is believed to have been behind the Sony Entertainment hack in 2014 which North Korea has denied.

GRIFFETH: That cyberattack struck 300,000 computers in 15 countries earlier this month. And it’s likely far from over. In the wake of the attack, experts now say businesses need to do more to keep their critical systems from being hacked.

Andrea Day has more on the story for us tonight.

(BEGIN VIDEOTAPE)

STUART OKIN: I think when all the dust is settled, there will be millions of victims to this WannaCry worm.

ANDREA DAY, NIGHTLY BUSINESS REPORT CORRESPONDENT: A massive attack that spread like fire, knocking down companies, even paralyzing hospitals in the U.K.

OKIN: The situation was extraordinarily bad.

DAY: Experts blame ransomware, which locks down files and holds them for ransom, combined with tools allegedly developed by the NSA and leaked online.

BRIAN VECCI, VARONIS TECHNICAL EVANGELIST: We do know that many of the exploits that are being used to these attacks first appeared publicly in the NSA breach. You put those things together, and it’s far more dangerous than it’s ever been.

DAY: According to Brian Vecci, the NSA technique is a worm that spreads from computer to computer through open holes. And after the so-called WannaCry attack, a series of follow-up hits that leveraged the same hole.

How much worse can this get?

VECCI: It can get pretty worse if companies and other organizations don’t rush to put security around these files.

DAY: We reached out to the NSA but got no response. Microsoft issued a patch months ago that closed many of the holes being exploited. So why is this still a problem?

VECCI: The answer is cost. It costs money and resources to secure this information. We’re playing catch-up because of how much data and how much complexity and how blind we’ve been to these kinds of attacks.

DAY: And he says a lot of data under attack was on systems with gaping holes, no security in place, and data that could be accessed by lots of people that just didn’t seem important.

What does the finance industry need to change right now?

VECCI: They need to change how they think about their files. They need to make sure the very basic controls, the systems that these files sit on, are patched, that nobody can access data that they don’t need access to and that everything is monitored.

DAY: What about the medical industry?

VECCI: Same thing. It’s not just patient records or the very sensitive data they need to worry about. They need to extend their security to all files. If you take out a company’s files or an organization’s files, it stops their ability to do business. The health care industry, it stops their ability to process patients or run as a hospital.

DAY: And he says some of the latest attacks we’re seeing are even more dangerous because they’re silent. You won’t even know, it’s just sitting there collecting data. Unlike WannaCry which locked everything down and let you know about it, you can’t catch what you can’t see.

I’m Andrea Day for NIGHTLY BUSINESS REPORT.

(END VIDEOTAPE)

HERERA: Coming up, with health care in limbo, small business owners are growing concerned.

(MUSIC)

HERERA: Small business owners across the country are not only dealing with rising health care costs but also increased uncertainty as Republican lawmakers try to overhaul the health care system.

And as Contessa Brewer reports, that uncertainty is playing out in Louisville, Kentucky.

(BEGIN VIDEOTAPE)

UNIDENTIFIED FEMALE: That’s good.

CONTESSA BREWER, NIGHTLY BUSINESS REPORT CORRESPONDENT: Bourbon is big business for Nicole Stipp and Kaitlyn Soligan. The women launched their company Matson & Gilman in Louisville, Kentucky, almost a year ago, providing concierge bourbon tours.

NICOLE STIPP, MASTON & GILMAN CO-FOUNDER: Tourism sites seemed to ripe for disruption, which was where we got really excited to kind of do something new.

BREWER: They consider Louisville a perfect incubator for their small business, with its friendly culture and low cost of living. Its highly regarded health care exchange was also a big draw.

But the Democratic governor who had supported Obamacare was replaced by a Republican who campaigned against government health care. Kentucky has since closed its exchange and shifted to the federal exchange. The result has been confusion and uncertainty for many businesses.

STIPP: We would like some stability, and some ability to plan. And Obamacare has been what we started our business with. And it would be really difficult at this point to imagine a growth future with it being rolled back.

BREWER: But the Affordable Care Act isn’t so affordable for other small businesses.

JESSE FLYNN, FLYNN BROTHERS: They tricked the country into making small business and the working person pay for everybody else.

BREWER: Jesse Flynn co-founded Flynn Brothers contracting in the ’70s. With 200 plus workers, they build buildings, pave roads, lay pipes, and work through mountains of paperwork related to health care coverage.

FLYNN: It’s an incredible burden.

BREWER: Flynn says he has to offer health care benefits to compete for quality workers. But premiums and deductibles have more than doubled in the last decade and Flynn blames Congress for the failure of tort reform, lack of competition, and especially Obamacare.

FLYNN: We’re into the millions when we’re talking about an annual premium here. And at some point, we need to look at other options. And I was hoping that legislatively, we would have other options this year other than self insurance.

BREWER: Flynn says he voted for Trump on the promise of repealing Obamacare. But now, he’s not sure if that will happen.

STEVE BESHEAR (D), FORMER KENTUCKY GOVERNOR: We need to come up with fixes for small business that find themselves in that kind of situation. But the fix is not to throw the baby out with the bath water.

BREWER: Kentucky’s Obamacare success story, its uninsured rate dropped from 20 percent to 6 percent. And leaders say that it improved overall health and the productivity of the workforce. Small business owners say none of that matters if they don’t know what’s coming down the pike.

KAITLYN SOLIGAN, MATSON & GILMAN CO-FOUNDER: It’s the instability that is the business killer right now. We don’t know what we’ll have access to in three months.

BREWER: These young entrepreneurs are so close to success, they can smell it.

SOLIGAN: Our business is absolutely, absolutely going to hinge its growth on what we’re able to do for future employees. And if providing health care isn’t one of them, we can’t have future employees.

BREWER: That coverage considered crucial to the health of small business.

For NIGHTLY BUSINESS REPORT, Contessa Brewer, Louisville.

(END VIDEOTAPE)

GRIFFETH: Tyler and I will have to check out that tour sometime.

HERERA: I think you will.

GRIFFETH: Yes.

HERERA: Absolutely. That’s NIGHTLY BUSINESS REPORT for tonight — I’ll tag along. I’m Sue Herera. Thanks for joining us.

GRIFFETH: Come on along.

I’m Bill Griffeth. Have a good evening, everybody. We’ll see you tomorrow.

END

Nightly Business Report transcripts and video are available on-line post broadcast at http://nbr.com. The program is transcribed by ASC Services II Media, 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) 2017 CNBC, Inc.

 

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