TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: All-time high. The Dow blue chip average had its first record close of the year as investors welcome the further reduction in the Federal Reserve’s stimulus.
SUSIE GHARIB, NIGHTLY BUSINESS REPORT ANCHOR: Number two. A new report says that China will overtake the U.S. as the world’s largest economy. And it’s coming a lot sooner than you think.
MATHISEN: And developing app-eal. What Facebook (NASDAQ:FB) is doing to nurture an essential part of its long-term health — the development of apps to draw in users.
All that and more tonight on NIGHTLY BUSINESS REPORT for Wednesday, April 30th.
GHARIB: Good evening, everyone.
Wall Street ended April with one important record, the Dow. The blue chip index is now at an all-time high, its first record close for 2014. The milestone came on a day when the Federal Reserve wrapped up its policy meeting deciding to keep its key interest rate unchanged at zero percent, and despite mixed reports about the U.S. economy.
First, let’s get those closing numbers. The Dow rose 45 points to 16,580. That’s the new record. And the Dow is now fractionally higher for the month. The NASDAQ was up 11 points but down 2 percent for April and the S&P added five points and is also higher for the month.
As for that data, economic growth in the first three months of this year was much weaker than expected, up just one-tenth of 1 percent, with the blame going to nasty winter weather. But there was good news about job. Payroll firm ADP reported 220,000 private sector jobs were added in April. That’s the most since November.
Steve Liesman has more on today’s Fed decision and what all those economic reports tell us about the state of the U.S. economy.
STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): Two reports ending in DP today, ADP and GDP, and they couldn’t be more different. GDP was a real shocker at a just barely positive zero 0.1 percent. That compares to Wall Street’s estimate of 1.1 percent.
Consumer spending was up 3 percent, but a good portion of that was increased spending on healthcare as a result of Affordable Care Act. Housing was down nearly 6 percent for the second lousy quarter in a row. Business continues to disappoint. And government spending was down half a point, failing to bounce back from the depressed numbers resulting from the government shutdown.
Economists at BMO said the American economy virtually stalled this year in the face of severe winter weather.
(on camera): One reason for optimism in the months ahead are numbers like ADP, payroll company whose data is used to forecast the government’s job report this Friday for just the private sector. Those numbers continue to show good job growth in the economy.
(voice-over): They saw private sector growth at 220,000, compared to estimate of 210,000, and March was revised up by almost 20,000. Non-farm payroll estimate for Wall Street, 215,000 for the government report on Friday.
Late in the day, the Feds seemed to take the GDP data in stride, blaming the slow down at least in part on the weather, and following through on Wall Street’s expectation to reduce its bond purchases design to drive down interest rates.
The feds signaled more tapering ahead, while at the same time promising to keep the short-term interests low for what looks like well into 2015.
For NIGHTLY BUSINESS REPORT, I’m Steve Liesman.
MATHISEN: Mohamed El-Erian joins us now with his analysis on the Fed and the economy. He’s chief economic adviser at Allianz.
Mohamed, good to have you back with us.
I want to get your reaction to a couple of things. You’ve got the economy basically flat in the first quarter. You have the Fed pulling back on its stimulus, something that worried a lot of investors. And yet, the Dow sets an all-time high.
What’s not computing, if anything?
MOHAMED EL-ERIAN, ALLIANZ SE CHIEF ECONOMIC ADVISOR: So, Tyler, think of it this way — and today was a perfect example — the Fed is on auto pilot. We pretty know what they’re doing to do. They reduce it by $10 billion every meeting, their Q.E.3, and they are going to keep interest rates low and continue to encourage us that the interest rates are going to stay low for a long time.
So, the Fed is predictable. Markets like that.
The markets also look at the economy and say yes, we had a weak GDP number, but as Steve and Susie said, we had a good ADP number and we have good business barometer number. So, put these two things together and what the market see is basically a range bound outlook. A lower volatility range-bound outlook.
And what does that do? It encourages the market to leverage, it encourages the market to reach for yield and to reach for return and pushes both the bond market and the equity market higher.
GHARIB: But, Mohamed, first of all — nice to see you again. Glad you’re back on NIGHTLY BUSINESS REPORT.
You have heard this — the new buzz word with policy makers is lift-off. They’re talking about the time when they will raise interest rates. When do you think that will be? And when that does happen, is that going to be good or bad for investors and for the economy?
EL-ERIAN: So, nothing today suggests that we really are near lift-off. If you look at the poor GDP number — yes, business investment, weather impacting it was an issue. But also exports were an issue, and the rest of the world is simply not as buoyant. So we’re not at lift-off, but neither are we at stall speed, right? So, the Fed will stay as it is. I don’t suspect you’re going to see interest rates hike for quite a long time.
MATHISEN: Mohammed, is the withdrawal of stimulus in the form of quantitative easing, is it a non-factor for equities and asset prices?
EL-ERIAN: No, it is a factor but it’s a factor whose impact will be felt later on. You know, at the end of the day, in delivering returns, lots of people are very short-term. So, when valuations keep on going up, when the return objective stays the same and when you don’t see the turn in valuations until much further down the road, you are tempted to stretch a little bit more. You are tempted to do the extra bit of leverage.
And that’s what we’re going to see and it’s going to continue to do so. Hopefully — and this is really important — hopefully, a better economy will validate these valuations. The risk is, if it doesn’t, but this is difficult, technical behavior when you tell people they’re in a wage-bound world and you give them high return objectives.
GHARIB: Right, let’s look a little outside the United States. I would like to get your thoughts on all these headlines we’ve been seeing about new sanctions, about Ukraine, how much does this concern, especially if they get to be very serious sanctions? And also, you know, what’s on your worry list?
EL-ERIAN: So, if they get really serious, and let’s define what we mean by serious. It means going from targeting individuals to targeting sectors. And if the sanctions hit finance, and energy, then you can expect two things to happen. You can expect —
GHARIB: Done deal just yet. They gave Siemens, that’s the German industrial giant, until the end of May to come up with a counter-offer.
MATHISEN: Did you ever have a fender bender and find out the damage was a lot worse than it first appeared? Well, a new report shows the government lost much more than it thought after bailing out General Motors (NYSE:GM) in 2009. The treasury lost $11.2 billion by rescuing the automaker, not the estimated $10.3 million lost when it sold its last remaining shares in the company. That was back in December.
The revised loss includes more than $800 million of write-offs just last month in its investment in the old G.M.
GHARIB: Two other companies bailed out by Uncle Sam could mean a lot more taxpayer money. After running through some stress test, the Federal Housing Finance Agency, which overseas government-run mortgage giants Fannie Mae and Freddie Mac says that in the worse case scenario, the companies may need as much as $200 billion in federal aid if the company and the housing market suffer another downturn.
MATHISEN: As expected, the push to gradually boost the nation’s minimum wage to $10.10 an hour failed in the Senate today, the vote was 54-42. That’s six votes shy of the 60 that the Democrats needed for the measure to pass. Opponents say the law would be too expensive for employers and would actually cost jobs.
GHARIB: Still ahead on the program: the U.S. has been the leading world economy for 150 years, but that all may be about to change. And one economist is calling it a wake-up call for investors and American businesses.
MATHISEN: The International Monetary Fund approves a $17 billion emergency rescue package for the Ukraine. The aid is designed to prevent a collapse of that country’s economy. The loan was put together in a matter of weeks, and was approved unanimously.
GHARIB: Americans would like to see the U.S. pull back from the world stage. That’s the conclusion of a new survey. In a big change from year’s past, the new NBC News/”Wall Street Journal” poll shows that nearly half of those surveyed want the U.S. to be less active in global affairs, with only a fifth of the respondents hoping for more overseas engagement. This comes after the U.S. and European allies issued tough sanctions against Russia.
MATHISEN: Quick, what’s the world’s biggest economy? If you said the U.S., you are correct — at least for now.
But a new report says that by one measure, the U.S. could lose that distinction to China sometime over the next year.
Scott Cohn has more.
SCOTT COHN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): China’s economy may become the world’s largest this year, passing the United States earlier than most expected. According to a new report, by 2011, China’s economy was already 87 percent the size of the U.S., leading some experts to predict China will top the U.S. as the world’s biggest economy by the end of 2014.
BTIG’s Dan Greenhaus says we shouldn’t be surprised.
DAN GREENHAUS, BTIG CHIEF GLOBAL STRATEGIST: But the number of people in China, they’re about 1.3 billion or 1.4 billion people, compared to just 305 million, 310 million in the United States. They should have a much larger economy.
COHN: Even though China’s economy may soon outstrips that of the U.S., the average Chinese workers still only make roughly $6,000 a year, while an average American makes nearly 12 times that, and that’s not going to change anytime soon.
RANDY KROSZNER, FORMER FEDERAL RESERVE GOVERNOR: China has been coming out strong for quite sometime, U.S. businesses, as well as world businesses are aware of that. But I don’t think that even if we pass this particular benchmark, it’s a tipping point. It doesn’t mean that the U.S. can’t still maintain its strength.
COHN: And investors should also remember, economic growth doesn’t always translate into stock market returns.
GREENHAUS: Even though they’re growing 7 percent or more, and even though the economy is set to become the largest in the world, the stock market has effectively gone straight down for the better part of five years.
COHN: While China’s stock market may be struggling, there’s no question China will be a growing force in the years to come.
For NIGHTLY BUSINESS REPORT, I’m Scott Cohn.
GHARIB: Here now to talk more about China is Barry Bosworth. He’s a former presidential economic adviser in both the Carter and Johnson administrations. He’s currently an economist at the Brookings Institution.
Barry, thanks you for joining us.
Let me first just ask you about this survey. Do you believe that this one measure that they’re looking at have legitimacy, in your view, that China will overtake the U.S. by the end of this year?
BARRY BOSWORTH, THE BROOKINGS INSTITUTION ECONOMIST: Yes, I think it does. But people should understand, it’s a very complex calculation to make. There is a huge range of error in this. But the basic message is that there is a total economy, China is beginning to approach the size of the United States is correct.
MATHISEN: Mr. Bosworth, 25 years ago something like that 11 of the 20 wealthiest corporations, the most valuable ones in the world, were Japanese. We all thought we were going to end up working for Tokyo. Is the fear that the same thing might happen with China overblown?
BOSWORTH: Yes, I think so. But still, fundamentally, I think China is a much bigger economy in the sense that there’s a lot of people. It’s got room for a lot of further growth because it comes per person, still far below those of the United States.
So, I think it’s inevitable as we look ahead, we can argue about the year, in which it occurs. But China is going to be a larger economy than the United States.
GHARIB: OK. So, if that’s the case, what’s the take-away here whether you run a business, or whether you’re an America investor, why should you care?
BOSWORTH: Because it’s a very — what we should realize out of this, from our economy’s perspective, this is a very big market. Now, we have to pay attention to the opportunities, both to invest in China and to sell exports things to China. And particularly in the area of exporting to China, we just haven’t done very well at all.
We’re very good at importing from China but we’re very bad at exporting to China. And I think the big reason is we don’t pay much attention to that market.
MATHISEN: Is that because we’re bad at it? Or because they protect their markets?
BOSWORTH: I think the bigger problem is that we’re bad at it. That stands out as the U.S. — for countries more than just China, we don’t have a very good export record. I think there is a good reason for it. For 30 years up until the financial crisis, this was a fully employed economy, and if you were an American business, you would say the way to make money is to focus on the U.S. economy. You didn’t have to spend a lot of time trying to find export markets, and when we were fully employed already.
But the world has changed since the financial recession. We need to export today.
GHARIB: Right, and some would say and the Chinese need to be better consumers. Do you see that changing?
BOSWORTH: Yes, I think that’s very important. I think China got a little off track after the WTO agreement to bring them into the international system. And I think they feel they have been too much of a focus on exporting and not enough of a focus on developing their own domestic economy. The financial crisis revealed to them that they were very exposed.
I mean, the shock of the collapse, the world trade was a big problem for China. And they’re still struggling with how to adjust to that.
So, I think yes, they want to develop their domestic economy. That’s good for them and that would be great for American exporters if we’re prepared to take advantage of it.
GHARIB: All right. Well, let’s hope it turns out good for both sides. Thank you so much, Barry. Appreciate you coming on the program. Barry Bosworth from the Brookings Institution.
MATHISEN: We begin tonight’s “Market Focus” with a $6.8 billion dollar power deal, Exelon (NYSE:EXC) will buy Pepco in a move to strengthen its operations on the East Coast. The combined businesses will have about 10 million customers and it will create the biggest mid-Atlantic electric and gas utility. Shares of Pepco surged about 17 1/2 percent today, to $26.76. Exelon (NYSE:EXC) fell 3 percent to $35.03.
Energizer will split its company in two. It plans to separate its household products unit, which makes its batteries and its personal care division, which include brands like Schick razors (INAUDIBLE) two independent and publicly traded company. Now, the company says it expects the separation to help it focus and to better allocate resources. Wall Street liked the news, shares up 14 percent today to $111.69.
Two oil companies raising their dividends. ExxonMobil’s board increased by 9 1/2 percent to 69 cents a share. That will be payable to shareholders in June. The move continues a 32-year record of upping its annual payout to shareholders. Chevron’s board also raised the dividend there by 7 percent to a buck seven per share, and that too will be payable in June. Exxon Mobil (NYSE:XOM) up about 1 percent to $102.41. Chevron (NYSE:CVX) fell just a bit to $125.52 was the close.
GHARIB: WellPoint’s first quarter profit dropped more than 20 percent and it’s because of an increase in membership, fuelled partly by the new health law. So, why did profits drop? Because there were higher administrative costs tied to the customer growth.
But earnings beat estimates and the insurer raised its outlook for the year, and that sends shares up 5 1/2 percent to $100.68.
Shares of Weightwatchers surge when the company reported solid earnings after the closing bell. It trumped Wall Street estimates on both the top and bottom line. Its guidance was also better than expected. Shares jumped initially after the close, up nearly 20 percent. By contrast, shares fell 3 1/2 percent to $19.80. That was during the regular session.
It was the opposite story for JDS Uniphase (NASDAQ:JDSU). After the market closed, the fiber optics component maker reported an earnings miss and revenue came in below estimates. The company also lowered its forecast for the current quarter, citing a delay in carrier orders. That sent shares down initially about 8 percent during the regular session. The stock fell 1 1/2 percent to $12.67.
MATHISEN: And coming up, when news happens people start tweeting. And Twitter has a way to track the hot topics across the globe, the moment it happens.
GHARIB: Facebook (NASDAQ:FB) is on the offensive, rolling out some new features and strengthen its lock on mobile users and helping advertisers target specific clients.
Morgan Brennan has more.
MORGAN BRENNAN, NIGHTLY BUSINESS REPORT CORRESPONDENT (voice-over): At its first developer conference in three years, Facebook (NASDAQ:FB) unveiling several new products including its long-awaited highly anticipated mobile ad network. Called Facebook (NASDAQ:FB) Audience Network, the new offering has been in the works on and off for several years and it’s something that CEO Mark Zuckerberg told developers today he is very excited about.
MARK ZUCKERBERG, FACEBOOK CEO: I’m really excited about this audience network. We’ve done a lot of work already in the past years to help build and grow your apps. And this is really the first time that we’re going to help you monetize in a serious way on mobile.
BRENNAN: The audience network will enable marketers and publishers to better target their ads on apps outside of the Facebook (NASDAQ:FB) platform, so app creators won’t have to sell their own ads or collect payments. Facebook (NASDAQ:FB) will do it all for them.
TAEK CHUNG, ADHUSKY CEO: For me, Audience Network, it helps do to Facebook (NASDAQ:FB) ads for multiple publishers and it’s really helpful for people like us because I don’t need to talk to each publisher directly. So, this is very helpful.
BRENNAN (on camera): Today’s network launch represents a new strategy for the company, expanding into advertising data that’s not tied to the Facebook (NASDAQ:FB) platform and most importantly, that’s not vulnerable to user growth and engagement.
(voice-over): Analysts say this could create a brand-new revenue for Facebook (NASDAQ:FB), despite the fact that rivals like Google (NASDAQ:GOOG) and Twitter already offer competing products.
BEN SCHACTER, MACQUARIE SECURITIES ANALYST: I mean, they simply monetize better than everybody so far, so they’re going to go to a publisher and say, hey, we can help you monetize better than on Twitter, better than on Google (NASDAQ:GOOG), better than other even more established networks. If they can hold true to that promise, then they’re going to win.
BRENNAN: While the biggest announcement of the day, the audience network wasn’t the only product unveiled. Users too have something to be excited about.
In the coming weeks, they will have log-in choices when using Facebook (NASDAQ:FB) to try a new game or app. They can even be anonymous.
ULF BURMEYER, STUDENT & DEVELOPER AT KICKSAPP: To me, the most important part of the keynote was enabling users to better control, which they get into the hands of (INAUDIBLE) because this is going to inspire much more confidence in apps developing, I guess.
BRENNAN: For NIGHTLY BUSINESS REPORT, I’m Morgan Brennan, in San Francisco.
MATHISEN: And finally tonight, some of the challenges and some eye-opening technology at Twitter. Shares of the micro-blogging site tumbled today, falling 9 percent lowest price since it wrapped up its first day of trading back in November. That is after disappointing investors late Tuesday with lower than forecast user growth and a weaker outlook, despite revenue doubling last quarter.
Still, CEO Dick Costolo offered a positive spin on the earnings report and talked about what Twitter needs to focus on right now.
(BEGIN VIDEO CLIP)
DICK COSTOLO, TWITTER CEO: I am focused on three things: growth, operating efficiency and operating leverage. That second and third are absolutely in service to steadily improving margins, steadily improving margins. So, as a high growth company, what I want to make sure we’re doing is not starving the growth engine while constantly focusing internally on getting better and better at operating efficiency and operating leverage in service margins.
(END VIDEO CLIP)
MATHISEN: And we all know that news travels faster than ever these days and Twitter can now see exactly how fast — giving us a look at its heat map of tweets moving around the world whenever big news breaks or even after the break of dawn.
(BEGIN VIDEO CLIP)
SIMON ROGERS, TWITTER DATA SCIENTIFIC: The response to the Adam Silver press conference about Don Sterling. We know that people are going to talk about big events like the Oscars. But when news happens, that was the reaction to the words “banned for life”.
CARL QUINTANILLA, SAN FRANCISCO: That’s the moment he says banned for life.
ROGERS: The moment he says “banned for life”, people respond immediately on Twitter. That is something that is really unique. It’s a place where people can discuss the stuff as it happens.
QUINTANILLA: And then the conversation sort of lingers for the rest of the press conference.
ROGERS: Yes, exactly. You can see there’s a cartel of peak and spike when amazing phrase happened —
QUINTANILLA: And it’s not a California story.
ROGERS: Not a California story. In fact, if you zoomed out you would get the whole world. You can see even — down here —
QUINTANILLA: Interesting. This next map is —
ROGERS: So, this is regular Beyonce chapter, you might remember she released her album online last year. And then you can see what happens when the album is dropped. This is normal. Suddenly, the album is dropped and the whole world is talking about it. Not just in the States, London, Istanbul, South Africa, around the globe, it became a major talking point.
QUINTANILLA: And finally a third map here.
ROGERS: You can almost set your watch to it. This is people tweeting the word “sunrise,” as dawn spreads across the world. You can see it happened across Europe there. And then, it’s just about to hit America, people tweeting sunrise, you get to the part, you would turn to your friend and say, what a beautiful sunrise and now you tweet it.
MATHISEN: That was Carl Quintanilla, amazing tech — who knew that Beyonce was big in Turkey? I guess she is big everywhere. Global star.
GHARIB: So cool. I mean, sort of like the sun never sets on Twitter empire, right?
MATHISEN: No, indeed.
GHARIB: That’s NIGHTLY BUSINESS REPORT for us. I’m Susie Gharib. Thanks for watching.
MATHISEN: And I’m Tyler Mathisen. Thanks for me as well. Have a great evening, everybody. We hope to see you back here tomorrow night.
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