Financial 411: Retailers Report Earnings and the Bond King Weighs In on Mortgage Industry

It's WNYC's Financial 411, our take on the economic news of the day. It was a happier day on Wall Street, with investors encouraged by fresh government data and corporate earnings reports from the nation's largest retailers. The government says manufacturing rose in July, with most of the gains in car and truck production.

Investors also seized on a Commerce Department report that found construction of new homes and apartments rose nearly 2 percent in July. Wholesale prices also rose slightly last month, marking the first increase since March. While rising prices might normally be considered bad news, economists say in this economy, it's a good sign. At the end of trading today, the Dow was up over 100 points, closing at 10,406. The Nasdaq and the S&P 500 each added more than one percent.

Retailers Release Earnings Reports

Walmart, the nation's largest retailer, saw profits rise 3.6 percent last quarter, thanks to strong sales overseas and cost-cutting at home. But sales actually fell at U.S. stores open for more than a year, adding to worries that some lower-income shoppers are still cautious about spending. Home Depot reported rising profits, as customers spent less, but shopped more often. And New York-based Saks narrowed its losses, after selling more items at full price. The luxury retailer lost $32 million for the quarter, compared to a loss of $54 million a year ago.

Wendy Liebmann, CEO, and, as she puts it, chief shopper, at WSL Strategic Retail, offers her take on the state of retail.

With all these retailers reporting profits, what trends are you seeing in consumer spending?

The trend is pretty consistent. It's a lot about people sitting on their hands and only buying what they absolutely have to have, unless it's an apple.

Saks still posted some losses, not as bad. But that's because they made their profits up by not offering any sales. Sales are what's bringing people in the door, right?

It is, but what Saks has done -- and some of the other department store retailers have done -- is instead of doing the big sales all the time, they've created different price points within the store. So you don't necessarily have to have a sale to get a better value or lower price. They've done what we call "good, better, best" pricing. So you can trade down to something more affordable, if you want, without having to have a big sale to do it. And that's helped a lot. In addition, they've really improved the exclusivity of some of the really high-end items in the store, so when the affluent come out shopping, they can feel like they're getting something special for their money.

So what's that going to mean for back-to-school shopping, for retailers?

It's very tough, I mean shoppers are saying I can only spend what I have, I'm not going to write all this up on my credit card again, so I'm getting the kids what they need to get back to school. Then I'll look at it again when they're in school and see what they need. And they're being very moderate about their purchasing. And any deal, any price, any discount, will certainly help out a lot.

So what should shoppers expect when they go to buy clothes and school supplies -- not a lot of sales, a lot of sales, what strategies?

A lot of great pricing, especially in the big-box retailers, whether it's the stationary supplier, or the Walmarts, Targets of this world. Apparel retailers --  there's a lot of discounting going on, and if you're a smart shopper, there's some really good values out there.

The Government's Role in the Mortgage Market

What role should the U.S. government have in the home mortgage market? What should be done with Fannie Mae and Freddie Mac? Those were the key questions at a forum in Washington today, hosted by Treasury Secretary Timothy Geithner. The government bailed out Fannie and Freddie in the fall of 2008 and placed them in a conservatorship. Since then, taxpayers have provided nearly $150 billion to the two mortgage giants, which are now responsible for two out of every three mortgages.

At the forum today, Geithner stressed that the Obama administration wants to make a decisive break with the past. "We will not support returning Fannie and Freddie to the role they played before conservatorship, where they fought to take market share from private competitors while enjoying the privilege of government support," he said.

Geithner didn't give many specifics about how to do that. One invited participant, Bill Gross, from the asset management firm Pimco, had some ideas. He suggested merging Fannie, Freddie and other quasi-private entities into a single public agency with explicit government backing. He advocated for one agency -- a government national mortgage association. "We are skeptical of other public/private models currently being considered," he said, "because they're more expensive, primarily, resulting in higher mortgage rates and therefore favoring Wall Street as opposed to Main Street."

Gross also said in the new post-mortgage-bust reality, Americans "should be well-housed, but not necessarily 100 percent homeowners." That is, maybe more of us should rent our homes.