NIGHTLY BUSINESS REPORT for December 25, 2015, PBS

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Rogers (NYSE:ROG), Phil LeBeau, John Harwood>

Markets; World Affairs>

ANNOUNCER: This is NIGHTLY BUSINESS REPORT with Tyler Mathisen and Sue Herera.

TYLER MATHISEN, NIGHTLY BUSINESS REPORT ANCHOR: Good evening, everyone. And welcome to this special holiday edition of NIGHTLY BUSINESS REPORT. I`m Tyler Mathisen.

Well, 2015 is nearly in the books. And it was a year that saw some surprises and a lot of big moves. Big megamergers like Pfizer (NYSE:PFE) and Allergen, big controversies like the Volkswagen emissions scandal, and big historic moves by the Federal Reserve just last week to lift its key interest rate from record low levels.

Tonight, we look back on 2015 and the year that was.

(BEGIN VIDEOTAPE)

MATHISEN: After nine long years, the Fed changed course with an interest rate hike.

JANET YELLEN, FEDERAL RESERVE CHAIR: With the economy doing well and expected to continue to do so, the committee judged that a modest increase in the federal funds rate target is now appropriate.

MATHISEN: But did that move end the guesswork affecting so many business decisions? Or add to it perhaps?

By the time it happened last week, the interest rate move was expected unlike say a brand crisis, and there were several of those this year. Volkswagen got caught trying to get around emissions standards, Chipotle customers got sick, Subway`s pitchman got a jail sentence, and Starbucks (NASDAQ:SBUX) found controversy twice, once for trying to promote awareness of social issues, and again when it went solid red for the holidays without any decorations.

Volatility it seems was everywhere. Stocks hit new all-time highs in May before correcting with a steep selloff, more than 10 percent in late August. The market steadied from there regaining most of the losses during the fourth quarter. Currency and bonds markets were shaken and stirred regularly.

Starting in January when Switzerland ended a cap on the value of the franc against the euro. At the end of June, Greece missed payments on a loan, threatening to divide the European Union. In midsummer, China responding to it crushing stock market down 38 percent in less than three months, devalued its yuan. That shocked the world markets again.

Economic stimulus in China, Japan and Europe, along with a rising dollar made U.S. goods more expensive around the world, denting profit margins for big U.S. multinationals -- think Caterpillar (NYSE:CAT), 3M (NYSE:MMM), Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO). In fact, all S&P profits were down more than 3 percent overall. And no sector felt the pinch more than commodities and energy.

In recent weeks, oil prices hit 11-year lows, down more than 65 percent in a year and a half, an oil glut with no end in sight has worldwide layoffs in the energy patch during a quarter of a million this year alone.

U.S. consumers are enjoying those lower gas prices, near $2 a gallon nationally and auto sales retail bright spot, could top a record 17.4 million set back in 2000.

Housing improved too, but the economy will be tested as the Fed raises rates and mortgages, auto loans and credit cards all get more expensive. Retail numbers are OK, but not great, and the future of brick and mortar stores has been questioned with online sales up 15 percent in the third quarter from a year earlier.

Mobile sales even stronger, projected to rise almost 39 percent this year.

So, there are pockets of strength, but the economy as a whole will be tested now. Wages are only barely higher. But the Fed`s bar for interest rate hikes was met with unemployment now down to 5 percent and inflation just touching 2 percent for the first time last month. Well, the hand wringing and teeth gnashing when to raise rates is over. Now we`ll begin to see if the Fed`s timing was right.

(END VIDEOTAPE)

MATHISEN: 2015 was really a tale of two stock markets the start of the year saw new highs, followed by the biggest bout of volatility in recent memory.

Dominic Chu followed all the ups and downs for us, and he joins us now.

The volatility came in sort of big spasms there a couple times in the summer and later in the year, as well.

Does the volatility in and of itself say anything about the health of the bull market?

DOMINIC CHU, NIGHTLY BUSINESS REPORT CORRESPONDENT: You know, what`s interesting because this is bull market arguably started during the depth of the financial crisis in March of 2009. The market is in essence tripled just to put a rough number around it since then.

And so, there are oftentimes when traders feel as though you get this kind of battleground, right? This kind of volatility, this consolidation, because if you look at the market overall, like you said, we`re not -- we haven`t posted huge gains or losses in 2015. So, we`re relatively flat.

MATHISEN: Roughly flat.

CHU: But we saw a lot of ups and downs almost like the bulls and bears are fighting it out. Sometimes traders feel as though it could be indicative of a changing trend. And, of course, the trend has been a seven-year bull market.

MATHISEN: Let`s talk about energy, because it seemed that energy, the price of oil and the value of stocks, energy stocks were inextricably connected.

CHU: Tied, yes.

MATHISEN: Why is that and can stocks go up if oil doesn`t?

CHU: You know, they can go up if oil doesn`t. This year is probably one of the clear indications that it can. The reason why I say that is because there have been a handful of stocks in the market. And we`re talking about the largest capitalization, the largest value ones out there, right? You`re talking about the Netflixs of the world. You`re talking about the Amazons, those ones worth $50 billion, $100 billion, $200 billion in market cap. They`ve been doing a lot of the heavy lifting.

Meanwhile, energy stocks overall, energy is 8 percent of the overall S&P 500. That`s no insignificant portion. However, if you look at health care, which is the third biggest, and then you look at technology and financials, the two biggest ones, tech and financials, you`re talking about 50 percent of the market right there.

So, energy is important and it will be key, but it may not drive the entire stock market.

MATHISEN: Quick thought on the merger market. The merger mania, do you expect it to continue into 2016?

CHU: You know, it`s interesting because we had a lot of those megamergers announce this had year. Some may face regulatory scrutiny. But it`s all going to be all about whether or not the market volatility continues into next year.

MATHISEN: All right. Dom, thank you very much. Dominic Chu, we`ll see you next year and sooner, I hope.

All right. The biggest and possibly the only story out of the Federal Reserve this year was the waiting and the hand-wringing, gnashing of teeth whether the Central Bank would or wouldn`t raise interest rates. For the first time in nearly a decade, they Fed did raise rates in the 2015 but just barely, both in the amount raise a quarter point and when on the calendar waiting, until just last week to make its move.

Ho, ho, ho. Steve Liesman has been on the case all year long.

(BEGIN VIDEOTAPE)

STEVE LIESMAN, NIGHTLY BUSINESS REPORT CORRESPONDENT: For the Federal Reserve, 2015 was mostly like a bad year for the space agency NASA.

UNIDENTIFIED MALE: We`re going to scrub for today.

LIESMAN: Repeated scrub liftoffs of a Fed funds raise health earth bound at zero for nearly a decade. Markets began the year thinking the Fed would hike rates in the summer. That launch was aborted after weak first quarter growth raised questions about the strength of the economic recovery. Markets adjusted. The first rate hike since 2006 would now come in September, but five, four, three, two, countdown halted after global markets took fright over weaker Chinese and Asian growth and the U.S. job market that slowed down,

Expectations for launch were reset, this time to December. When the month came jobs had rebounded and growth was OK, but oil prices fell hard. Inflation wasn`t rising. And high yield debt blew up. The meeting came, five, four, three, two, one -- the Federal Reserve finally lifted off raising its interest rate by one quarter point to a new range of 25 to 50 basis points.

YELLEN: This action marks the end of an extraordinary seven-year period during which the federal funds rate was held near zero to support the recovery of the economy from the worst financial crisis and recession since the Great Depression.

ANNOUNCER: Three, two, one, zero -- and liftoff.

LIESMAN: Now that liftoff has been achieved, markets end the year wondering how high will interest rates fly in 2016 and most importantly, how fast will they get there?

For NIGHTLY BUSINESS REPORT, I`m Steve Liesman from mission control.

(END VIDEOTAPE)

MATHISEN: All right. One of the reasons the Fed felt it was ready to move on interest rates is what it was comfortable that the labor market was finally on steady ground, and as Hampton Pearson tells us, the numbers seem to tell us the Federal Reserve got it right.

(BEGIN VIDEOTAPE)

HAMPTON PEARSON, NIGHTLY BUSINESS REPORT CORRESPONDENT: In 2015, the post-recession job recovery continued, but at a slower pace. About 210,000 jobs per month were added to payrolls this year, compared to 260,000 in 2014, with the unemployment rate falling to a post-recession low.

Enough of a floor on the economy for the Fed to raise interest rates for the first time in nearly a decade. But there remained pockets of resistance. Wage growth remained stagnant, just over 2 percent in the last 12 months. And millions of workers are either under-employed or out of work as the labor force participation rate remains at a near 40-year low.

DOUGLAS HOLTZ-EAKIN, AMERICAN ACTION FORUM: That`s a decrease in the jobs being created. We continued to see the labor force participation rate slide. It`s gone down every year since the recovery began, and those kinds of numbers really aren`t an economy that`s hitting on all cylinders.

PEARSON: Announced layoffs at 574,000 and still climbing are the highest since 2009, according to a leading outplacement firm. The energy sector has been particularly hard hit, shedding more than 92,000 workers due to the year-long slump in global oil and commodity prices.

JOHN CHALLENGER, CHALLENGER, GRAY & CHRISTMAS: It is unusual to see so many cuts layoffs in a time when unemployment is so low. The reason seemed to be that companies are much quicker to act when they see areas of their business that are doing poorly. They don`t wait for the recession.

PEARSON: At the same time, the number of job openings increased over the last 12 months to just over 5 million. There`s a demand for skilled workers across the economy. From the construction trades to high tech. And those with skills are earning higher wages.

HOLTZ-EAKIN: The reality is that labor market success relies on education and skills. There`s demand for those individuals. There are jobs for those individuals and they are going to have labor market success.

PEARSON: After the holidays, the challenge remains what it has been since the end of the recession, creating more jobs in what continues to be a slow growth economy.

For NIGHTLY BUSINESS REPORT, I`m Hampton Pearson in Washington.

(END VIDEOTAPE)

MATHISEN: John Canally joins now us to talk more about the labor market, the Fed and other factors that helped shape the committee this past year. John is with LPL Financial.

John, welcome. Good to have you with us.

Let`s talk a little bit about unemployment. It`s now at 5 percent. How much lower do you think it can go?

JOHN CANALLY, LPL FINANCIAL CHIEF ECONOMIC STRATEGIST: It can probably go a percent lower. We could probably get to 4 percent. The recent low at least in my memory was in the late 1990s, it got down below 4 percent, but because the participation rate is falling, there`s probably a floor underneath of that, and that`s probably not the real unemployment rate. You know, either you have to take into account the fact that people have stopped looking for work and all of that.

MATHISEN: If more people are working -- forgive me for interrupting you -- if more people are working and unemployment rate goes down, that would suggest that maybe income growth could kick up a little bit. Do you expect that in 2016?

CANALLY: At this point in the business cycle, you would expect that. Wages have started to move higher. We started 2015 with wages 1 1/2 to 2 range. As we end 2015, in the 2 to 2 1/2 range. I would expect by the end of next year, we`re in 3 1/2 to 3 percent range.

And overall incomes are running higher than they have been but still below where they were prior to the Great Recession. So, still alt of work to do on wages and income.

MATHISEN: Let`s talk interest rates. The Fed last week raising interest rates after a long series of cuts and zero rates for the past six, seven years.

Do you think the economy can withstand that? Do you think that`s a headwind too many?

CANALLY: No, you know, I think in some cases the start of the Fed rate hike cycle we saw earlier this month is actually a positive. It will get people who had been on the sidelines about maybe buying a new house or buying a new car or maybe a business owner looking to do some capital spending, it will get them off the fence and get them going.

And with Fed Chair Yellen saying earlier this month they`re going to be gradual in terms of raising rates, the actual increase in rates is not likely to bite. With mortgage rates at about 4 percent, also housing is probably in good shape, too. Typically, you have to get mortgage rates well above 6 percent to have a bite on housing.

MATHISEN: John, thank you so much for your time tonight. John Canally with LPL Financial.

Still ahead, what the auto industry may do this year that it`s never done before.

(MUSIC)

MATHISEN: Most polarizing story related to jobs was the push to increase the minimum wage in several cities and states to levels above the federal mark of $7.25 an hour. With all the protests and pressure to hike wages, some companies took a leading role.

Kate Rogers (NYSE:ROG) takes a look at the year that was for the minimum wage.

(BEGIN VIDEOTAPE)

KATE ROGERS, NIGHTLY BUSINESS REPORT CORRESPONDENT: From big corporations like Walmart to big cities like Los Angeles, 2015 was the year of the raise. With the federal minimum wage stagnant at $7.25 an hour since 2009, companies along with state and local governments have taken matters into their own hands. Right now, 29 states and Washington, D.C. have wages above the federal floor. Los Angeles, San Francisco, Seattle, and Chicago are among large cities that have also moved independently to hike pay for workers beyond the federal minimum over the course of several years.

And in the fast food industry, McDonald`s (NYSE:MCD) announced in April it would be hiking wages at company-owned stores. A small win for the "Fight for 15" movement which has been advocating for higher pay in the industry for several years. In New York, Governor Andrew Cuomo instituted a wage board that raised wages for many fast food workers in the state to $15 an hour by 2021.

The hikes across cities, states and industries placed pressure on main street businesses that aren`t already paying above the federal minimum to shift their policies in order to keep up.

GOV. ASA HUTCHISON, ARKANSAS: If an employer is not offering a good wage rate with some good benefits, you`re not going to be able to attract the employees you want.

ROGERS: But for wage advocates, raises aren`t kicking in fast enough.

ALISSA HARRON-MENZA: Consumer demand and income levels have not recovered in the wake of the Great Recession. And raising the minimum wage is a very effective tool for boosting consumer demand because low wage workers tend to spend every additional dollar they earn.

ROGERS: While the debate over pay rages on, Bar Marco, a Pittsburgh- based restaurant instituted a tip free flat wage for all employees from kitchen to wait staff of $35,000 a year. No tip policies at restaurants marked a trend that picked up in 2015.

Workers at Bar Marco also get a stake in the restaurant through the profit sharing plus health insurance. For workers, it`s incentive to husband.

ZAC CERQUEDA, BAR MARCO LINE COOK: We`re making what we make and being able to make more is definitely pushing me to do better every day.

ROGERS: Main Street will be watching in 2016 as presidential hopefuls on both sides of the aisle continue their debate over when and how to raise the pay floor in Washington. And in Congress, Democrats will continue to push to hike the federal minimum to $12 an hour by 2020.

For NIGHTLY BUSINESS REPORT, I`m Kate Rogers (NYSE:ROG).

(END VIDEOTAPE)

MATHISEN: A major bright spot in the news this year came out of the auto sector and while the final numbers won`t be in until January, it`s looking like a record breaking sales year for the industry.

Phil LeBeau joins us from Chicago.

Phil, record sales this year. But some people wonder whether these were so-called high quality sales. In other words, were these committed buyers or people just jumping off the fence because of very cheap financing and big incentives?

PHIL LEBEAU, NIGHTLY BUSINESS REPORT CORRESPONDENT: Well, look, incentives also play a role in people finally pulling the trigger in a dealership. But I think, generally speaking, the feeling in the auto industry is that these were high quality sales, primarily because there`s still so much pent up demand out there, Tyler. The average age for a vehicle in the United States is still well over ten years.

And if you look back ten years ago, so much of what were in the vehicles then that so many people are driving now, it`s so completely outdated people are saying it`s time to buy a new vehicle. So, that`s why I think the record sales for 2015 were high quality ones.

MATHISEN: I agree with you. What you get in and on a car these days is so qualitatively and quantitatively different than you got a decade ago.

LEBEAU: Absolutely.

MATHISEN: It`s driven people into the showrooms.

The Volkswagen emission scandal, how damaging has that been?

LEBEAU: Incredibly damaging. There is n doubt about that. You look at the percentage of sales and how much they`ve fallen off for Volkswagen, it`s probably not as much as some would expect.

Keep in mind -- there`s a sizable percentage of their vehicles, about 25 percent, that they`ve been unable to sell, that are sitting in the back of showrooms. We have not seen the end of this.

Ken Feinberg is now in charge of a compensation fund for people who own a Volkswagen, who want compensation because they believe they`ve been defrauded in some fashion, this will play out in the months to come.

MATHISEN: Jeep had a great year. You`ve been talking about it all year, those crossovers, the SUVs, the pickups.

Is this at least in part a function of cheap gas?

LEBEAU: Yes, absolutely.

When gas is cheap, people are not worried about fuel economy nearly as much and as a result, we are close to seeing record sales when it comes to pickup trucks, SUVs and crossovers. People naturally want a bigger vehicle. We have always been that way in America. And while we all shifted towards -- not all of us -- but a lot of people shifted towards smaller cars when prices were higher, now the pendulum has moved the other way.

And that`s why people are moving towards those bigger vehicles.

MATHISEN: How close are we to seeing self-driving cars?

LEBEAU: Very close. The technology is real close. It will be there before regulators. Think about this, Tyler. Back in January, we went in an Audi self-driving test car in California and we said, wow, this is really cool. Maybe some day we`ll see it.By the end of the year, we were using that technology, similar technology in the Tesla Model S, the autopilot version, in New York City.

So, the technology is there. Now it`s a question of whether or not regulators want you and I and everyone else to have it every day.

MATHISEN: All right, Phil. Greetings of the season to you. Thanks again.

Phil LeBeau in Chicago.

LEBEAU: You too.

MATHISEN: Coming up, a controversial year in politics, geopolitics and others. Few have seen a year like this one before.

(MUSIC)

MATHISEN: From Cuba to Greece to Paris to Putin, geopolitics a constant undercurrent of the market this year and will likely to continue to be one in the year ahead.

David Malpass is president of his own research firm Encima Global where he focuses on geopolitics and economics.

David, it is always great to have you.

Let`s skip around the world a little bit. Let`s start with Europe. Europe survived.

DAVID MALPASS, ENCIMA GLOBAL PRESIDENT: Hi, Tyler. Well, it did but it was a tough year. Remember, Greece all through the summer was hanging firewood, was at risk of either leaving the euro or going bankrupt. And then they had to replace or -- you know, the prime minister resigned and then came back.

None of that is really resolved. And meanwhile, the refugee flow is just giant into Europe. They`ve done I think pretty well in tough circumstances.

MATHISEN: That is going to put that refugee flow is unceasing and is going to put serious pressure on the budgets of some of those countries, correct?

MALPASS: That`s right. So the fiscal deficit targets will being blown apart really. And that puts more and more emphasis on bank regulation. If you`ve got the government`s more indebted who is going to buy it and it ends up being the banks of Europe that are buying it, and that puts strain on the regulators.

I think right now, they`re holding together I think but you saw in Italy over this last week, a lot of strain on some of the subordinated debt.

MATHISEN: You know, the Middle East and I`m talking about sort of from North Africa across the Middle East, all the way to Afghanistan and Pakistan, that feels like it is more a mess than ever. And now with low, low, low oil prices, there must be strains on the budgets of a lot of those countries there.

MALPASS: That`s right. Russia, of course, has strain. Saudi Arabia has strain. And Saudi Arabia has a currency peg. So, one of the things to watch in 2016 is how much pressure builds up there.

On the good news front, they discovered a huge amount of natural gas and hydrocarbons off of Egypt, off of Israel, and I think developing those will cause a lot of prosperity in the region if they can only harness it.

But the surprise in 2015 was Russia coming in big-time into Syria. The U.S. had left a vacuum and so Russia is filling that, which I think we wouldn`t have expected at the beginning of the year.

MATHISEN: Quick thought on China. How did it come through, weather 2015? What do you expect next year?

MALPASS: I think they did well enough. You know, they had this big goal of keeping the currency stable and getting into the SDR and they managed to accomplish those. They have course had huge stock market bubble that formed in February, March, April. And then it popped. So that was dramatic during the summer. But they seem to have survived and growth continues, some of the fastest growth in the world.

So, I think China is well enough positioned for the environment that we`re in, which is one of deflation. You know, prices falling on lots of things but China seems to be competitive.

MATHISEN: David, we covered a lot of territory. Thank you as always. David Malpass with Encima Global.

MALPASS: Thanks, Tyler.

MATHISEN: You`re welcome.

From geopolitics to domestic politics, the presidential campaign was a huge story in the second half of this year. And it promises to be the biggest of 2016.

John Harwood joins to us help us look back at some of the big political stories of the past year.

Is what we`re seeing on the campaign trail signaling a lasting change in our system, John? It seems so polarized more so maybe than ever.

JOHN HARWOOD, NIGHTLY BUSINESS REPORT CORRESPONDENT: It`s extremely polarized, but Donald Trump is really a phenomenon we haven`t seen before, totally unconventional candidate, way outside the norms of in terms of his behavior, his rhetoric what we`ve seen from other candidates.

So I think the question of lasting change depends on how lasting Donald Trump is. A lot of people, myself included, did not expect him to be the force that he ends the year as. But we`ll see when we get close, February 1st is the Iowa caucuses, February 9th is the New Hampshire primary. When the real votes start getting cast is Donald Trump still going to be in the thick of it? That will give us a lot of the answers.

MATHISEN: It`s really you`re really hitting on that, John, because I remember back in June, shortly after Mr. Trump announced he was giving a talk somewhere and I tossed off the idea that I didn`t think he was really a serious candidate. He is serious and he can smell it now.

HARWOOD: He has got a core of supporters, people who are very frustrated with the political system in the country. They`re frustrated with cultural change in the country with the diminishment of their economic prospects, and they hear Donald Trump talking with strength and energy about what he`s going to do for them.

Now, that doesn`t mean he`s going to be able to do the things that he says. It doesn`t mean that his policy proposals to the extent that he has them make any sense or can actually be applied. But it is a visceral emotional appeal that he has shown on the campaign trail. And it`s unmatched by anyone else in this race.

MATHISEN: It is going to be a fascinating year. I`m not going to ask you to predict who you think the Republican nominee will be, because who knows? And as you pointed out a moment ago, the first votes haven`t even been cast, John.

HARWOOD: That`s right. Things will move quickly. Once we get into February because you have those first two contests that I mentioned, then you get to March 1st and you`ve got Super Tuesday which is a whole raft of states. And again, we`ll find out what`s real and what`s fake when we get to that point.

And we do have conventional candidates in the field. Senators, governors who simply haven`t been able to match Donald Trump`s traction. We`ll find out in the early part of the year whether he can have staying power.

MATHISEN: John Harwood, always great to be with you. John Harwood reporting tonight from Washington.

Well, everybody, thank you so much for watching this special holiday edition of NIGHTLY BUSINESS REPORT. Hope you had a good holiday. I`m Tyler Mathisen. Merry Christmas, everyone. We`ll see you on Monday.

END

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