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YOUR MONEY

The Real Labor Market; Buying and Selling the Economy

Aired June 8, 2013 - 09:30   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.


CHRISTINE ROMANS, HOST: One hundred seventy-five thousand jobs created in May. The unemployment rate ticks up to 7.6 percent. Those are headlines. But there are numbers you don't see every month and you need to pay attention to them.

I'm Christine Romans. This is YOUR MONEY.

The most important number of all is your unemployment rate. It's either zero percent or 100 percent. Either you have a job or you don't. But outside your personal statistic, here's what's going on in the labor market.

Over the past 12 months, the economy has created 2.1 million jobs. That's an average of 176,000 a month. Good, but not good enough to push down the unemployment rate meaningfully.

The unemployment rate ticked up a little bit to 7.6 percent in recent months but the underemployment rate is much higher, 13.8 percent, that number includes all Americans looking for work plus those working part-time but want to be working full time and others who recently stopped looking.

And, finally, the percentage of Americans who have a job is just 58.6 percent. You have to go all the way back to 1983 to see numbers that low.

Mohamed El-Erian is the CEO of PIMCO.

Austan Goolsbee is an economics professor at the University of Chicago Booth School of Business. He's former chairman of the President Obama's council of economic advisers.

Two people I'm very glad to have with us this morning, today, to talk through and walk through what's happening in the economy.

Let me start with you, Mohamed.

The labor market, I mean, it's a slow and steady crawl, but it is moving in the right direction. What's the biggest thing standing in the way of it performing even better than this?

MOHAMED EL-ERIN, CEO, PIMCO: A couple of things are standing in the way. One, there isn't enough demand in the economy. And second, we have structural impediments. And the two things together means that the unemployment situation is getting better but not getting better fast enough and that's a problem not just for the numbers you cited but we have 4.4 million Americans that are long-term unemployed, and the longer you're out of the jobs market, the harder it is to get back in.

ROMANS: I think that's absolutely right and something that a lot of economists and frankly politicians have worried about, too, what that means for America, with so many people out of work for so long.

So, let me bring in Austan.

You know, you've heard Mohamed say that probably the biggest problem in the labor market is the long-term unemployed. In May, 37 percent unemployed are without a job 27 weeks or longer. You know, I would point out, and you can see that chart -- it's getting better, I mean, December 2011, it was 40 percent, that was the highest since World War II. But, still, nearly 4.5 million people.

Austan, how do we solve that?

AUSTAN GOOLSBEE, PROFESSOR, UNIVERSITY OF CHICAGO BOOTH SCHOOL OF BUSINESS: You know, it's a tough thing to solve when the growth rate is only modest, as you're pointing out.

I thought both of your comments were right on the money. And it's made harder by the fact that whatever our growth rate is, the rest of the advanced world is well below the United States, so that's dragging us down. And then you've got a very substantial fiscal drag from higher taxes from the sequester, from a lot of stuff coming in negative from the government.

ROMANS: Mohamed, let me give you this piece of, I guess, positive data. Gallup poll out this week showing that more businesses are hiring, at least that's the perception of 37 percent of people surveyed said their companies are planning to increase payrolls, 37 percent, that's the highest level in five years.

So, what does it take for companies to start hiring? What does it take for them to look at the cash in the bank, to look at these very low interest rates and to look at an economy that's slowly healing and say, I'm going to hire?

EL-ERIAN: So, think of it very simply. If you are a CEO and you're asking yourself should I invest in new plant equipment and hiring, you ask the following question: what's the cost of investing and what's the return on my investment?

The cost of investing is very low for the large companies, not so for the small companies, but for the large companies, it's very low. That's not the problem. The problem is the perception of the return on investment.

And there's two issues here. One is the lack of demand. People are worried that the household is stretched, that unemployment remains high and that the rest of the world as Austan said is not doing that great. That's not going to buy a lot of our goods. So, they're worried who is going to buy what I produce.

Second, they're worried about the framework. There's a lot of question about what will the tax system look like? What will Congress do?

So mix the low anticipated demand with the uncertainty and people are not investing enough. And as a result, the corporate sector is not using all this cash it has on its balance sheets.

ROMANS: You know, Austan, I have to ask you this question because right after the jobs report came out on Friday, you saw the first sort of wave of the press releases from Republicans who said that the job was good but not great and it's not great because of President Obama's policies, because of people worried about Obamacare and the implementation of Obamacare, and because -- you know, because it's the fault of this administration and its policies coming up from the recession that's holding back the economy.

I want -- I want to give you a chance to respond to that.

GOOLSBEE: Well, two things. One, they had that press release filled out every month since the recession -- since Obama came into office rather than since the recession began. So I don't think the political interpretation should be the one we look at.

My only view on whether policy is the thing holding things back is you see this same behavior of companies sitting on cash nervous to invest all around the world, in places where there was no Obamacare they haven't followed the same policy prescriptions as in the U.S. and that overwhelmingly makes me think it's not about policy in the U.S. It's about fear there might be another worldwide recession, fear there might be another worldwide financial crisis. So we got to get past that.

So, in a way uncertainty is the good news, because if it's being driven by uncertainty, both of that uncertainty is going to get resolved over the near term and they can get back to investing. I fear it might last a little longer because it's not really about policy.

ROMANS: Austan, what's your letter grade on the economy? I mean, just quickly, give me a letter grade on the economy, you think.

GOOLSBEE: I don't know, on the economic conditions I'd say modest at best. The rest of the world is no higher than a "D". So this is one where your neighbor's great, it's kind of like a joint lab project or something. The other guy's getting a "D" is dragging us down.

ROMANS: That's such an academic way to look at it.

Mohamed, what's your letter grade on the economy?

EL-ERIAN: I would give our economy a B to B-plus. It's getting better but not past enough. I would give Europe a D. I would give China a B- plus and the global average is probably around a C, that's why there's the sense of uncertainty out there.

ROMANS: I give both of you a solid "A" for this particular broadcast. Thanks, guys. Mohamed El-Erian and Austan Goolsbee, nice to see you this weekend.

Coming up, investors couldn't make up their minds but homeowners may need to be more decisive if they want to get in on the record low mortgage rates. We're going to tell you why, next.

(COMMERCIAL BREAK)

ROMANS: Over the past week, the stock market hasn't really looked like itself. The Dow dipped below 15,000 in the middle of the week and bounced back after the jobs report. The S&P 500 has kind of been struggling here. The NASDAQ also dropping. Volatility is back.

While stocks are busy bouncing around, mortgage rates were rising. The average 30-year fixed rate mortgage 3.91 percent, up 0.1 percent from last week. But check out the rise from early May when it was 3.35 percent.

Fannie Mae's chief economist Doug Duncan says it's unlikely rates will ever be that low again. So, buyers and sellers taking notice.

The housing and stock markets have been the bright spots in our economic recovery. Is the luster starting to fade?

Jeff Kleintop is chief market strategists, LPL Financials. Stephen Moore is an editorial writer at "The Wall Street Journal."

Nice to see both of you this weekend.

Stephen --

STEPHEN MOORE, THE WALL STREET JOURNAL: Hi, Christine.

ROMANS: -- are these bad signs of the economy or part of the growing pains of a slow and steady recovery?

MOORE: A little bit of both actually. You know, it is true as the economy picks up everyone expected -- including myself, I've said it on the show -- that as the economy picks up and people start to borrow more money and there's more demand for credit, that interest rates would rise.

But, of course, the conundrum, Christine, is as those interest rates rise, they kind of cause some economic problems. The mortgage rate rises and when that interest rate rises don't forget who the biggest loser is, the federal government, because the United States is the biggest debtor in the world.

ROMANS: Yes, that's true.

You know, Jeff, here's -- let me bring in Jeff, I want to know what Wall Street wants. Here's the frustration for me: when you have signs of economic strength, suddenly people start freaking out thinking that means the Fed is going to pull back, right. But if you had too much economic weakness, Wall Street will freak out because the economy is not strong enough.

So it's hard to tell what investors want to see here.

JEFFREY KLEINTOP, CHIEF MARKET STRATEGIST, LPL FINANCIAL: Well it's easy, they want to be goldilocks, can't be too hot and can't be too cold. The problem is, of course, you're usually not goldilocks for too long, right? You're either too hot or too cold.

Today's jobs report was in the middle and the interest rates are right in the middle, particularly on housing. They bounce back reflecting better growth in the economy but we're not yet to the 4.5 percent on the 30-year mortgage which is the rate at which housing started to recover. Once we crossed down below that, we started to see housing begin to turn up and show some strength.

So, that's helped the labor market, it's helped the economy, it's helped confidence come back among investors and consumers. So, it's critical, and we're not quite there yet. So, maybe half a percent away.

And it might be a while until we get there given we're still not too hot and not too cold either.

MOORE: Christine, I can say something about this issue?

ROMANS: Sure.

MOORE: I have never seen tin my 25 years as a professional economist an economy that's too hot. I mean, I just reject that whole idea that somehow more people working, more investment is somehow bad for the economy.

Now, I know there's this kind of superstition on Wall Street that somehow if we have good jobs numbers or if there's an increase in investment and spending, somehow that's going to cause Ben Bernanke to take the punch bowl away.

But look, I think -- look, in the early 1980s when we had a big expansion we had economic growth rate of 7 percent, 8 percent, 9 percent. We can do that without the economy crashing again.

ROMANS: Seven percent, 8 percent, 9 percent -- we are so far away, 7 percent, 8 percent, 9 percent are you kidding me?

MOORE: We did, look it up.

ROMANS: I know we did it but every period in history is a little bit different. You don't exactly mimic every -- and the factors are different. We have the Fed issue here, and you have the Fed pumping $85 billion into the economy and raising questions what it's going to look like.

And, you know, Stephen, this week, former Federal Reserve Chairman Paul Volcker, this is what he said about the Fed's recent moves. I want you to listen. (BEGIN VIDEO CLIP)

PAUL VOLCKER, FORMER FEDERAL RESERVE CHAIRMAN: I know it's fashionable to talk about a dual mandate, the policy should somehow be directed toward two objectives of price stability and full employment. Fashionable or not, I find that mandate both operationally confusing and ultimately illusory.

(END VIDEO CLIP)

ROMANS: Now, two things I'll say about Paul Volcker, he is so tall. The podium is two feet below him.

Second of all, consumer prices relatively stable. No question the Fed's moves are helping stock prices.

But, Stephen, what will the history books say whether this is a boost or a bust to the broader economy?

MOORE: Well, first of all, the history books will say Paul Volcker was one of the great Fed chairmen of all-time. He's the one who brought inflation down, remember, from 14 percent to 3 percent or 4 percent.

But amen to everything he just said, it's one of the most brilliant things I've heard from anybody involved the government in a long time. I've always said that the Fed should have one mandate and that is to keep prices under control. And, actually, you got to give Ben Bernanke some credit for that because, you know, as you just said inflation has been tame for the last four years.

ROMANS: Jeffrey, what's your gut on what happened on stocks here? You know, you had this pullback, you got all this (INAUDIBLE) about what the Fed is going to do and when? I mean, does the stock market after this June swoon, does it come back? What are you telling your clients?

KLEINTOP: You know, we're seeing it. We're seeing the volatility come back into the stock market. We didn't get that in the first half of the year. We're starting to get it now.

So, I think it's a move from a Gallup higher to a grind higher, but higher -- modestly higher in the second half of the year on a lot of volatility as each data point gets scrutinized just as we today with the labor market. Is it too hot or is it too cold?

And the question about when will the Fed end that QE program? Remember, when they ended QE1 and QE2, stocks fell because the economy wasn't in a self-sustaining recovery. So, every economic data point will get that scrutiny between now and the end of the year.

ROMANS: I'll ask both of you this next question. So, Jeff, you get to think about this question while I ask Stephen first.

Stephen Moore, what letter grade do you give the economy right now?

MOORE: You know, I'd give it about a B-minus but I'm optimistic about the future. I mean, when you take into account corporate balance sheets still look beautiful, American companies are lean, mean fighting machines, right now, you've got the low interest rates, you've got the housing recovery -- I'm pretty optimistic that we may see that B-minus turn into a B plus.

ROMANS: Whoo.

OK, Jeff, your turn.

KLEINTOP: Yes. You know, I'm right there, too. I think a B minus -- this economy has held up well. One of the things I grade on a curve a little, maybe more of a C plus than a B minus, because the government sector -- government job growth is fading, government is a drag on GDP, minus 1 percent was the contribution in QE1.

The private sector is doing well, 3.5 percent private sector GDP growth, roughly 200,000 private job growth in the private sector. As the government sector is shrinking, the private sector is growing.

MOORE: Exactly.

KLEINTOP: So, we're giving it a little bit of a boost there because the private sector is coming back stronger despite the sequester and the fiscal cliff.

MOORE: It's an anti-Keynesian recovery.

ROMANS: You know, I will say something giving the letter grade, too, because I'm going to get all this mail from people who are going to say, I can't refinance my mortgage, so I give it an F.

MOORE: Right.

ROMANS: I don't have a job, I'm going to give it an F.

MOORE: Yes.

ROMANS: I have $28,000 in student loan debt and I just got a job at Starbucks, I'm going to give it an F. There's an economy that's doing something and a lot of people left behind. And that's been the argument has been so much.

Stephen Moore and Jeffrey Kleintop, nice to see both of you.

MOORE: Great to be with you.

ROMANS: I will give you the same letter grade I gave Austan Goolsbee and Mohamed El-Erian, you both get an "A." Nice to see you come back again soon.

All right. See this? Do you know what this is? Do you what this is? It could be illegal to buy this in the U.S., I'M going to tell you why after the break.

(COMMERCIAL BREAK)

ROMANS: Has Apple lost its shine? Competition, lawsuits, congressional hearings.

It is still the most valuable brand in the world but this stock super nova has been falling to earth, tumbling about 40 percent since last September. Still, every hour for the last year, 11,000 iPhones, 8,000 iPads, 3,000 iPods and 2,000 Mac computers are sold. That's every hour.

Apple has been fighting lawsuits all over the world. And now, the company that changed the world is not allowed to sell several models of its most revolutionary products. An international trade body ruled against Apple, saying some older iPad and iPhone models on the AT&T network use a chip based on Samsung technology.

That's right. Right in here in a device that may have made the personal computer obsolete in here is technology that Apple took from its biggest smartphone competitor. That's according to an International Trade Commission.

Now, Apple is vowing to fight the ruling in federal court, but Samsung isn't just challenging Apple in the legal world. It's challenging Apple for its dominance.

New research shows Samsung may have overtaken Apple in the U.S. smartphone sales in May, coupled with scrutiny from congress over corporate taxes, could this Apple be headed for its expiration date?

I'm joined by Andy Hargreaves, senior research analyst at Pacific Crest Securities.

Andy, can Apple recover or are the glory days over?

ANDY HARGREAVES, SENIOR RESEARCH ANALYST, PACIFIC CREST SECURITIES: Well, depends what you think glory days are. Is it going to be the growth engine that it once was? No. I would be shocked if it ever was again.

ROMANS: About the patent issue in particular -- I mean, the idea that they can't import any more of these and they are made in Asia, right? So, they can't bring them in because international trade body said they can't.

You think it has minimal impact on the bottom line for Apple?

HARGREAVES: Yes. I mean, the practical implementation of the ruling is Apple can't sell iPhone 4s and iPad 2s to AT&T. By the time the ruling goes into effect, if it's not vetoed by the Obama administration, the iPhone 4 probably won't be for sale very much longer.

So, the reality is that it's going to have very little impact on what Apple sells.

ROMANS: Let me show you Apple versus Google chart. You can see the tale of two tech companies. You know, a lot of people tell me -- people who ask about the stock market, should I buy Apple or should I buy Google? You know, what does this tell you? This chart, what does it tell you about both the fortunes of Google and fortunes of Apple? HARGREAVES: Well, it tells you the future of the industry is in software and services. People perceive Google software and services offering to be better than Apple's.

ROMANS: Could Apple surprise us again? I think we have counted them down before and led by Steve Jobs they really had a renaissance. Can that happen under Tim Cook?

HARGREAVES: Yes, yes, sure it can. Look, the reality is they set the bar so insanely high, right? I mean, they created the two most successful products in the history of consumer electronics in a five- year period. That's really hard to replicate. And so, people expecting them to do it again isn't fair to a certain extent.

But this is an incredibly innovative company in my mind. It's got a massive engine of internal software and hardware development and really loyal customers. Yes, they can do it again.

ROMANS: Loyal customers and now a dividend so shareholders may be more loyal.

HARGREAVES: And buyback.

ROMANS: Yes, exactly. Andy Hargreaves, senior research analyst, Pacific Crest Securities -- nice to see you this morning. Thank you.

HARGREAVES: All right. Thanks.

ROMANS: As the great philosopher Kanye West sings -- digging for gold isn't as profitable as it used to be. Tell you why, next.

(COMMERCIAL BREAK)

ROMANS: Golden opportunities, is it now or is it over?

As the stock market rises, investors are dumping money into stocks and pulling out of gold. Check out this chart -- gold peaked about $1,900 an ounce in 2011, but it has since fallen hard. So, has gold lost its luster?

(BEGIN VIDEOTAPE)

ROMANS (voice-over): America's latest gold rush. When even reality TV fans are watching shows like "Gold Rush" and "Yukon Gold", is that a symbol the bubble has burst?

For centuries, investors have depended on gold as a safe store of value, in a face of rising prices. But now, the precious metal's luster seems to be fading. Gold prices are down more than 20 percent since September.

What's going on? And why now? Is gold still a safe haven?

Economic growth numbers out of China are reason enough for investors to worry. Slowing growth in the world's second largest economy would mean lower demand for precious metals with industrial uses like gold. But some aren't buying it.

STEPHEN LEEB, LEEB CAPITAL MANAGEMENT: A lot of people are taking that as evidence the world is slowing. No inflation. Commodities are dead. Get out of gold.

That is not the deal. This is real desperation on the part of the West to setoff some sort of panic so no one will ever go near gold again.

ROMANS: The move out of gold would suit many central banks just fine because lower gold prices imply higher confidence in their monetary policies which could be summed up in two words: print money.

That confidence may have pushed investors away from gold into stocks, which are now trading near all-time highs. It can't last forever. All that extra money in the financial system could fuel inflation making gold a safe hedge against rising prices.

T. DOUG DALE, SECURITY BALLEW: My suspicion is that gold is looking for a bottom either this month or next, and you'll likely see gold resume its upward trend in coming years.

(END VIDEOTAPE)

ROMANS: It costs around $1,200 ounce to extract gold from the ground. And some gold miners say that as long as prices stay low, digging for gold isn't worth it.

But Nouriel Roubini, known in economic circles, of course, as Dr. Doom, he predicts that gold will continue to fall. He says it could reach close to $1,000 an ounce by 2015.

Thanks for joining the conversation this week on YOUR MONEY. I'll be back at 2:00 p.m. Eastern. The economic recovery turning four years old, but are you celebrating? We'll get to the bottom of it with Arianna Huffington and Fareed Zakaria.

Until then, you can find me on Facebook and Twitter. My handle is @ChristineRomans.