Transcript: Friday, April 18, 2014

NBR ThumANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Susie Gharib.

SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Good evening, and welcome to a special edition of NIGHTLY BUSINESS REPORT. I`m Susie Gharib.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: And I`m Tyler Mathisen. Welcome from me as well.

Spring, of course, is a time of renewal, a time of hope, a time when the weather warms and we put winter in the rearview mirror. And that couldn`t come quickly enough this year. The overarching question now for the first several months has been — did the severe weather during the winter really hamper economic growth or are things worse than we think?

GHARIB: Well, spring is now here, finally, and signs of thaw are starting to take root. We`re seeing a rebound in some of the economic data and retailers are seeing improvement but are betting on a strong spring to erase the chill winter put on sales.

Tonight, we`re going to look at whether the winter doldrums are gone and the economy can start to grow.

MATHISEN: And as we know, the economy has had a hard time gaining steam. And will its engines aren`t fire on all cylinders? And a key engine, naturally, is the labor market.

Just this week, Federal Reserve Chair Janet Yellen said the recovery in the labor market has been exceptionally slow. Despite that many are encouraged now that the trend is headed in the right direction.

Hampton Pearson starts us off today with a look at why there`s hope for an economic spring thaw.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: Springtime hiring is in full bloom. Just last week, first time unemployment claims hit a seven-year low, dropping by 32,000 to 300,000 on seasonally adjusted basis.

It comes on the heels of a March jobs report showing employers adding
192,000 jobs to the economy, enough for a complete recovery of all 8.8 million jobs lost during the recession that began in 2008. That`s according to the Bureau of Labor Statistics.

Leading economists say people who had given up looking for work are coming back into the job market.

DREW MATUS, ECONOMIST: We`re beginning to pull those people back into the labor force and we`re not causing a big increase in the unemployment rate, which tells us that they`re not only able to look for work, they`re able to find work.

PEARSON: Other parts of the economy showing signs of life, auto sales rising 6 percent last month, topping 1.5 million vehicles, the biggest monthly gain since last fall. As well as construction, hiring up 20,000 in March, the best move in the last three months.

Treasury Secretary Jack Lew says there`s a potential for an even bigger construction boom in the housing sector.

JACK LEW, TREASURY SECRETARY: We have seen housing values return in a fairly decent way. We haven`t seen as much progress in new starts and in construction. That`s a potential for another boost to the economy.

PEARSON (on camera): As the rebound in springtime construction moves into high gear, the hope is more jobs leads to more wages and a rebound in consumer spending.

For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.

(END VIDEOTAPE)

GHARIB: Let`s turn now to Diane Swonk for her outlook for the U.S.
economy. She`s chief economist of Mesirow Financial.

Hi, Diane.

I`d like to start talking to you about the job market, just where Hampton Pearson left off. We got a survey from the Federal Reserve this week saying that a lot of people feel that their chances of getting a job are a lot better. Are we going to see spring hiring?

DIANE SWONK, MESIROW FINANCIAL CHIEF ECONOMIST: We are going to see spring hiring. We are also going to see some catch-up to that winter doldrums that we did go through, particularly in the month of January.
Many of the parts of the country that suffered the worse in harsh winter condition, we saw people sort of hibernate.

We also saw people migrate and they moved — we saw vacations have now surged and in the Federal Reserve report this last week, we saw that there`s a lot of ski resorts seeing a lot of strong bookings, some of the best winters they have seen. And people are going to sunny vacation, even summer bookings are up now, because people are sort of scrambling to do anything they can to get — shake off these winter doldrums. That`s going to be increase hiring and things like amusement parks, hotels, leisure and hospitality.

What we really want to see, though, is the shift to higher quality jobs in the manufacturing and construction and I think we`re going to see that as well. We are seeing construction come back, albeit it not as rapidly as we`d like. And I think there`s enormous potential there, and I think construction is going to do better than overall home sales do because we really have a lack of inventories out there and we`re finally starting to see some activity there as well.

MATHISEN: I was one of those hibernators, Diane. And I just woke up and am a little cranky, by the way.

SWONK: I was a hibernator, too.

MATHISEN: No, not at all.

If you had to put a grade on the economy, as you look forward into the summer months, what would that grade be right now?

SWONK: You know, that`s a great question. I mean, you know, unfortunately, I was one of the kids that strived for A`s, even though it wasn`t easy to do. And so, anything less than an A, even an A-minus, was really considered horrible in my household.

That said, we were sort of in a C to C-minus economy. We`re moving to a B, B-minus economy. It`s still not as good as it should be and I think Janet Yellen made that very clear in her speech this week that we`ve made progress, but it`s not enough.

Of those 8.8 million jobs recouped in the private sector, most of them were in low-wage jobs when the bulk of the jobs we lost were in higher wage, manufacturing, construction, business services, and it`s not the number of jobs we create, but the quality of the jobs we create as well.

GHARIB: All right. So we know that when people have jobs, they feel much better about taking those vacations, as you were talking about, or spending money. Will we see consumers spending given what`s going on in the job market?

SWONK: We`re going to see very uneven consumer spending, sort of a bifurcated consumer market, reflecting income inequalities, reflecting where the money is, and also where the pent up demand is. We had vehicles that not only are already old and being scrapped at a record pace, they also got hit very hard by this winter and they`re being replaced at a record rate. Now that people are returning to the showrooms, you`ve seen vehicle sales pickup quite substantially.

I think that`s where a lot of pent-up demand is. You also have an ability now to use home equity line credit where you couldn`t — to do remodeling, to do — to add on to your house. Not as many people are willing to still trade up or actually try to qualify for a new mortgage, but it`s much easier to qualify for a home equity line of credit than it was than even a mortgages, and people are going to be doing that remodeling and big ticket spending in that area where you haven`t seen it for some time.

It`s not as much as we want, but we like to churn in the housing market, which is the biggest trigger to additional consumer spending, but you are going to see some real big ticket spending. On the other side of it, you`ve got a lot of consumers still moving out of the middle of the market, down the retail food stream and into discounters — continuing to stand discounters, and you don`t have a lot of apparel sales. Apparel has been really a difficult area because you`ve got demographics not only as a birth rate fallen, we no longer have a lot of kids entering, as many kids entering school as we did, so back to school sales aren`t as great, but also older workers just don`t need as much of a new wardrobe.

And, unfortunately, up until recently, many of the jobs we`re creating, we`re creating uniform jobs. Not wardrobe jobs.

MATHISEN: I`m going to ask you a long question, but ask you to give you a short answer.

SWONK: A short answer — that`s not possible, Tyler.

MATHISEN: How concerned are you as an economist about income inequality in the United States?

SWONK: Very concerned. It`s actually one of the number one concerns I have today.

MATHISEN: Diane, that was — that`s a hard question to answer short, but you just did. Thank you very much.

SWONK: Thank you.

GHARIB: Diane Swonk of Mesirow Financial — have a great weekend, Diane.

MATHISEN: And while the data will continue to give us clues about the health of the economy, corporate earnings reports will show us the impact of winter, but they could also provide some insight into the future.

Dominic Chu takes a look.

(BEGIN VIDEOTAPE)

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): The winter chill is giving way to warmer spring weather. And that means the economy may be starting to heat up. Over the last few months, the numbers haven`t been great.

Questions have come up about the housing recovery, consumer spending and even corporate profits just to name a few. After all, if it`s too cold and snowy, home builders aren`t breaking ground on new homes. Consumers are having a hard time getting to the malls and as a result, many companies see a drop-off in business, that all means lower profits.

But it`s not all doom and gloom.

MATUS: For the small number of earnings who have gotten year to date, for the first quarter, we have seen revenues not doing as well as people might have hoped. But I do think some of that is due to the weather and there`s no reason to expect that will be sustained as we move forward because the fundamentals are in place for the U.S. economy to do quite well.

CHU: If that is the case and the bad weather effects are a temporary phenomenon, that means this winter could just be a speed bump on the road to a more robust economic recovery and a better economy means better profits.

PETER KENNY: At the end of the day, there are earnings. We do have an expanding economy and we do have improving, you know, macroeconomic numbers here in the United States which tends to support the story that earnings should continue to grow.

Keep in mind, cash on balance sheets has never been this high.
Corporate America has never been in better shape.

CHU: A key part of the earnings story will lie with the American consumer. That`s because the bulk of the U.S. economy is driven by consumer spending. For that reason, some money managers are investing in stocks that capitalize on that spending theme.

STEPHEN WEISS, SHORT HILLS CAPITAL: The two stocks I like in that environment and the environment for the next couple of months are Macy`s
(NYSE:M) and Target (NYSE:TGT).

CHU (on camera): So, it comes down to this: if consumers spend all that money they didn`t spend during the winter, it could bode well for corporate earnings in the coming months.

For NIGHTLY BUSINESS REPORT, I`m Dominic Chu.

(END VIDEOTAPE)

GHARIB: So, what do these trends mean for the stock market?

Here to answer that, Robert Pavlik. He`s chief market strategist of Banyan Partners.

Bob, thanks for joining us.

I just want to ask you, we have been talking a lot about the winter, you know, thaw and, you know, spring blooming and all of that. What about the stock market? Are we going to see spring fever in the stock market at some point?

ROBERT PAVLIK, BANYAN PARTNERS CHIEF MARKET STRATEGIC: You`re certainly seeing that right now. The market is coming back off its lows, and I think there`s a potential for this market to even reach about 1960.
But I think there is going to be periods of resistance.

Certainly, there`s going to be questions about earning season, about what that`s going to do, to the full year earnings forecast. There`s a potential for the earnings forecast for the S&P 500 to be taken down a little bit. If we don`t see that consumer spending or business spending pickup as the year continues to move forward.

I`m optimistic. I do believe that you`re going to see a resumption in business spending, specifically capital expenditure spending from corporations. The companies, if you think about it, have really taken the easiest path to the return on investments. They have bought back their older bonds, they`ve bought back shares, they have refinanced, they`ve increased their dividends, they`ve moved forward as far as they can basically with that.

Now, they have to start planning for the future. Capital expenditures means more spending going on in the overall economy. It means a resumption in growth, and I do think that`s going to happen later this year.

MATHISEN: You know, Bob, you raise a very interesting point there, because companies have engaged in a lot of financial engineering to get their earnings per share up. They have done a lot of buybacks, which is one way you can do that. But it is much harder to engineer revenues. And earlier this week, we saw shy revenues from the likes of IBM and Google
(NASDAQ:GOOG) and several others.

Where`s the organic growth going to come from?

PAVLIK: I think it`s going to come from new products. I think, you know, the report that we saw earlier this week with Google (NASDAQ:GOOG) was very interesting, because people are now questioning Google`s focus, are they moving in the right, are they moving in the wrong direction, especially with regards to drones and to Google (NASDAQ:GOOG) Glass? But then at the same time, people question what Apple (NASDAQ:AAPL) is doing with their cash.

I think that`s the kind of market that has to be created going forward in this country, not focused on what`s already been in place, but create that opportunity for themselves. That`s what opportunistic companies do.
And again, I think that that`s what`s going to drive this market going forward, that along with capital expenditures, that along with a resumption, a return to a more normalized interest rate environment.

Once we get away from this artificially low interest rate environment that the Fed has created, banks are going to be more willing to lend.

If I`m Jamie Dimon, I`m not going to be so interested in making a 30- year mortgage loan for 3 percent, 3 1/4 percent. But I may start to become a little bit more interested in at 4 1/2 percent, 5 percent, 5 1/2 percent.

GHARIB: All right. So, Bob, as investors start sorting through various companies and going after the ones that have good fundamentals and real profits and stuff like that, what does that mean for the overall trend in the markets? Are we going to see this volatility, big selloffs, big rallies and a big correction?

PAVLIK: I do think that there`s a potential for this market to continue to have this volatility, this extreme volatility. When you come off a year at 30 percent last year, and you`re going to have an economy that`s just barely moving forward above trend, that brings with it that volatility. There`s going to be a question about what happens with interest rates.

When Ms. Yellen spoke about raising interest rates six months after the end of tapering, there was a market panic to some degree. But I think that raising of Fed funds rate is quite a ways off in the future, maybe a year off. And I think that`s going to be just fine.

But when we get to the end of easing, the end of tapering, there`s going to be questions about what happens with the interest rates, and I think that`s going to be your best opportunity to get into the stock market, to make your plans, to be opportunistic, to get involved with the cyclical companies, things like industrials, technology, financials. I think that`s your best play in this market.

GHARIB: All right. Thank you so much, Bob. Bob Pavlik, chief market strategist of Banyan Partners.

Well, if jobs are one of the economic engines, housing and the consumers are the other two. How they are holding up as the weather heats up? That`s next.

(MUSIC)

MATHISEN: This lingering winter weather means that the spring housing market hasn`t exactly gotten off to a running start. First, it was that weather. Now though, increasingly, the blame is going to a tight mortgage market — so tight that it`s keeping many potential buyers locked out of homeownership.

Our real estate reporter Diane Olick has the story.

(BEGIN VIDEOTAPE)

DIANE OLICK, NIGHLY BUSINESS REPORT CORRESPONDENT (voice-over): The signs of spring are finally here, including more of these signs. But so far, word on the street is this spring housing market is underwhelming.

BRAD HUNTER, METROSTUDY CHIEF ECONOMIST: The market kind of divides into the haves and have-nots. You know, you have the people who have good credit, good jobs, that`s the move-up buyers. They are buying.

OLICK: But the rest of the market is not. First time buyers and those with lower credit scores. That`s more than half of potential buyers.

You see it in the mortgage numbers, lending volume down to the lowest level in 14 years according to a new report from Black Knight Financial Services. Only about 30 percent of 2013 loans went to borrowers with a FICO credit score below 720 and nearly half of all home sales are now in cash.

SUSAN WACHTER, WHARTON SCHOOL REAL ESTATE PROFESSOR: Using the credit center is not happening. It`s not on the table. And it`s really still that threat of what happens to mortgage if a mortgage goes bad.

OLICK: Lenders are clearly still spooked by the housing crash, which cost them billions of dollars in payments back to Fannie Mae, Freddie Mac and the FHA.

PAUL MILLER, FBR BANK ANALYST: There were a lot of bankers are telling me now, I never want to service a defaulted loan again, which means I won`t originate a lone that does default. I`m keeping my credit scores about 700.

OLICK: Mortgage analyst Paul Miller has been revising his numbers down for mortgage volume every month. Now, he`s at $1.1 trillion worth.
Compare that to $1.9 trillion in mortgages made in 2013.

MILLER: The bigger guys are just not going to do it. That`s where the scale is, that`s where you really get, you know, the marginal borrowers, below 680 FICO scores. That`s how you give them credit.

OLICK (on camera): Wells Fargo (NYSE:WFC) recently said it would start offering loans to borrowers with lower FICO scores, but only through the FHA, and government`s mortgage insurer, and only through Wells` own retail channels. It`s a very small share and a far cry from the heady days of subprime lending.

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

(END VIDEOTAPE)

GHARIB: After a long season of cold, snowy weather in most parts of the country, many retailers were feeling the brunt of old man winter. But as Courtney Reagan tells us, many of those companies are now betting on an extreme case of spring fever.

(BEGIN VIDEOTAPE)

COURTNEY REAGAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
This year has been harsh for retailers, with severe weather winter keeping shoppers at home, cranking up the heat, subsequently cutting into budgets.
With spring weather slow to sprout across the country and Easter landing three weeks later this year, Wall Street had low expectations for retailers March sales.

However, Costco (NASDAQ:COST) managed to surprise to the upside with sales at stores open at least a year gaining 5 percent, shopper traffic also up 5 percent for the month. Though analysts say recently, Costco
(NASDAQ:COST) is a rare, steady standout, in the retail space.

JHARONNE MARTIS-OLIVO, THOMSON REUTERS DIRECTOR OF RESEARCH: Shoppers went and bought groceries to stay at home. Also on top of that, we have the shift of the Easter effect, which definitely benefited one more day in the month of March and helped sales for Costco (NASDAQ:COST).

REAGAN: L Brands, the retailer that owned the limited Victoria`s Secret and Bath & Body Works saw March sales fall 1 percent, better than expected but certainly not inspiring.

(on camera): FBR analysts Susan Henderson thinks L Brand is going to have to increase those promotions to clear some of the inventory that didn`t sell. That`s helpful, though, for consumers looking to fill Easter baskets and spring wardrobes.

MARTIS-OLIVO: The month of April, we`re going to see consumers receive a boost from tax returns and also usually find that historically the month that Easter false in tends to perform very well as consumers go back and buy new spring merchandise at full price. On top of that, there are some pent-up demands because shoppers have stayed at home for the past few months.

REAGAN (voice-over): Leaving retailers and investors hanging hope on the Easter bunny.

For NIGHTLY BUSINESS REPORT, I`m Courtney Reagan in Tucson, Arizona.

(END VIDEOTAPE)

MATHISEN: Patrick McKeever joins us now with his outlook for retail sales and consumer spending. He`s senior retail analyst at MKM Partners.

Patrick, welcome. Good to have you with us.

Who is spending this spring and where are they spending?

PATRICK MCKEEVER, MKM PARTNERS SENIOR RETAIL ANALYST: Well, as you just talked about, the numbers were not so great in March. We`ve got this Easter shift, Easter is three weeks later this year than it was last year.

So, it`s not easy to get a read on the consumer. We`re coming out of a tough winter and there was some hibernation going on there. It was a terrible fourth quarterback for most retailers, really one of the worst that I have seen in my — I don`t know, 15 years or so of covering retail stock.

So, it`s not easy to get a read on the consumer. There aren`t a lot of bright spots out there. We have seen some weakness in some of the stalwart areas like the dollar stores, for example. Family Dollar reported last week they had a 4 percent decrease in their same store sales in the most recent quarter.

So, it`s not a great environment. I think we`ll see a bounce, but we haven`t gotten it yet.

GHARIB: You mentioned about dollar stores, Patrick, and Courtney in her piece was talking about good business at Costco (NASDAQ:COST). When you look at the retail sector, which are the kinds of companies that are doing well and which are the ones that are struggling?

MCKEEVER: Well, you know, within my space, I cover discount retail, so I cover sort of the value end or the low end of retail. And the sector that`s continued to perform pretty well is off-price apparel, so that`s TJX and Ross Stores (NASDAQ:ROST).

And when I go out and look at stores and try to gauge traffic, the one that jumps out is, as a better check tends to be T.J., T.J. Maxx, Marshalls, Home Goods. So, there`s some I think continued strength in that area.

And then we`ve got Costco (NASDAQ:COST), the drugstores have been doing pretty well, but that`s not the front end. That`s more of the pharmaceutical side of the business. And Home Improvement has been doing pretty well with Home Depot (NYSE:HD) and Lowe`s.

So, those are your bright spots. On the weaker end, as we know — as we all know, the teen apparel names have been very weak, Abercrombie and American Eagle and Aeropostale (NYSE:ARO).

MATHISEN: My wife just can`t get enough of Home Goods, by the way, Patrick. She`s in there at least once a week. They`ve got something that speaks to her. It doesn`t speak to me. But it speaks to her.

Can you take me through the two big ones, Target (NYSE:TGT) and Wal- Mart (NYSE:WMT) — whether you cover them or not, where do they fit in today`s retail environment?

MCKEEVER: Sure, and I do cover both of those stocks. So, Wal-Mart
(NYSE:WMT) had four quarters of negative same store sales in 2013. And I`m looking for flattish comps in the current quarter. So, not looking for much of a change there.

The big issue for them has been store traffic, which has been down at their core business, which is the Wal-Mart (NYSE:WMT) U.S. Supercenter business. Target (NYSE:TGT) has had a different set of issues. They have had weak traffic trends, but they have also been dealing with Canada, which they went into in a major way last year, and it`s been a very tough endeavor for them.

And then, of course, they are coming out of this — the data breach over the holidays. That has really hurt their business. The outlook, frankly, isn`t that great for either company in the near term.

GHARIB: All right. So, what is it going to take to change the mood of the consumer? You said it`s been a rough period. We`ve got a bad winter and all of that. What has to happen over the next couple of months to put consumers in the buying mood? In all of your experience, what are the usual trends?

MCKEEVER: Well, certainly, it would be nice to have the employment market heat up a little bit more. I mean, the jobs numbers have been OK, but not great. That lower income consumer still feels like they are in a recession. They haven`t really come out.

So, some jobs growth would be nice. Maybe — you know, I know the housing market has slowed a bit more recently. Maybe a bounce there would help. The other thing that hurt business last year frankly was Washington.
And if we get some more stabilization and clarity around policy, I think that will help the consumer this year.

MATHISEN: All right. Patrick, I`ll see you in the parking lot at Home Goods, OK? I won`t be inside.

MCKEEVER: Sounds good.

MATHISEN: Patrick McKeever, retail analyst at MKM Partners, thanks for being with us.

GHARIB: And coming up next, high school graduations are right around the corner. So, that means college is next. How students and parents are finding new ways to pay for higher education.

(MUSIC)

MATHISEN: We have been talking this evening about the economy and the consumer, but it is mid-April and that means thoughts turn to college. The bad news, a Sallie Mae study found that families spent an average of more than $21,000 on college costs last year. That is among families that had those costs. The good news, the bulk of college costs are paid with scholarships and grants, 27 percent of the tab paid by student and parent loans with the same percentage coming from parents` incomes and savings.

One more bit of good news — Sallie Mae says total average savings for college tops $15,000 this year, and that is up 30 percent from just last year.

GHARIB: But since a college education is an expensive proposition, students and parents are looking beyond loans and scholarships to help pay for that degree.

Mary Thompson has more.

(BEGIN VIDEOTAPE)

MARY THOMPSON, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over):
For many students, it`s not all-night study sessions or a strange freshman year roommate that frightens them most about college, it`s paying for it.

JONATHAN GIBBONS, STUDENT: When we`re 18 years old, we`re a little too young to make the decision to take on a lot of student debt, and that`s what scares me.

THOMPSON: Those fears spawning new approaches to college funding.
Funding like peer to peer loans from companies like LendKey. Though financial aid expert Mark Kantrowitz says those loans are hard to come by.

MARK KANTROWITZ, FINANCIAL AID EXPERT: Most of the students who try peer to peer lending do not get funded and those who do get funded don`t get fully funded.

THOMPSON: Massive open online courses or MOOCs, like those offered by Coursera, touted too as a way to cut costs. With MOOCs, students would get credit for taking cheaper online course, a promising idea that`s yet to pay off.

KANTROWITZ: But the reality is, the very few students complete and stick with it to the end of the course. Of those, very few actually earn credit from the program.

THOMPSON: This year the cost of a private college tuition and room and board topped $40,000. A public school for an out of state student cost $32,000. And it was over $18,000 for a student who is in state.

(on camera): These never-ending increases prompting some states to explore new ways for students to pay for their college after they graduate.
Under these proposals, students would pay part of their income back to the state for a set number of years.

KANTROWITZ: A lot of these proposals need to have the rough edges smoothed out.

THOMPSON: In the interim, Kantrowitz cites a few tried and true ways to cut the costs of college. Find scholarships and grants before you take out a loan. Go to a school in state. And live like a student when you`re a student, so you won`t have to once you graduate. Cut back on eating out and trips home, and work if you can so you won`t be working for years to pay off the debt.

For NIGHTLY BUSINESS REPORT, I`m Mary Thompson.

(END VIDEOTAPE)

GHARIB: And that`s it for this special spring thaw edition of NIGHTLY BUSINESS REPORT. I`m Susie Gharib. Thanks for watching.

MATHISEN: And I`m Tyler Mathisen, thanks from me as well. Have a great weekend, everyone. Happy Easter and we`ll see you Monday.

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) 2014 CNBC, Inc.

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