Interview: Wells Capital Management
>> crude oil may have had its longest decline this week since august. however, the fallout from rising gas prices will likely be felt in the second half of the year. economists we surveyed are lowering their outlook for economic growth. they say rising energy prices and higher interest rates will squeeze consumer spending. our next guest has lowered his forecast. gary schlossberg, senior economist with wells capital management, joining us from san francisco. welcome, gary.
>> thank you.
>> how have you changed your forecast?
>> marginally, actually. i had growth during the balance of the year at 3.5% to 4%, in line with where we’d been in the last few quarters. lowered it to about 3% to 3.5%. tentative at this point because i think the situation is still fluid. certainly with respect to energy costs.
>> and is it energy specifically the reason behind contracting those numbers?
>> that’s the main reason. we think those oil prices, where they are now, are high enough to slow, not derail the recovery, but slow economic growth. of course, there is added upis ide for the oil prices, energy costs, which may cause us to lower both forecasts further.
>> whiure tentative?
>> we’re tentative because at this point we don’t know how high oil prices will rise. we know we’re just moving into the heart of the driving season and gasoline prices, even according to the energy department, will be moving up from current levels so it really depends on how high they move. by our estimate, at the moment, those energy costs―gasoline prices adjusted for inflation, crude oil prices adjusted for inflation, the oil “tax” isn’t inordinately high, high enough to slow growth, but not derail it.
>> how do you think it will play out for consumers? next week the retail sales report is due. how much do you think consumers may slow down?
>> we expect a fairly strong retail sales number for march, up .7% with a rebound in auto sales. at the moment, woo we see respectable growth. there are indications that growth lost a step or two at the end of the first quarter. as we move forward, we expect to see growth moderate with consumer spending growth moving more towards the 3% track. the other issue out there is how sensitive the economy is to higher interest rates. certainly, consumer spending may be more sensitive, indirectly, as interest rates move up, if, in fact, it cools the housing market and home price increases moderate, we lose big gains in household wealth which we think have been a main driver in consumer spending, of late.
>> help explain this for me, if you can. you, many economists and the european union bringing down forecasts. was it close to $60 a barrel? what has changed given that to this point consumers are resilient?
>> right off the bat, it takes a while before the increasing energy costs slows consumer spending materially. we’ve seen evidence of it in the lower income groups. the discounters in retail, at least until march, were lagging the performance of upper-end retailers so there was evidence that energy price increases were tempering consumer spending. but this latest burst, i think, was something of a surprise. we hoped energy prices would level into the $40 to $45 range seen late last year and given the strength in china―which we didn’t expect as we expected chinese economic growth to slow but it hasn’t slowed at all, continuing to put upward pressure on energy costs in the first quarter. we queue knew the market was volatile, sensitive and finally balanced but i didn’t expect the sustained rise we’ve been seeing in part because china is holding up so well.
>> outside of oil and retail sales, what else is key for investors to watch next week?
>> early in the week we have the retail sales report on wednesday. but prior to that, on tuesday, we have foreign trade, that could be a flash point for the dollar. the dollar has held up well of late. we think it reflects underlying confidence in the u.s. economy and willingness of private foreign investors to put money here. but the trade deficit could be a sensitive issue for the market . we get the minutes to the march 22 fomc meeting later that day, some interest in how officials were viewing, how deep seated the concerns were about inflation at that meeting and later in the week, i think, the attention, once we get beyond the retail sales report on wednesday, the attention will shift to the calendar on friday, a very full one with industrial output, april consumer sentiment. we get our first read on april manufacturing activity from the empire state manufacturing index and also export and import prices for march. a very full calendar. of course, we have the treasure auctions on wednesday and thursday, as well.
>> gary, thanks so much. have a wonderful weekend.
>> thank you.
>> gary schlossberg, senior economist with wells capital management. the 2 1/2 year bull market in stocks may end sooner rather than later. bloomberg news reporter sophie hayward will tell us when analysts forecast the market will be bearish.
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Listen Market briefing --- Ellen (fast)
Chart of the day --- Tom (slow)
the major averages -- willis group holdings will pay $50 million to settle new york attorney general eliot spitzer’s investigation into kickbacks to insurers. spitzer’s office says the settlement will be used to reimburse policyholders. willis joins marsh & mclennan and aon in settling allegations they steered business to insurers that paid hidden fees. marsh settled for $850 million in january and aon agreed to pay $190 million. cardinal health hit by a subpoena by new york attorney general eliot spitzer. the company says the subpoena is part of an industry-wide investigation into drug wholesaling and says a number of companies in the industry have also received subpoenas. yesterday, amerisourcebergen said it received a similar subpoena from spitzer’s office related to purchases from other wholesalers referred to as the alternate source market . the two companies together, with mckesson, distribute 90% of u.s. drugs made by manufacturers. in terms of declines today, cardinal health down 2.3%, as was amerisourcebergen. one of the specialists handling trades on the new york stock exchange says it’s being investigated by the big board in connection with forged documents. van der moolen holdings says the probe involves some of its employees and whether they forged approvals required for the execution of an unusual trade. it is the third time van der moolen has been investigated in less than a year and the company has already paid a $58 million settlement. those shares down 7.7% in trading on friday. we’ve also been following shares of shopko stores. the private equity firm agreed to buy the discounter for $750,000. goldner hawn will acquire shopko for $715 million in cash. it the u.s. labor market has changed. jobless data indicates there’s a shortage of college-educated workers and surplus of less educated people in the work force according to wachovia economist, john john silvia. the shift is the subject of the “chart of the day” with tom keene. very interesting information on the work force.
>> it was a quiet week in economics and john silvia of wachovia corporation launched this paper a couple of days ago, one of the best i’ve seen in ages. it’s off a speech he gave at harvard in march. the simple story, it’s not one job economy. you have a high educated class with very low unemployment rate and you have a group of employees with lesser education and the disparity is wide. the chart tells is simply. if you go to the chart, on the bottom is the low unemployment of those with a bachelor’s degree, 2.4%. coming up, some college, 4%. high school, the red line, high school graduates, 4.78% and the great, great painful divide up to those with less than high school. the thing that’s interesting, ellen, about john silvia’s note is the harshness of tone. he says, look, get over it, tough love is required, that’s right out of his paper, education matters and it’s one part the government for the retraining but it’s about these employees, they’ve got to understand that they’ve got to go out and make it a life-long project to be more educated. he says the rules have changed.
>> i spoke the other day to the c.e.o. of symbol technology on long island and when i asked him about whether they’re having a hard time finding workers, he said, for those skilled jobs and he said it’s because of their location, not in the high-tech areas. tell us more about the education issue?
>> he said it’s geographic based and talks about the golden crescent states, the boom economy states, the south and the west, and says forcefully it’s about education and a combination of education, stand up straight, get in the car and move just like people got in a covered wagon 150 years ago and sylvia’s forceful about this. he grew up in new england and says people from new england in another time and place moved to ohio and now that ohio and some of the more industrial states are struggling, you have to pick up and move with education and advancing education to some of these other states doing so well―texas, the deep south and west, as well.
>> how does age play into this? what factor did he find in the breakdown?
>> he didn’t talk a lot about older employees, but he did talk about teenage employees. the teenage participation rate is way down, something i’ve heard from jim glassman at j.p. morgan, as well, in that these kids get this and aren’t working anymore, they’re in school, college kids are staying in school, the college kids that can’t get jobs, are staying in school, the teenage rate is down because they perceive they know that education matters. a college degree has never meant more than it does now than what i’m hearing from sylvia and from other economists on the radio program, it’s plain and simple. that trend is widening as we go into this decade and into the next decade.
>> thanks so much.
>> sure.
>> tom keene is our editor-at-large at bloomberg. we’ll take a break. oil tumbles from record highs this week. up next, we’ll speak with one economist who lowered his growth forecast. gary sloshberg joins us.
