Stalled or Moving Forward?

Jason Stipp: I'm Jason Stipp for Morningstar, and welcome to the Friday Five. In a week where the economic outlook seems cloudier than ever, we are devoting today's Friday Five to a key question on a lot of investors' minds: Are we stalling or are we moving forward?

Here with me as always with the Friday Five is Morningstar's markets editor, Jeremy Glaser. Jeremy, thanks for joining me.

Jeremy Glaser: Jason, always happy to get the Friday Five moving forward.

Stipp: What do you have for us this week?

Glaser: Well, this week we'll see that GM is moving itself out of reverse, that Cisco is seeing a slowdown, the Fed finally makes a move, economic data moving in the wrong direction, and we'll see if there is going to be a restaurant rebound.

Stipp: So in auto news this week, GM turned in another profit, a good sign for the auto industry. Autos are obviously an important part for the recovery of the United States, but when you peel it back, it's not quite as simple as all-optimism. What do you see there?

Glaser: GM, for the second quarter, reported a profit, which is a sharp turn of events from the billions of dollars they were losing before. Now, a lot of this is because they were able to cut a ton of costs in bankruptcy and also because fleet sales are looking pretty good. But new car purchases from individuals still aren't very strong. People are worried about unemployment, worried about losing their job, whatever it might be. They are not out there buying cars. Until that happens, we're not going to see a real turnaround at GM. They plan on doing an IPO later; we'll be interested to see how that's received by the market.

Stipp: So the consumer, obviously, is still looking a little bit weak for the automakers, but perhaps a little more strength on the business side. Business spending, obviously, also very important to another big bellwether, Cisco. They reported on Wednesday. They got a pretty good quarter, but their outlook was not so rosy, and that caused some more pessimism for investors. Tell us about that.

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Glaser: That's absolutely right, Jason. Cisco's quarter was really not that bad. Businesses were out there, replacing the routers that they have, they are buying good networking equipment, but the outlook was extremely weak. It looks like business spending could be starting to slow down. This could be a big concern for the economy, could show that we're going to be stalling, that businesses were really just replacing what they had to, but they're not really in expansionary mode yet. Certainly something that we're going to keep a close eye on. Businesses were something that were really leading us out of the recession into the recovery. And consumers might have to step up and take their place.

Stipp: Also casting a bit of gloom on the market this week, the Fed came out and said the recovery was not progressing perhaps as fast as they had hoped and as fast as they thought it would, and they also said that they were maybe taking some steps to kind of address that. What do you think the impact of that's going to be?

Glaser: The Federal Reserve came out and said that they are going to take the principal from these mortgage-backed securities that are expiring and use it to buy long-term Treasuries instead of allowing their balance sheet to shrink.

Now, the immediate impact of this will be extremely small. The balance sheet is still going to be very large. But I think the statement that it says is if deflation becomes a bigger issue, if things continued to slow down even more, the Fed is going to be open to doing quantitative easing or essentially printing money. They are going to try to inflate the economy. They're going to do everything in their toolkit. They're not going to leave any stone unturned.

This is supposed to soothe the investors' fears, but it actually stoked them because they were worried about the bad economic outlook. But I think, certainly, it shows the Federal Reserve is not going to let us slip into a recession because of a too tight monetary policy.

Stipp: So if we are maybe faced with some more moderate growth here in the U.S., a lot of folks I know have been looking to overseas to power some growth, to Asia and to some emerging markets. Data this week shows, though, that we might see some moderation there as well.

Glaser: The economic data out of Asia this week was not very good. Both China and Japan showed that the growth is slowing in those economies. In China we saw imports did not rise as much as they had been. We see a slowdown in the trajectory of growth there. And in Japan, the orders for having machinery that manufacturers are using looked very weak.

It just show that people aren't investing. People aren't confident in the recovery happening worldwide. We are hoping that Asia was going to be an engine of growth with Europe kind of lagging behind and with what certainly appears to be a stall in the United States. That might be less feasible right now.

Stipp: So, Jeremy, I know if I'm feeling depressed about the economy or anything else, sometimes I like to treat myself to a night out at a restaurant, and there is a new option for me now that can maybe really boost my spirits.

Glaser: Jason, with the Friday Five, we are extremely interested in culinary innovation. We've talked about the Double Down. We introduced the Triple Threat. But this week we saw that Denny's is introducing a wonderful new sandwich. That will be a grilled cheese that has five mozzarella sticks in the middle. Now I think this is the kind of American ingenuity that's going to get people get back into restaurants. It could help their consumer spending number, maybe even out some of the other not so great economic indicators we've seen over the past week, and it could be a good sign for things to come.

Stipp: Well, I don't have a crystal ball, Jeremy, but something tells me that the health-care industry might see a little bit of growth based on this sometime in the near future.

Glaser: Yeah.

Stipp: Thanks for joining me.

Glaser: You are welcome.

Stipp: For Morningstar, I'm Jason Stipp. Thanks for watching.