Poor Jobs Report Feeds Recession Fears & Another Company Leaves CA for TX

0:00Tuesday on NBC, Jimmy Fallon and Bozma St John host the highly anticipated new competition show. I hired 10 creatives from all walks of life. They will be battling it out to see who can impress the world's biggest brands. This is a huge opportunity. This is the battle for the next big idea. This is not play play. We're spending millions of dollars. I'm so excited to embark on this adventure with all of you. Make the best idea win! On Brand with Jimmy Fallon. Series premiere Tuesday on NBC. Good morning Brew Daily Show. I'm Neil Freiman. And I'm Kyle Haggy. Today, markets are cratering after a spooky jobs report.

0:39Do not, I repeat, do not open your brokerage account today. And we'll talk about how retailer strategy of locking up your toothpaste has backfired spectacularly. It's Monday, August 5th. Let's ride.

0:55The man, the myth, the legend, Kyle Haggy is here today to fill in for Toby, who's living his best northern Michigan life for just one more day. Kyle, the people want to learn more about you. So I've got what I've heard. I've got an icebreaker. Okay. Hit me with it. Which Olympic team do you think you'd have the best chance of making the cut for? Olympic basketball men's easy answer. I played growing up. Okay. I'm not LeBron James, but I think I could be a great personality hire for the team. I think so too. You'd be an amazing. I would ride the bench golf claps going great locker room presence.

1:29You know, real gym rat. That's a great answer. It would be so fun for me. I think it'd be skeleton in the Winter Olympics. What is skeleton? I mean, you just get on a sled headfirst and just go down the track. It's just as long as you can get in the sled, you're good to go. Yeah, I've heard of people who did not grow up skeleton-ing, making the skeleton team. So just being a, you know, this is a perfectly rational choice that I just made, but I think I could possibly make the skeleton team. There's a low barrier to entry in that sport. Exactly. And now we have a bunch of pro-skeleton people listening, being like, no, it's a very, very skilled event.

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2:35Okay, what else? Eventually, I would need it to make money. Love that for you. You can easily monetize your newsletter with Beehive, whether through their robust ad network or by charging a subscription to your readers. I pretty much have no excuse to not start this thing up right now. Look, I'd be your first subscriber, but before I sign up, I need to make sure you're qualified for pizza reviews. So what is the best slice of pizza in New York? Neil, it's Prince Street Pizza, no doubt. Approved. that pepperoni slices so good okay what kyle is about to do and you should too is head to beehive.com slash brew to get a 30-day free trial then you can use code brew for 20 off three months i'm christian mccaffrey pro running back and abercrombie is an official fashion partner of the nfl i'm not kidding when i say nfl by abercrombie broke the internet last year and i think this season's lineup is even cooler and so does my wife who keeps stealing all my hoodies.

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3:42Well, the jobs report for July came in on Friday and as Scooby-Doo would say, rut row. The employment numbers came in way lower than expected with the U.S. economy adding 114 ,000 jobs compared to the 175K predicted. The unemployment rate also ticked up again to 4.3%, up from 3.7 % at the beginning of the year. If this downer of a report happened in isolation, then fine, maybe you could write it off as an outlier. But it comes after weeks of multiple data points setting off alarm bells, so it's pretty safe to conclude that there are clear cracks forming in the U.S. economy. And this is all putting the actions or inactions of the Federal Reserve under a harsh spotlight.

4:26At its most recent meeting last week, Chair Jerome Powell declined to cut interest rates from a 23-year high, instead putting it off until September. But critics, and there are many of them, say that the Fed should have paid attention to the warning signs and cut interest rates in July. Now it's behind the ball. And in very much related news, stocks are in full meltdown mode this morning. The Nikkei 225 in Japan plunged 12.4 % for its worst day since Black Monday of 1987. European stocks are down bad, but not as bad as that. And Wall Street futures are also tumbling. The S &P 500 is down 2.7%, and the NASDAQ is down 4.5 % as of 6 a.m.

5:07Eastern. It is gnarly out there. Yeah, Neil, you just terrified everyone in the morning. I'm about to hop off this podcast to go check my stocks. Yeah, things are in meltdown mode. And there's something called the SAM rule. You've probably heard of this in your research, which basically states the economy is in a recession when the three-month average of the jobless level is half a percentage point higher than the 12-month low, which every time there's going to be a recession or people think there's a recession, they roll out this new rule that's like in the history of the world, this has never not predicted a recession until it doesn't, and then we just find a new rule.

5:42So I'm not sure about the SAM rule, but it's interesting nonetheless. Also, the volatility index, the VIX, which is known as Wall Street's fear gauge, basically is up to high levels. I checked this morning. It was at 41.3 in pre-market trading. So there's a lot of volatility in the market. And Goldman Sachs has moved the prediction up of a recession from 15 to 25 percent. So it seems like there's some trouble signs in the economy. economy, although most kind of sober-minded people say, like, we're not there yet, and there's still a chance to complete the quote-unquote soft landing. We're not there yet.

6:17And to be clear, like, the economy is not in a recession now. I mean, we added jobs, 114 ,000 jobs added. The unemployment rate is 4.3%. That's still quite low. But there are a lot of warning signs. There's a lot of economic data points that point to a lot of cracks forming, and the jobs report was just the latest in those. And so people who had fell on the edge over the past few weeks, the jobs report happened and they were like, oh, God, like we are perhaps going down this path. The Fed is too late to cut interest rates. Even before the Fed meeting last week, a bunch of former Fed governors and economists were saying the Fed needs to cut now because we're seeing all of these warning signs.

6:55The alarm bells are going off that the economy is going down a hill a little bit after being so resilient in the face of 23 year high interest rates. And everyone was so surprised that the economy had stood up as well as long to those interest rate hikes. And now it finally seems to be crumbling just a bit. And now the prediction is that the Fed is going to certainly cut interest rates at its next meeting in September. But the question now is by how much? The standard interest rate cut would be by 25 basis points, that a quarter percentage point. That's what the Fed typically does. But now bets are ramping up, especially this morning after the market meltdown, that the Fed will cut by 50 basis points, an extra large one, a supersized one, if you will, to sort of get ahead of this potential recession that we're seeing.

7:43And I think right now it's really easy to pile on to the Fed and say, why didn't you cut interest rates? But I do think that they've done actually a pretty decent job. I think for the last three years we've heard a recession is right around the corner. And we have kind of pulled off this soft landing where there normally is this dynamic between inflation rates and unemployment. We've kind of muddled through all right compared to other nations. And I think now we're kind of hitting this divergence point where we're going to have to cut interest rates and hopefully save off this recession. But I got I got hope in my man, Jay Powell.

8:15Yeah. I mean, if you look at CNBC and they're running the markets meltdown header, I don't know how much hope you would have. But it really is all about the job market. That is what props up the U.S. economy because 70 percent of the U.S. economy, U.S. GDP, is driven by consumer spending. And consumers will spend when they have jobs and they feel good about their jobs and they feel good quitting their job and moving to a better paying job. So everything crumbles when the job market goes down. And so that's why the job report specifically on Friday was so spooky. and economists have a saying that unemployment goes up like a rocket and comes down like a feather.

8:53There is this virtuous cycle where unemployment can rise very fast, very quickly, and it takes a long time to come down. So that's why you're seeing people a little afraid at that rising unemployment number, because it could go much higher pretty quickly unless the Fed steps in. Some people are calling for an even emergency rate cut, which the Fed does not do unless it's like the COVID pandemic. So we'll see what happens. But yeah, definitely don't look at your portfolio today. It is really bad out there. The Nasdaq is in a correction. It's 10 % off its recent highs. There are a few earnings reports coming down the pike.

9:27But yes, we are officially on recession watch, I would say. Yeah, don't look at your stocks and JPOW don't read the headlines. Stay strong. These days, trying to buy moisturizer from a convenience store feels almost as complex as pulling off that prisoner exchange last week. Rather than being accessible on an open air shelf, standard grooming products are increasingly locked behind a barrier to prevent theft, requiring you, a non-thief, to call an employee to free it from its plastic prison. It can take minutes just to get toothpaste. And who's been benefiting from toothpaste locked in cages? Amazon, of course.

10:00In the company's earnings call last week, CEO Andy Jassy said the anti-theft measures are driving a lot of customers to its website. It's another sign that the plastic shield strategy at retailers is completely backfiring. Customers hate it. Workers are frustrated with having to constantly unlock cases and companies are losing out on sales to e-commerce sites. It wasn't always this way. Before the pandemic, most products at CVS or Walgreens were sitting there all fresco. After all, the easier they are to grab, the more customers will buy. But in 2021, retailers started warning of a massive uptick in theft, especially from organized criminal crime rings looking to resell their stolen wares and began putting products under lock and key.

10:42Kyle, I don't think anyone is happy with the status quo, and there are plenty of signs that this plastic barrier initiative is backfiring in a big way for stores. I got to say, free the goldfish. I just want to go in and I want to be able to buy my goldfish without pressing that little red button in Walgreens. What is so interesting about this story is the data is actually not very clear. It's hard to track theft actually at the store level. And so average shrink, which is basically how much product is lost across the entire supply chain, has stayed relatively stable at 1.5%. So sometimes the data actually isn't even backing up that there is this uptick in theft.

11:22However, it feels like there has been because of this like great shoplifting freakout where we saw videos on social media all the time of these, you know, organized crime ring stealing stuff, but it is backfiring tremendously. And Neil Saunders, who's the director of this retail practice at the firm Global Data, has said this is such a blunt instrument. Basically, like, we have thieves. We're not sure what to do with it. We don't have clear data. Let's just lock everything up and hope for the best. And it's turning out that, yeah, that does reduce theft, but it also drives down sales. It's like, you know, we got rid of the tumor, but unfortunately the patient died.

11:53Like, it is hurting stores. And there's really no positive side to this. Consumers hate it. It said more than 60 % of survey participants said locked merchandise was either inconvenient or very inconvenient. And then the employee side of things, which I think is like an under discussed element in this story. It takes about 500 hours of annual labor to go and go to the button when someone presses it, unlock the toothpaste, give it to them. And that's basically what retail employers are doing. Our employees are doing all day now. And then it's a vicious cycle. No one wants to work. Those jobs are very hard.

12:26They've only gotten harder. You have more turnover and stores get worse. So it's not really a win for any retailer. It might only be a win for Amazon. Right. But there must be some reason they're doing it. Maybe you think that corporations are these very complex and sophisticated organizations, but they can't. Like you said, it leads to a loss in sales. And that's absolutely true. Studies show that secured cases causes sales in physical stores to drop 15 percent to 25 percent. Meanwhile, all of those sales are going to Amazon. The online sales of personal health and beauty products accounted for 11 % of e-commerce in 2019.

13:03Now they account for 18.5%. And so that's not a direct link to what's going on in the CVSs and Walgreens. But you can sort of connect the dots a little bit. And now retailers are looking for different ways to prevent theft and also have people buy more things. So you're going to probably start seeing these new smart locked cages things going on at your local convenience store. And some are piloting this already where basically you go up to the container and it's locked behind whatever you want to get. And instead of asking an employee to come, they will ask for your phone number. They'll send you a text message.

13:41I know we're all in like a two-factor authentication world. They'll send you a code, a four-digit code that you can unlock yourself. Yeah, I just feel like that is still adding so much friction that if I'm going to have to get it on my phone, I'm just going to go on Amazon.com anyway. I know Jeff Bezos is walking through Walgreens just like laughing, smiling, seeing the state of retail right now. So they're going to have to find a way to make it easy to shop. The other downside is when you go to a retail store, you end up buying things you weren't going to have to buy. And now that's kind of gone away.

14:11Like you're in there, you're getting acne cream, you push the button, you're a little embarrassed, then you want to run away. And so retail is in a tough spot. It'll be interesting to see what new technologies come online here. Next story. It turns out it's not just the recent USC grads who loved wearing cowboy hats their senior year who are moving from California to Texas. It is Fortune 500 companies as well. Tesla, Charles Schwab and Oracle are a few of the name brand companies to leave California in recent years. And last week, another big name was added to that list, and that is Chevron. The multinational energy company specializing in oil and gas will be moving its headquarters from San Ramon, California, to Houston, Texas.

14:50What's up, H-Town? The reason for this move was to, quote, enable better collaboration and engagement with executives, employees, and business partners. And other companies that I mentioned had different reasons for leaving. Tesla actually said it was because employees were struggling to find affordable housing. Charles Schwab said the cost of doing business in California was just much higher than other places. And Oracle said that the move would provide employees with, quote, more flexibility about where and how they work. Now, to put some numbers behind this, the global real estate company CBRE, which itself moved from L.A.

15:22to Dallas, so pretty meta, said eight Fortune 500 companies have pulled their headquarters out of California from 2018 to 2023. However, it is important to note California still has an impressive roster of corporate residents. Apple, Alphabet, Meta, and NVIDIA still call the Golden State home. And in total, it has 55 Fortune 500 companies, although Texas is right behind it with about 50 plus as well. Neil, does California have something to worry about here? I'm not taking what Chevron said, why they're moving at face value with whatever corporate speak that you just said. I mean, there's a very clear reason and trend line going on here, which is that they have fought for years with California's government, which is one of the most strict in the country, perhaps the most strict when it comes to environmental regulations.

16:09So, first of all, I was very surprised to find out that Chevron was based in California in the first place because big oil and California politics do not mix at all. And apparently there had been a lot of fights, especially about a new law that got that was passed down the pike that capped profits for refiners because California has the highest gas prices in the country. And this was one way that the government, you know, very liberal democratic government tried to attack corporations to to prevent price gouging and bring down prices for consumers. But also, I mean, this did not surprise me at all.

16:43Houston is the global oil capital of the world. More than a third of all publicly traded U.S. and oil gas firms are located in Houston. Chevron had 7000 employees in Houston compared to 2000 in California. So this seemed like a matter of time. And moreover, I was just more surprised that Chevron ever existed in California. But it has been a 140 year history in the state. I mean, they started a specific coast oil company in 1879. And so that got me thinking about California's very rich oil history. I mean, do you, have you seen the movie? There will be blood. Yes. You're probably like, Oh, that's based in Texas, right?

17:19No, it's actually based in Southern California. So this is maybe the, be the final denouement of the oil, uh, the oil industry's last gasp in, in, uh, California before it goes, Texas. What I think is interesting here is almost like viewing California as a product. And we're seeing a lot of companies move out, but California is a premium product. It's got the best weather. It's got great nature. It's got super smart people. And so I think they can get away with putting a little more pressure on businesses. And if one leaves, it also has all of the startups that will probably be the next Fortune 500 companies right there in the Bay Area.

17:52So I think it just has a lot going for it that can put more pressure on businesses. Yeah, but there has been a clear trend line away from California and toward Texas, and that eventually will show up in California's tax revenues. And I'm sure they don't like losing jobs at all, however many. All right, up next, why are people buying smaller cars?

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19:46We've all heard about short king summer, but I'm actually going to coin a new term on today's podcast, Neil. That is small car summer. That's right. Small car summer is here and it's taking over every compact car parking spot in your town. And I actually, I have some data to back up this new term. So sales of sub-size SUVs in the U.S. were up about 20 % in the first half this year, far outpacing overall vehicle sales growth of 2%, according to data from Cox Automotive. Moreover, compact car sales increased 18%, compact SUV sales rose 12%, while full-size pickup truck sales slumped 4 % in the same time period.

20:24And pricing obviously is important to consumers as well. There's been a 19.6 % price increase of automobiles from Jan 2021 to 2024. Most of these compact cars are actually around 30K. Some even get down to 25K. So there's definitely an affordability thing here. Some of the small cars that are crushing it this summer, Sentra has a 55 % jump in sales. Civic is up 38 % through June. And Corolla is up 25 % in 2024. Now, to be fair, the top three best-selling cars in the U.S., they're not participating in small car summer. They're the Ford F-Series, the Chevy Silverado, and the Ram pickup. Neil, I have a very important question for you.

21:02What's that? Are you all in on small car summer? I think it is a great trend because I think that larger cars are worse for the environment, dangerous, way more dangerous when you get hit. So I think there has been an imbalance recently that Americans have shifted to larger cars. And a big reason of that, why that's happening, is because they have bigger profits for automakers. So automakers are like, hey, you want bigger cars? Like, we are more than happy to sell you a large pickup for$60 ,000 where we make our biggest profits. And those are the profit centers for many of these companies. So I think by all indications, public health, safety, it is good.

21:45It is a positive development for people to drive smaller cars. And I know a lot of people need big cars for whatever reasons. Obviously, that is totally cool. But there has been a huge run-up in size over the past decades. And it's kind of remarkable. I mean, the average weight of a new vehicle sold in 1980 was 1 ,000 pounds. Last year, it was 4 ,300 pounds. So this is a trend that critics have called auto obesity, where cars are getting bigger. They're taking up all of the parking spots. And there is a big reaction to that. And that's largely because of inflation and affordability. People are looking for cars under that 30K mark.

22:25And they're sort of going back. The balance is being shifted back towards smaller cars specifically. Not because maybe people want to drive smaller cars, but because they're cheaper. Yeah, the auto obesity I've actually never heard. I love that term. And it's so true. Like cars now are basically tanks. I test drove a Rivian like a couple of months ago. It's a massive car. I get why people like it. But it seems like if we had auto obesity, we now have like Ozempic for cars. And we're coming a little bit back to reality with these compact vehicles. Your point about profit margins is very interesting, though.

22:55Like the companies actually want to sell you a larger car. So eventually I think the market will push people towards that direction. But maybe coming back to reality a little bit is good for America and all of our roads and infrastructure. Yeah, I mean, I think the U.S. automakers do realize that they have to start selling smaller cars, though, to compete with the smaller, the cheaper EVs that China perhaps is coming to the U.S. market. I mean, a couple months ago, Ford CEO Jim Farley said we have to start to get back in love with smaller vehicles, said we are just in love with these monster vehicles and I love them, too.

23:28But it's just a major issue with weight and weight is crazy. The battery pack on a Ford Super Duty model weighs more just the battery pack than a Honda Civic. Yeah, it's things are like you said, they are tanks and people seem to be having a little bit of a reaction to that and getting smaller cars. We should also say smaller cars doesn't necessarily mean compact cars means those crossover SUVs that you see everywhere. I'm team e-bike. Just grab an e-bike. All right. Let's head to our winners of the weekend. the segment where Kyle and I pick two athletes at the Olympics who brought great honor to team USA.