US Videos

Best of Times, Worst of Times

Jason Stipp

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to the Friday Five.

We're getting literary on the Friday Five this week and channeling Dickens with A Tale of Two Recoveries.

Joining me with the analysis is Morningstar markets editor Jeremy Glaser.

Jeremy, thanks for being here.

Jeremy Glaser: You're quite welcome, Jason.

Stipp: Well, it was the best of times and the worst of times this week. What do you have for the Friday Five?

Glaser: Well, let's start off with the worst of times with GDP and the debt ceiling. And then we'll take a look at some relative good news in the housing market, at Whole Foods, and at the oil supermajors.

Stipp: So we got some pretty dismal news on Friday, perhaps ... showing that we're not pulling out of the worst of times yet; GDP really came in under consensus. How bad was it?

Glaser: The GDP number this morning was not pretty. We had 1.3% growth in the second quarter. People expected it to be pretty bad; they were expecting 1.8%, which is hardly gangbusters growth, and it was even worse than that.

But also there were huge revisions back to previous growth that indicated things were much slower than we thought. For example, in the first quarter, it turns out we only grew 0.4%, and even going back farther, the economy looks much weaker than the government had initially expected or had initially reported.

And that's something that's kind of troubling. I think certainly we were kind of hoping that we were on a really good recovery path, and we might be seeing a slowdown, but that there was some fundamental growth. But it turns out that the economy is still very weak, and it's still very fragile.

Stipp: So, looking at Washington, it really feels like the worst of times. They are still at loggerheads. What's the latest on the debt ceiling, and are we any closer to any sort of agreement that we can hang our hats on?

Read Full Transcript

Glaser: This is an incredibly fluid situation. It seems like every minute we get some new information from either a congressional leader or from the White House or from some other interested party, and I think that as of now, a deal is still possible. I think that the two sides, particularly the Boehner plan as it was written this morning--even though it could be changing this afternoon--and the Reid plan are relatively similar with the exception of when we'll vote on the debt ceiling again--it will either be before the 2012 election in the Boehner plan, or after the 2012 election in Harry Reid's plan. But, I think that both sides have agreed that there won't be revenue increases. There will be large cuts equal to the amount of raising the debt ceiling.

And the real question now is can Speaker Boehner whip up some of the Tea Party members of his caucus, some of the fresh members of his caucus, to sign on to a debt ceiling agreement that they're frankly not very excited about and really don't want to vote for under almost any circumstances.

So we'll see what kind of goodies and how well he can kind of whip those votes together, and I think that's the thing that people are going to be focused on. I think that's what people will be looking at. If something doesn't happen today that will happen over the weekend. And I think that will really decide if the deal can get done.

Stipp: Pressure is certainly on and intensifying.

Jeremy, in the residential housing market, it has been stuck in turmoil, in the doldrums of the worst of times for so long. We got some recent data on housing. Are there any signs of a turnaround there?

Glaser: We actually got some good news, which is nice in housing, because it's something that it is so unexpected.

The Case–Shiller Index showed some seasonal strength in housing, which was something that we would expect historically, but that we haven't seen for a while. Even though we're in that prime home-buying season, that people still weren't actually out there buying homes because they couldn't get financing or they were worried about the economy.

People seem to be out there buying again. It's not a huge increase, and obviously one data point a trend does not make, but certainly I think it shows that people, at least the housing market may be getting back to some health. Pending home sales also looked much better than they had in a long time, so there definitely are contracts out that are inked and hopefully will be able to be closed on. I think that the strength of the housing market is a key component of getting growth back, so it's good to see these metrics moving in the right direction.

Stipp: Jeremy, throughout the recovery, as the economy has limped along, one bright spot has been corporate earnings. They've come in pretty well over the last several quarters. We're obviously in the midst of earnings season now. Whole Foods reported. Potentially another bright spot there?

Glaser: Believe it or not, people might not be able to afford much, but the people who can afford to go to Whole Foods are out there, and they're shopping, and they're spending a lot. Whole Foods had a great quarter; they had big revenue growth, big earnings growth. And I think it really shows that for a lot of the high-end consumers, the recession is over, that their jobs have really come back, that their pay has come back, and that they feel comfortable enough to start spending.

We've seen that through other higher-end luxury retailers, but we also see it now at a high-end grocery store, which is a good sign that consumer spending might not be completely dead forever, that we haven't had this huge secular change that we're not going to spend it all anymore. But it just shows just how the recovery really is bifurcated between the haves and the have-nots.

Stipp: Jeremy there is nothing like a fresh salad to make you feel better about an ailing economy.

Also in earnings news, we heard from some energy majors. Commodities are obviously a volatile input for them and output for them. What did their earnings look like? How are they doing?

Glaser: The oil supermajors had great quarters. ExxonMobil and Chevron both reported very hefty increases in both revenue and earnings. A lot of that's coming from higher oil prices. Even though the prices of oil and gas have come down from their highs, they're still pretty lofty, and the big oil supermajors really have the ability to take advantage of those higher prices. The integration and some of the synergies that they have there really let them have a lot of those increases drop right to the bottom line and drop to shareholders.

Now, I think our analyst Allen Good has pointed out that these higher oil prices, these higher margins might not be sustainable forever, and he expects some slowdown. But it still shows that there are sectors of the economy that are still doing well. Corporate earnings look pretty good, and that just highlights again the difference between some of the bad data we see from a macroeconomic perspective, but then also the very positive earnings data we continue to see.

Stipp: Well, certainly a mixed bag of news, Jeremy, but I hope when we get to that last page we'll at least have a quasi-happy ending. Thanks for joining me.

Glaser: You're welcome, Jason.

Stipp: From Morningstar, I'm Jason Stipp, thanks for watching.