Interview: Economist with Wachovia Securities
>> well, i think it’s a good number. it reflects strong growth. importantly, it confirms the fact that the american economy is on the right path and the things that underlie that number were encouraging, as well. much stronger exports, strength across the board in construction and housing. and the fact that inventories were depleted suggests we are going to have strong results for the third and fourth quarters.
>> that was treasury secretary john snow giving us his reaction to the latest g.d.p. report and the nation’s output of goods and services grew to 3.4% annual rate in the second quarter. also today a survey showing manufacturing growth accelerated in the chicago area this month. the improvement much stronger than economists had been forecasting. also the university of michigan consumer confidence index for july rising to the highest level since december. what does the future hold for economic growth? here to offer her insight is gina martin, economist with wachovia securities and joins us from our washington bureau. thank you for joining us on this friday.
>> thank you for having me.
>> a lot of focus in today’s report on inventories and the fact that the inventory levels came down. does that indicate to you as we are hearing from other folks and investors are reacting to that economic growth perhaps will accelerate?
>> i think it will because we’ll have an inventory bounceback in the third quarter maybe, and the fourth quarter, as well. inventories went down much quicker than we thought they would
>> given today’s report then, have you been spending time rejiggering your forecast for the second half of the year? we are expecting some final sales slowdown. we’ve got final sales in at the strongest pace we’ve seen since late 2003 in the second quarter, with which was a bit of a surprise for us. we expect that number to moderate going forward that. will be offset by the inventory increase, which keeps the second quarter growth somewhere around 3%.
>> given the fact we have oil prices and back above $60 a barrel, how does that play into it, begin that the slowdown you talk about really seems to be coming on the consumer side ?
>> it certainly is on consumer minds. the latest survey of back-to-school spending shows consumers are little bit hesitant to spend this much this year as last year. i think it’s obviously going to turn onto a little bit of a decline in consumer spending going forward. that’s baked onto our forecast.
>> what’s interesting is we obviously are on the last day of the month. in the stock market where we saw a surge for the major indexes for the month of july, it was the retailers giving the biggest boost to the s&p. it might be particularly interesting or are you watching the retailers closely to see what kind of slowdown they report?
>> i am. i think there is a divergence between retailers. what we are seeing is those retailers catering to the high end are certainly doing very very well. as those consumers haven’t been hit nearly as hard by gas price increases and the overall oil market . you have retailers at the lower market catering to the consumers that have taken a hit given the higher prices.
>> we had a rally in the yields in the treasury market for the month of july. that 10-year yield at 4.27%. how well do you think treasury market is reflecting economic growth prospects?
>> i think the treasury market has finally caught on to the fact there is an inflationary scenario out there. i was a little bit surprised after this morning’s release though that treasuries sold off. especially considering the fact that we’ve got an inflation number that was rather bullish. inflation dropped below 3% in the second quarter. which indicates perhaps this growth is not feeding through to an inflationary scenario. perhaps treasuries are reacting to the fact we have had several consecutive quarters of unit labor cost increases and some inflation is out lfment
>> earlier today we spoke to ben bernanke. he indicated inflation is not a problem. you do think the administration is underplaying inflation concerns?
>> not right now. we have seen several reports over the last month that indicate inflation is slowing from the pace of growth we saw last year and early this year. we got the c.p.i. out flat for the month. the p.p.i. was flat, as well. now we get this g.d.p. deplator under 3%. perhaps we have passed that peak in inflation. one of the key in terms of chairman greenspan as well as our economic team is whether or not unit labor cost increases will feed to future inflation. i think that is why the fed is on a track to increase interest rates for the remainder of this year to fight off that future inflation that may creep up on us this year.
>> where do you see the yield on the 10-year going?
>> i think it will remain in a range, some where around 4.5%, maybe below 4.5% by the end of the year. i think treasuries are in a different universe. it’s obvious foreign investors are very interested in buying u.s. securities and investing in the u.s. market . that is reflected in the u.s. treasury securities. it’s no longer trading simply on growth expectations and inflation expectations, but on a global marketplace. so we can no longer look at just g.d.p. and inflation expectations for the u.s. economy for where the treasury is headed.
>> thank you for joining us. have a wonderful weekend.
>> that was gina martin of wachovia securities. we’ll take a quick break and come back with “chart of the day.”
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the government estimates outgoods of goods and services lowered to 3.4%, but the ninth straight quarter above 3% growth. we’ve not seen a run like this for 19 years.
>> right now i think the prospects look very good. forecasts from the administration and from the blue chips suggest we’ll have strong growth this year, growth going onto next year and inflation is not going to be a problem.
>> treasuries fell on the report and on this last trading day of july, recorded their biggest monthly decline since november. bond investors anticipating the federal reserve will continue to raise rates. note the dollar having its fourth week of losses against the euro. let’s get caught up how the stock market settled. declines across the board for the dow, s&p and the nasdaq. as for the weekly performance, the dow ending the week down .1%, the s&p little changed. the nasdaq gaining .2%. a rally when you look the full month of july. with these monthly gains, we saw the s&p and nasdaq reach four-year highs earlier this week. with bank stocks specifically that were one of the weakest groups, bob bowdon wraps up the day and month from the new york stock exchange.
>> here at the new york stock exchange, we finish the day, we finish the week and the month of july in trading. let’s update you. for the day friday, stocks were down across the board. you see the major indexes were hauled down between .6%. stocks managed a slight gain, just .04% on the s&p 500. that marked the fifth consecutive weekly gain for that index. for the month, stocks up almost 3%. it was the second best month in 2005. as for today’s lower markets , good news was bad news. that was the idea. the commerce department says the u.s. economy grew at 3.4% in the second quarter. that’s the ninth straight quarter of above 3% growth which could set the stage for more interest rate increases. if you look at some of the worse stock groups, many were interest-rate sensitive. financial shares dragged on the s&p 500 like mortgage stocks that were down. fannie mae and freddie mac both down over 2%. higher interest rates hurt the home builder stocks. d.r. horton, pulte, toll brothers. all of these stocks, these four are up year-to-date more than 36%. on a day when oil prices rose, oil stocks fell with exxonmobil down over 2%. chevron and conoco down between 1% and 2%. archer daniels midland company, the world’s largest grain processor gained 2.6%. the company had fiscal fourth quarter earnings at 30 cents a share, beating the 28th average estimate. republicans blocked democratic amendments that would have made gun makers open to civil lawsuits. now since they will not be open to those lawsuits you, had smith and wes-on shares up 25%. they shot up, sturm ruger up 11% on the day. i’m bob bowdon, bloomberg news.
>> it was concern abouts higher interest rates and crude oil prices sending the nasdaq lower on this friday. robert gray has the details now from the nasdaq market site.
>> the nasdaq composite closing lower in friday’s session. it was the fifth lowest close for the composite in july, finishing higher than 6% for july. second best month of july for the composites since 1997. it’s a month that typically does not body well for investors’ long the nasdaq. if you look at 1995-2004, during those 10 years, composite rising only three julies with an average loss of 1.5%. investors this month coming out with beater than 6% gain for the composite. as far as friday’s session went, it was definitely concerns over higher interest rates. g.d.p. report, john classman, managing director of equity trading at civic american securities citing the g.d.p. report and oil back above $60 and inflation concerns which would portend higher interest rates weighing on stocks. google unraveling, saying microsoft has google in their sights. says earnings being rewarded for companies that have positive forecasts. those that don’t were getting hammered. money on the sidelines, the rally will continue and money will come in from real estate. take a look at some of the stocks leading deet klein friday. h.p. ending their ipod distribution deal. i did talk to gene munster, analyst with piper jaffray. he said it may cause head winds for apple. if people want an ipod, they will be able to find it. synaptics which makes the touch wheel on ipod plunging on their forecast. saw symantec, falling on its forecast, as well. stocks with positive forecasts coming out. they were rising. nasdaq stock market stock rising to a record as it boosted its full year profit forecast. whole foods rising to a record on its forecast. kla-tencor at a better than one-year high, rising up on its forecast. we saw, of course, other stocks rising as well at the nasdaq. i’m robert gray.
>> chevron’s second quarter profit declining 11%, soaring energy prices helped to deflect some of the problems that chevron has suffered with refineries as well as production. june grasso has more on what is behind the numbers.
>> chevron shares turned lower on the earnings news. the number two u.s. oil company was not able to take full advantage of the price gains in oil and gas because of down time at two refineries and a continuing drop in output. net income dropped to 3.-- $3.68 billion or $1.76 a share from $1.94 a year earlier. that was seven cents higher than the average analyst estimate.
>> like any energy company they are doing well. they are below last year, but beat estimates. chevron was expected to fall a little bit begin some of the difficulties they are dealing with right now internally. management is probably working on those problems. you’ll see that improve in the next quarter too. chevron climbed to $45 a barrel. production slide in two refineries idle for re―for repairs left chevron unable to capitalize on the quarter rises. chevron’s profit from oil and gas sales fell 6.5% as output from old fields dropped. the company agreed in april to buy unocal to bolster output and raised its offer to $17.3 billion this month to stem off a competing bid from cnooc in china for $18.5 billion in cash.
>> as any chevron holder would assume, would you want their company to make the veafment effectively. you don’t want to overpay. if it gets out of hand, there is nothing wrong with letting this one go.
>> unocal’s second quarter profit rose 39% on higher energy prices. net income per share climbed to $1.73 a share from $1.25 above the average analyst estimate. unocal has recommended shareholders approve the sale to chevron in a vote scheduled for august 10. the bidding were not over yet. it is complicated by the fact that cnooc faces difficulties getting u.s. government approval for any bid for the company. back to you.
>> thank you, june. today’s resignation of news corporate deputy chief operating officer lachlan murdoch took many by surprise. shares of the company closed lower on the news. he was considered a successor to his father chairman rupert murdoch.
>> a lot of people apparently didn’t see this coming. there is no official reason given less an year after news corp moved its headquarters from new york to sydney. the son and potential heir of the company unexpectedly resigned. he and his wife and young son will move back to australia. analyst at u.b.s. with a buy rating on the stock said in a phone interview investor wers caught off guard.
>> it certainly was a surprising announcement. lachlan murdoch is viewed as one of the successors to his father, rupert murdoch. now this leaves only the other son, james murdoch as the possible family successor of the company. i wouldn’t know lachlan murdoch still remains on the board.
>> departure leaves lachlan’s brother james as the only other family member in the running to succeed their father. rupert murdoch is 74. his media includes fox tv, direct satellite and a movie studio. after inheritting a newspaper from his own father. murdoch wants to be replaced by one of his children and has groomed them to take over the business. investors said they prefer murdoch’s second in command peter chernnan. michael nathan says nepotism is a concern. intermediate partners leo hindry had this to say about the nepotism issue. he says lachlan murdoch was the real deal, deserved every role he held and said rupert murdoch did not get enough credit for the exceptional quality of nonfamily executives.
>> thank you. we’ll take a quick break and come back with a closer look at the economy.
