Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jason Stipp and Jeremy Glaser | 06-12-2015 09:00 AM

Friday Five: Economy Shakes Off Winter Blues

This week's retail sales report provided more evidence that the economy is bouncing back from a tough first quarter. Plus, Apple conference insights and more.

Jason Stipp: I'm Jason Stipp for Morningstar and welcome to The Friday Five, Morningstar's take on five stories in the market this week. Joining me with The Friday Five is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're welcome, Jason.

Stipp: Up first this week, the retail sales report showed more evidence that we're shaking off the winter blues. It was up 1.2% in May. What's your take on that report?

Glaser: This is another piece of data that shows the first-quarter contraction in GDP seems like an outlier. It was caused by weather, it was caused by some other factors that were going on, and it really wasn't a sign that the U.S. economy was careening toward another recession or toward a slowdown.

This was a pretty solid sales report. Like you mentioned, that headline number was up 1.2%. A lot of that was gasoline, which has come up a little bit, and auto sales. But even stripping that out, it was still a broad-based increase across a lot of different categories, which is always good to see.

You look at this report in conjunction with other data, like the jobs report that was very strong last week and some other labor data this week including the small-business optimism data, and you start to get a picture of a U.S. economy that's not necessarily going gangbusters but definitely is bouncing back from those doldrums--and that's good to see.

I think that will definitely be a focus as the Fed meets next week. It's extremely unlikely they will raise rates right now, but it does still seem to be very much on the table in September or later this year given this data.

Stipp: In the industrial sector, Johnson Controls joined somewhat of a trend in slimming down and really focusing on its core business this week.

Glaser: The real trend has been toward bulking up recently in a lot of different industries where we've seen a ton of M&A activity among companies trying to gain scale. In pharmaceuticals, for example, we've seen a lot of M&A.

But there also has been a little bit of a countertrend of companies slimming down in order to be more efficient and to focus on their core business. That's what we're seeing here from Johnson Controls. They are selling off the rest of their auto business, which is mainly seating, so they can focus on their batteries and building-efficiency segments, which they think are going to be higher margin; there is less competition there. That's really where they want to put their investment dollars. They think there is better return there.

This is probably the time to do it. Dave Whiston, who is our analyst on the auto sector, thinks that premiums for auto parts are actually pretty high right now and that they will be able to get a good price for this business and get out of it, focus on what they want to and be paid a pretty dollar to do that.

There is no timeline or detail on exactly how this deal will be structured or who potential suitors are; they just announced that they are exploring this. But certainly it's good to see management making these types of decisions in order to become more profitable instead of just bigger.

Stipp: In talking about M&A, we also heard rumors this week that 3G Capital, a Brazilian firm, was interested in acquiring Diageo, the spirits maker. Just rumors at this point, but what's your take on that?

Read Full Transcript

{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article