Interview: Drug stocks
>> the u.s. economy growing at a 3.8% annual rate in the final three months of 2004, up .7 of a point from the original calculation a month ago. bruce kasman is head of economic research at j.p. morgan and joins us from their offices in new york with his reaction to the numbers. the number was expected to be higher. any surprises in why, though?
>> not really. i think we had broad based improvement in just about every component in activity. it was a surprise that consumer spending was weaker and business investment was stronger but most of that was a sense that some of the car sales and trucks in the fourth quarter were really investment by companies, less than by consumers. it was broad based, healthy and more or less as expected.
>> one of the things people were looking for in the report was whether or not we would see a big jump in business investment that you mentioned because there were expiring tax credits. we did get the business investment. what have you seen since then? will this fall off into this quarter?
>> it doesn’t look like it. woo had an important are durable goods number this week suggesting orders and shipments continue to run strong and all of the business surveys, both on spending and hiring, continue to stay strong so i think there’s a possibility of a little pullback but the strong, basic message is that the corporate sector is in gear in providing fuel for economic expansion at this stage?
>> any concerns about consumer spending?
>> some of it was just recall clation of whether it was businesses or consumers spent on cars. the basic message is consumer spending is strong and i think an important underlying message in the report was that we got wage and salary income actually revised up, now running over the last two quarters. it tells us the consumer is strong and there’s fuel coming from the corporate sector in terms of labor and income to keep the consumer moving ahead.
>> we get a big report next friday on jobs. we were talking with tom keene about how people are revising their forecasts higher. where are you and what do you think contributes this month to the jobs report?
>> we’re being a little bit cautious here, looking for what i think is a healthy 200,000 gain but we’re not putting all that much emphasis on the high frequency indicators, which have been quite positive. we think they’re more an indication the trend is improving rather than you’ll get a big increase in the february gain relative to the last two or three months.
>> we do see at 225, though, a big jump from where we have been. is it going to be a secular or just a short-term move?
>> i think the basic message, when you look at all of the labor market indications, is that things have been reasonably healthy. the underlying trend in payrolls has been about 175,000 per month and it looks like it’s stepping up so we’re declined to think the―inclined to think the trend may be moving up to a 200,000 pace with healthy labor income generated alongside the job gains.
>> alan greenspan said the economy had gotten through the period of high oil prices and oil prices have gone up. are we in danger of oil being a restraining factor?
>> i think oil will be a restraining factor and as we go through the end of the first quarter, we will see consumers moderate a bit here. but i think it’s a very big difference, keeping energy prices between $45 and low 50’s and moving from 30 to 50 was a big spike in gasoline prices which is what we saw last year. it’s a restraining force but less of a restraining force than what we saw last year at this time.
>> the big question then, of course, is whether the fed, if the economy is picking up and it looks like there’s strength throughout the economy, do they keep going and if they do, how far do they go?
>> it’s been our view that the fed will complete the normalization process this year. we think fed funds rates are going up above 4% by the end of the year. however, i don’t think there’s a rush here or that we should expect the fed to pick the pace up any time soon and i think the steady course of 25 basis point rate hikes for a while coming from the fed.
>> do they keep the language?
>> i don’t think there’s concess on the committee to change the language but at some point they’ll have to make a decision that they’re close enough towards the end of the process to take out the notion of measured and also the message that policy rates are accommodative. we think we’re at least two or three meetings away from that decision coming.
>> we have 30 seconds left. we have had a strong performance in the markets this week, good economic data. let me leave everybody nervous and ask you what your one fear is?
>> is that as we continue to have good economic news and continue to see the fed move, whether the interest rate environment will remain quite as benign as it has been. it’s clearly been a big support for the economy but it runs the risk, if it begins to move on the longer end higher, that we could see negative feedback.
>> thank you very much, bruce kasman, head of economic research at j.p. morgan. the international olympic committee sized up the big apple for the 2012 olympics this week. mike buteau joins us from atlanta with the reaction and the next steps. “money & sports” is next.
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>> welcome back “world financial report,” michael mckee. green means go home on a good note. the dow jones industrials finishing up by 93 points on the day, 10,842. the s&p 500, about 11 points higher, 1211, the close there, at a high for 2005 but not for the year yet. the nasdaq also up on the day, by 14 points, 2065. a week from today, we’ll get february’s labor report and recently, some economists have sharply raised their forecasts. time for our regular look at the “chart of the day” with bloomberg news editor-at-large, tom keene.
>> we talked about this yesterday. and i really rarely repeat a story but this bears repeating. we saw that help-wanted index, tea leaves of a surprise yesterday, and all the economists in the last hours bringing up estimates as they prepare for next friday’s report is is a well known chart, carol massar runs this at 8:30 in the morning on the friday when the data comes out. the change in non-farm payrolls, the zero count line and the slow-motion recovery up to the blue circle which is credit suisse first boston’s big jump up yesterday. we’re starting to see lots of big numbers. even merrill lynch, david rosenburg, who’s more cautious, 240,000. that’s a big number.
>> what does csfb call for?
>> 275,000. and deutsche bank, 275,000. i think as we go through monday and tuesday into next week, we’ll see the bloomberg survey flush out and pick up a little as we see many different tea leaves indicating a buoyant labor market .
>> why do you think they think things are turning around now in the labor market ?
>> so many months of guessing wrong. the number one thing they’re seeing from the reports we get in is finally time has moved. time has healed a lot of the wounds of overinvestment in the 1990’s, rationalizations out of the shock of september 11 and shock of recession and the one message that’s consistent is you hear time has moved on, we’re farther out. it is 2005, a long way from 2001.
>> you mentioned them being wrong, i’m going to put up another “chart of the day,” my turn here. the white line is the bloomberg estimate and the red and yellow lines are the numbers that have come through, the revision in the actual number and you can see how far off they are.
>> it’s a tough number to pick. the number i can remember in my head, the number can be 100,000 off each way and yet you can still say you were right. so the numbers to remember, as we look towards that important repeat, 225,000, plus or minus 50,000 or 100,000 and the tendency is up going into next week.
>> bloomberg news editor-at-large, tom keene, thank you very much. we want to find out what’s going on with oil prices. in 2004, surging oil tapped the market ‘s gains. now that oil is revisiting $50 a barrel, some investors say it’s deja vu for the market . that’s the subject of “taking stock.” what’s the significance of the $50 oil in the stock market we’ve seen?
>> it’s a meaningful level looking at the trends. tuesday, oil surpassed $50 for the first time this year, the s&p and dow had their biggest drops of the year. last year, when oil was at $50 or higher, there was a strong correlation with down days in stocks. a negative one correlation means that oil and stocks move in complete opposite directions. last year, when oil was at $50 or higher, it was negative .82, when it was below $50, it was negative .65 so there’s a much higher correlation when oil is above $50 than when it’s below.
>>ised good news for energy stocks, but what about for other companies? how concerned are investors that oil will start to show up on the bottom line.
>> wal-mart and fedex have said they are blatantly concerned and that’s obvious, because for wal-mart, the more customers spend on gasoline, the less they spend at their stores and fedex’s concern is due to increased fuel prices, companies like delta obviously would be concerned with increased fuel prices. you also have economists that are looking at economic growth and they’re forecasting $40 to $45 oil. with oil in the $50 range, they’ll have to bring down the economic forecasts and bring down our expectations for consumer spending.
>> exxon-mobil today raised by prudential. what other stocks are people buying with oil at these levels and which ones will they avoid?
>> again, people are already expecting slowing profit growth in retailers. so as long as oil is staying higher than levels previously expected, you would expect them to decrease their weighting more in retailers. energy stocks, the obvious play, as stocks like exxon and conoco keep hitting record highs. other places people may be considering they’re going into may be consumer staples where profits should stay at relatively normal levels even with higher oil.
>> any other factors overshadowing energy or is that the story right now?
>> that seems to be the story and people are looking ahead to the jobs report next week and that’s always significant and can always overshadow higher oil and any time you get a strong earnings number, people may say, we can get through this.
>> thank you very much, bloomberg news energy reporter, ari levy. investors got good news on the american economy today. does the g.d.p. data suggest stronger economic growth in 2005? we’ll ask head of economic research at j.p. morgan.
