tv Nightly Business Report PBS July 21, 2009 7:00pm-7:30pm EDT
>> paul: the federal reserve has pumped hundreds of billions of dollars into the economy. but the fed chairman says the recovery still has a long way to go and now is not the time to tighten monetary policy. >> suzanne: caterpillar's latest results weren't much to write home about but it's improved outlook helped boost the market. coming up, a look at what the latest flood of earnings says about the economy. >> sunshine is the best disinfectant and it will discourage and deter bad behavior. >> paul: the special inspector general overseeing the $700- billion tarp bailout fund tells lawmakers transparency is needed now. >> suzanne: then, apple shines, posting a 15% jump in profits as i-phones and mac computers continue to fly off store shelves, even in a recession. >> paul: i'm paul kangas >> suzanne: and i'm suzanne pratt. susie gharib is off tonight. this is "nightly business report" for tuesday, july 21. "nightly business report" is made possible by:
this program was made possible by contributions to your pbs station from viewers like you. thank you. 7//& >> suzanne: good evening everyone. the federal reserve is not done yet helping to fix the u.s. economy, that is. that was chairman ben bernanke's message for congress today, saying the fed intends to keep interest rates low and credit easy for quote an extended period. bernanke said it's the right policy, even though the economy is showing quote tentative signs of stabilization. the chairman also reassured investors the central bank has an exit strategy ready to go
once it's time to reverse its easy money policy. darren gersh explains. >> reporter: always cautious, the federal reserve is checking out the exits in case of an inflation emergency. a jump in prices would require the fed to unwind the $600 billion it has pumped into the economy. but chairman ben bernanke made it clear he and his colleagues are not expecting to put an exit strategy into action for "an extended period of time." vince reinhart is a former senior staffer at the fed. he says the central bank won't raise interest rates or tighten credit until it believes a durable economic recovery is under way. >> they don't have that evidence yet, and they are trying to send a signal to push back against market participants who are expecting too quick a turn in monetary policy. >> reporter: yes, banks are looking better and markets stronger, but bernanke cautioned the recovery he expects later this year will be tepid and rising unemployment remains a major concern.
>> job insecurity, together with declines in home values and tight credit, is likely to limit gains in consumer spending. the possibility that the recent stabilization in household spending will prove transient is an important downside risk to the outlook. >> reporter: so why all this talk about an exit strategy? some analysts are concerned about all the cheap credit the fed has pumped into the financial system. banks are now holding a lot of that cash in reserves which could come roaring into the economy in the form of new lending once growth returns. that could mean high inflation and a new bubble. bernanke said three features of the fed's exit strategy should keep that from happening. first, the fed charges a premium for some of its lending, and as markets have returned to normal, banks have sought cheaper sources of cash. second, the fed can effectively pay banks more to keep reserves with the fed, reducing the incentive to make new loans. and third, the fed can buy and sell securities, a technical tool it uses to keep inflation in check.
>> so we do have a number of tools to do it, and we're quite aware of this issue, and we will not allow the broad measures of money circulating in the economy to rise at a rate rapid enough that it would cause inflation eventually. >> reporter: there's just one problem: reinhart says it's important to remember the earliest this exit strategy would take effect is next year. >> we don't know who the federal reserve chairman will be next year. we don't know if the congress will be considering a federal reserve reform act of 2010. there are going to be lots of mechanisms to put pressure on the federal reserve. >> reporter: so reinhart says, even though the fed has an exit strategy, it may not feel free to put it into effect when the time comes. darren gersh, "nightly business report", washington. >> paul: the troubled asset relief program or tarp that ben bernanke helped pass through congress is facing new scrutiny. the special inspector general for the $700 billion program says the tarp has grown, evolving into 12 separate programs at a cost of about $3
trillion. but as stephanie dhue reports, neil barofsky and congressional lawmakers say that evolution has credit ratings agencies come without a lot of explanation. >> reporter: the treasury department is under fire for keeping secrets. specifically, how the money the government provided to the banks is being spent. investigation and oversight committee chairman edolphus towns demanded action. >> if treasury does not put this information up on its website, this committee will, and if treasury does not turn over this information voluntarily, secretary geithner will be brought before the committee to explain why not. >> reporter: treasury says once the banks receive the tarp money it's impossible to distinguish it from other funds. special inspector general neil barofsky did his own survey and found banks have used the money to do everything from paying down debt to mergers and lending. he says the treasury knows exactly what banks have done with the tarp fund and should say so. >> the most alarming thing to me
is that treasury continues to refuse to adopt this recommendation, even in light of the proof that we now have at this audit, they continue to tell us it was a meaningless survey. >> reporter: the treasury's thirty billion dollar public private investment program, known as the p-pip is also under fire. the treasury has selected nine investment firms to participate, but it has not adopted barofsky's recommendation that there be a firewall between the managers of the public fund and their private investments. some of the same firms chosen to participate in the program have also reportedly helped the administration craft the proposal. >> if in fact these individuals had a hand in writing these programs, it becomes all the more important from a perception area alone that we have the tightest and most significant barriers and walls to protect them from taking advantage of a program they may have had a hand in reporting. >> reporter: treasury says it has already adopted some of the i.g.'s recommendation and will
continue to work with his office in ways that are constructive. stephanie dhue, "nightly business report", washington. >> suzanne: key players in the financial crisis could soon have to follow a new set of rules. the obama administration today issued a proposal to reform the nation's credit ratings agencies and curb their power. the proposal hopes to limit conflicts of interest by barring ratings firms from offering consulting services to the companies they rate. the measure also aims to cut down on "ratings shopping" a practice where companies ask for preliminary reports from the agencies, then hire whichever gives the best ranking. those preliminary reports would also be available to individual investors. >> paul: wall street's blue chips extended their winning ways to a seventh straight session today. by 10:00 am the dow was up 68 points thanks to an upbeat outlook from caterpillar and lower but better than expected earnings from merck, dupont and freeport mcmoran. after the tech-laden nasdaq
market failed to join the blue chips on the upside, the market pulled back in the early afternoon. but with apple and yahoo on deck for earnings after the bell stocks snapped back in the final hour of trading. >> paul: california's lawmakers have a deal to close the state's $26 billion budget deficit. now, after eight months of
political wrangling, they're working to line up votes for the agreement. it calls for no new taxes and $15 billion in cuts. the remainder of the shortfall will be closed by borrowing from local governments and speeding up tax collections. education took a big hit, with $9 billion in cuts to primary schools and state colleges. while there is mounting opposition to the agreement, a vote is expected thursday. >> suzanne: joining me now with more on today's bernanke testimony, plus a closer look at what people are calling the "jobless recovery" is lakshman achuthan. he is a business cycle expert at ecri. lakshman, welcome again to the program. >> thank you. >> reporter: before we get into our topic of the labor market i want to ask you your thoughts on the bernanke testimony. what is your takeaway from that? >> on the one hand, it's nice that we're even talking about an exit strategy because it
suggests that as we believe that this recession is drawing to a close and we need to start thinking about undoing many of the things that were done to combat the recession, in particular on the federal reserve side a lot of easy money but of course the devil is always in the detail, and in this case it's all about timing. when do they begin to pull back? >> emily: one of the things the fed >> one of the things the fed chairman was talking about today was employment. he said we may not see a peak in unemployment until a ways away. explain to people. what do we mean when we talk about a jobless recovery? >> for various reasons these will begin to rise when a
recession is over however we don't see a lot of job growth. that lags behind. in 2002, when we were coming out of the last recession and also in the early 1990's, we had just that where g.d.p. and production and sales all went up and jobs did not grow. >> suzanne: you will have to excuse us. we have apparently a fire-safety test here on the floor of the new york stock exchange. just bear with us for a second. can you? >> yes. >> suzanne: can you explain for me the paradox of a jobless recovery? how is it possible that you can still be having an economy that's recovering and all these people are still losing jobs? >> yeah. the actual job losses will begin to abate for large sectors of the job market. in particular, the service sector. that's where 90% of us work -- nine out of 10 people work there
and i expect that as the recession draws to a close, this summer, that we'll start to see jobs growth in the services sector, and certainly not job losses. the problem, really, is in the manufacturing sector where about one out of 10 people work but we see outsized job losses. in the last 10 years, we've gone from 18 million manufacturing jobs to 12, so we've lost a third of our manufacturing jobs, and they're never coming back so it's kind of the tail wagging the dog, as it were, and we'll probably have that this time around, too. >> suzanne: would you expect that ware going to see the economy shift and become even more of a service-sector economy, less manufacturing? where are these people going to get jobs from? >> yeah, they're going to be shifting over to the services sector. this is something that's been going on for decades where we have been shifting from a big manufacturing employment base to more of us working in services. mind you, the manufacturing
portion of g.d.p. is still quite high, it's on the order of 40% or so but just less and less people are needed in order to produce that much goods. so if you're in manufacturing, it's not a bad idea to see if you can get a job in services. >> suzanne: what about those people who are making these doom-and-gloom predictions of 25% for the unemployment rate? is that really a possibility, do you think? >> not for the headline unemployment rate that right now is about 9 1/2%, because you really need to have a depression in order to get those kind of unemployment rates and that is simply not going to happen. our leading indicators, the weekly leading index has soared to a multiyear high, and there is just no way that we're going to have this recession accelerate to the down side. it's not happening. >> suzanne: i hope you're right. i think we have to leave it there, though. thank you for joining us. >> all right. >> suzanne: our guest this evening: lakshman achuthan.
>> suzanne: a blockbuster earnings report from apple late today. the tech giant proved to be recession-proof during its third quarter as it sold more than 5 million i-phones and 2.5 million mac books. as a result, apple earned $1.2 billion, or $1.35 a share, 18 cents better than analysts were expecting. meanwhile, yahoo also beat expectations, despite a mixed report after the bell. it earned $141 million or ten cents a share. but, the company sees operating income falling during the current quarter, from its second quarter level. yahoo also launched a new homepage today with a focus on jump-starting its search advertising business.
and those are the stocks in the news tonight, suzanne. >> suzanne: as you mentioned, paul, earnings season is in full swing. so far, most companies are blowing away expectations. but that may not be enough to propel the market higher. as erika miller explains, investors want to know how the earnings are being generated and
evidence business is improving. >> reporter: a rocketing recovery for earnings may be too much to hope for. but analyst nick colas thinks corporate profits may be at the start of a gradual climb in altitude. >> i think it has to be a slow and steady recovery because we're in such a deep hole in the economy. unemployment is still rising. initial claims are still very high. unemployment rates are still very high and are probably going to climb past 10%. and all of those factors make for a slower than average recovery. >> reporter: he is skeptical about the earnings forecasts of wall street analysts. according to thomson reuters, earnings for the s&p 500 are expected to fall 21% in the third quarter. but thanks to easy comparisons, profits are expected to soar an eye-popping 188% in the fourth. colas says no way. >> i think its very unlikely. and i think what you are going to have to look at what kind of sustainable core earnings growth these companies can have.
and i would be surprised if core earnings could be anything better than 5% or 10% improved. and core revenues anything better than 2% or 3% improved. >> reporter: it's still early in the earnings reporting season, just 16% of the s&p 500 have announced results. nearly all have beat expectations and by an average of 30%. but analyst tony dwyer says there's a catch. >> underneath the surface of the 'beating expectations' is that earnings are still down more than 30% from a year ago. so you are coming from a very low base of expectations. most importantly, revenues are disappointing. you really need to have increased revenues to take advantage of the lower cost structure. >> reporter: for the most part, companies are confident things are not getting worse. but that's not good enough. now wall street wants proof that things are actually improving. the bottom line for stock investors is buckle your seatbelt. the market could be in for a bumpy ride. erika miller "nightly business report" new york.
>> paul: tomorrow, street critique guest david garrity joins us for an update on tech earnings. >> suzanne: there's a new leader at freddie mac, the mortgage giant's third c.e.o. this year. former putnam investments chairman charles "ed" haldeman has been named chief executive officer. his predecessor, john koskinen will return as freddie's non- executive chairman of the board. haldeman is expected to begin his new job next month, after the company releases second quarter results. >> paul: it looks like cost cutting moves are perking up results at starbucks. late today, the coffee giant said it earned $151-million or 24-cents a share in its third quarter. that beat expectations by a nickel and reversed a loss from a year-ago. starbucks shares ended the day at $14.69 a share, but jumped 9% in after hours trading. euquu
>> suzanne: tonight's "of mutual interest" commentary has a list of hot funds to avoid! here's john waggoner, mutual fund columnist at "usa today." >> you can find plenty of information on what mutual funds you should buy. but today, were going to eliminate the positive and accentuate the negative. were going to tell you what funds not to buy. you can choose among nearly eight thousand funds of all stripes, and some of them are just plain silly. start with leveraged funds, which use futures and options to goose their returns. many leveraged funds promise to give you twice the return, on a daily basis, as a broad-based index, such as the standard & poors 500. some new funds even promise triple the gain or loss from the index. financial pros have lost billions using leverage. be smarter than the pros and don't mess with it. you don't need currency funds, either, which track the movements of the dollar against the yen, the euro, and the brazilian real. do you know which direction the new zealand dollar is going to go? if not, leave these funds alone, too. while we're dissing funds with an international flavor, you can
safely sidestep the international funds that invest in a single overseas country, particularly an emerging market. unless you have close ties to india, and understand its economy and politics, don't make a financial passage to india. closer to home, don't invest in a u.s. treasury-only money fund. interest rates are so low now that many treasury-only funds yield exactly zero. you can get better yields and government safety from your friendly local bank. finally, look at funds that have rotten records for a long period of time. sure, they could get better. but they usually don't. most people don't need more than six to ten broadly diversified funds with low expenses. all those other funds do make money, just not for you. i'm john waggoner. >> paul: recapping today's market action, caterpillar's outlook helps lift stocks. the dow gained 67 points and the nasdaq added almost seven points. and to learn more about the stories in tonight's broadcast, to watch our streaming video and to take part in our daily blog, go to "nightly business report" on pbs.org. you can also email us at firstname.lastname@example.org.
>> suzanne: that's "nightly business report" for tuesday, july 21. i'm suzanne pratt goodnight, everyone. and good night to you, paul. >> paul: goodnight suzanne. i'm paul kangas wishing all of you the best of good buys. "nightly business report" is made possible by: this program was made possible by contributions to your pbs station from viewers like you. thank you. captioning sponsored by wpbt captioned by media access group at wgbh access.wgbh.org