Morning Brew Daily - US Economy Shrinks 0.3% & Starbucks’ Turnaround Plan Gets Bumpy

Episode Date: May 1, 2025

Episode 573: Neal and Toby discuss the latest GDP report and how Trump’s tariffs may have dampened the growth of the US economy. Then, Meta and Microsoft bring good news for their Q1 earnings as their AI and cloud businesses remain strong. Plus. Starbucks CEO Brian Niccol was hoping his turnaround plan would start out hot…but instead, it left investors feeling a chill down their spine with disappointing Q1 earnings. Meanwhile, Neal shares his favorite numbers from The Vatican, ‘Monty Python and the Holy Grail’, and the ‘Minecraft Movie’.  Subscribe to Morning Brew Daily for more of the news you need to start your day. Share the show with a friend, and leave us a review on your favorite podcast app. Visit https://planetoat.com/ to learn more! Listen to Morning Brew Daily Here: https://link.chtbl.com/MBD Watch Morning Brew Daily Here: https://www.youtube.com/@MorningBrewDailyShow All investing involves the risk of loss, including loss of principal. Brokerage services for US-listed, registered securities, options and bonds in a self-directed account are offered by Public Investing, Inc., member FINRA & SIPC. Public Investing offers a High-Yield Cash Account where funds from this account are automatically deposited into partner banks where they earn interest and are eligible for FDIC insurance; Public Investing is not a bank. Cryptocurrency trading services are offered by Bakkt Crypto Solutions (NMLS ID 1890144), which is licensed to engage in virtual currency business activity by the NYSDFS. Cryptocurrency is highly speculative and involves a high degree of risk. Cryptocurrency holdings are not protected by the FDIC or SIPC. APY as of 3/18/25,  subject to change. *Terms and Conditions apply. 00:00 - Happy May! 02:45 - US Economy Shrinks 07:50 - Meta and Microsoft Earnings  11:30 - Starbucks Earnings Stink 18:00 - Neal’s Numbers 24:45 - Headlines Learn more about your ad choices. Visit megaphone.fm/adchoices

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pwc.com slash US slash brew AI. That's pwc.com slash us slash brewAI. Good morning Brew Daily show. I'm Neil Fryman. And I'm Toby Howell. Today the Starbucks rebuild isn't going as planned. Should they trade for Janus? Then honey, I shrunk the economy.

US GDP contracted in the first quarter of the year. It's Thursday, May 1st. Let's ride. Good morning on the first day of May. And honestly, pound for pound, it might be the best month. month of the year. The Kentucky Derby is coming up on Saturday. Mother's Day is a couple Sundays from now. The NBA and NHL playoffs get really good. Then later in the month, Universal Epic Universe will become the first major park to open in Orlando in 26 years. The French

Open and PGA Championship take place for tennis and golf lovers. And three weeks from tomorrow, Memorial Day weekend kicks off. And the weather, Chef's Kiss. I think you forgot the best part, though, Neil. You can say the Justin Timberlake line. It's gonna be May. That's my favorite part. And that word from our sponsor, Planet Oat. Neil, I was in the morning brew kitchen yesterday, and I have to tell you,

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You win? Details at Yamava.com must be 21-20. Please gamble responsibly. Monopoly is a trademark of Hasbro. Hasbro is not a sponsor of this promotion. The U.S. economy is looking a lot like my brand-new jeans that I actually washed in hot water. it suffered some serious shrinkage in Q1 of this year. According to Commerce Department data, US GDP, the value of all goods and services produced

across the economy, fell at a 0.3% annualized rate in the first three months of the year. That was the steepest decline since Q1 of 2022 and missed economists' expectations of a 0.4% increase. The biggest driver of the shrinkage was net exports, aka the difference between how much we import versus how much we export. imports skyrocketed in the first quarter, increasing 41% as businesses battened down their hatches and built up enough inventory to try and weather the trade war, which hurt the overall number because imports are subtracted from the calculation of GDP since they are sourced from foreign countries, aka not domestic. As for consumer spending, the engine that drives 70%

of the economy, it's a little complicated. First quarter consumer spending was up just 1.8% its smallest growth in the last two years. But a separate report from the Commerce Department also released yesterday so that consumer spending grew at a brisk pace in March specifically, mainly because people were rushing to make big ticket purchases like cars before the tariffs kicked in. So, Neil, it all adds up to an economic contraction. This is a Helmsdeep economy, which was the pivotal battle in the Lord of the Rings,

the two towers. Businesses were rushing in reinforcements and supplies like their apocalypse survival kits and hunkering down for the upcoming siege. And we're all just waiting on Gandalf to save us. Overall, it was just a front-loading frenzy, as you mentioned. US imports surged by more than 40% in the first quarter. And that subtracted nearly five percentage points from GDP, which was the most on record. Overall, economists were having an absolute field day with this report because they were

all educating us on how GDP is calculated. And the bottom line is that it was extremely distorted by how many. imports, businesses were taking in, and that clouds the overall economic picture. So it's really hard to get a sense of how good the economy was doing because of the threat of tariffs that are coming in April, change so much about the economy, creating a ton of chaos and leading to a very cloudy picture on how things are actually doing outside of the trade war. Yeah, you see these numbers about spending pulled forward and you think to yourself, wait, consumer

spending is good. It props up the economy, right? But economists were saying that you're basically borrowing demand from the future when you do that. So even though you might have had a gangbusters march, that might mean May, the best month of the year, June, July is not as gangbusters as May was. And so you are seeing a lot of signs of a little bit of just spookiness across the market because S&P 500, NASDAQ had their worst quarter since 2022. You look across the business world as well. companies are basically giving up on trying to forecast what's ahead. GM pulled its 2025 profit guidance on Tuesday, citing the auto tariffs. A lot of the auto industry has followed.

Delta has pulled its guidance, as we've spoken about, as did a lot of the airline industry. And yeah, consumers are spooked too. That accelerating of purchases is kind of trying to get ahead of those increased costs, which, you know, cause vehicle sales to jump in March. So spend, baby spend, but, you know, it comes with a price later down the road. Overall, though, I think if you look at parts of the GDP data, it shows that the underlying economy is doing okay. There's this one particular line item that strips away the import madness and inventories and government spending and all of those very volatile factors.

It's called final sales to private domestic purchasers, which is a measure of consumer and business spending. It gauges the underlying demand in the economy. That was perfectly fine in Q1. It came in at a 3% annual rate. So a lot of economists were pointing to this to say, besides all of this import craziness and the drop in government spending that we saw because of Doge, the 3% annual rate is pretty much what we saw in line over the past couple of quarters. So that's holding up pretty strong.

So overall, people are doing pretty okay given all of the chaos that's been going on. And we haven't said the I word yet, inflation. The Fed's favorite inflation tractor, which is the PCI index rose through. 3.6% in the last quarter compared to 2.4% the quarter before. Technically, it's actually not as bad as that sounds because in March it only jumped 2.3% compared to the same month last year. But now the Fed has this very difficult task ahead of them because they meet next week. Right now, you're seeing a little bit of cracks in the job market as well. The private payroll report from ADP came in a lot lower than expected that they added just 62,000 jobs last month. That's a

smallest gain since July, missed expectations by a wired margin. So now you have some cracks forming in the job market. You also have inflation remaining a little bit higher. So they're still in that rock and a hard place where Jerome Powell says we need to see some progress on that inflation front to make any moves with rate. So another tough decision lays ahead. The bottom line, though, is that this negative GDP number that we saw is extremely distorted and doesn't really tell the full picture.

Yes, the economy contracted, but because of how GDP is calculated, You know, it is a more confusing picture than that negative headline suggests. Moving on, on Tuesday, Meta CEO Mark Zuckerberg and Microsoft CEO Satya Nadella held a chummy fireside chat at Meta's AI Developer Conference. Less than 24 hours later, the two hopped on earnings calls to brag about how much their companies were crushing it. Because while GDP may have been negative, everything about these performances were positive. Meta topped revenue expectations for Q1 with $42 billion in sales and,

indicated that growth ahead would be just fine. Investors had been worried that because Meta relies so much on ad buys from Chinese companies like Sheehan and Tamu, tariffs would cause a slowdown in its moneymaker. Not so. Meanwhile, Meta continues to plow absurd amounts of money into AI, stiff-arming the critics who warned of a slowdown. The company jacked up its capital expenditures forecast, essentially what it will spend on AI infrastructure this year, to $72 billion because of more data center investments, that's more than the $67 billion it's spent on AI in the last two years combined. Microsoft, meanwhile, is also killing it beating top and bottom lines estimates thanks to a 33% revenue gain in its highly profitable Azure cloud unit, which sells computing power

to other companies and has been a major beneficiary of the AI boom. Investors were blah-bapa-ba-loving it. Meta shares rose more than 6% in after-hours trading, and Microsoft gained over 8%. Let's talk about meta first because you are right. Zuck is not holding back when it comes to these capital expenditures. If meta spent at the upper level of its new production, its capital outlays would be 84% above what it spent last year. So it's also going to be very close to what Google is spending this year.

And Google brings in a lot more money, a lot more revenue than META does. So it's probably the right call, though, because both Zuck and its META CFO, Susan Lee, got into the very nitty-gritty of how META is already using AI across their business. They're using LLMs to refine decisions about what content they show to users. They said that they incorporated it into threads, the micro-blogging app that competes with X, and they've already seen people spend more time on the app because of that. Also, the thing that people really want to hear is that it's improving the ads that it shows because 98% of META's revenue comes from its ads business.

And so if you can boost ad revenue, that is music to investors. year. So measured over the long term, which is what, you know, CEOs do and what Zuck is doing here, it's probably making the right call about boosting its AI spend in the near term. And what about these headwinds that Meta is facing? Well, I guess they're not so gusty at all. Those Chinese customers who have counted for 25% of all of Meta's growth over the past two years, Shanan Timo being the top among them, the Metas executives said they had seen some pullback from those advertisers because of the tariffs. But again, this quarter ended March 31st. So, and tariffs didn't kick in until April. So we aren't sure the total impact of that. But the bottom line is that

meta's ad business is super resilient. And it looks like these advertisers are shifting their spend to other countries instead of the United States. But meta is in like every single country otherwise. So it is still working out just fine. Meanwhile, it faces an, it's facing an antitrust trial right now that might hive off media Instagram and WhatsApp, two of its biggest moneymakers, and that is going through the courts right now. So we'll see what happens with that. But overall, I mean, a gangbusters quarter for meta. And then just one final note on Microsoft. Microsoft's kind of been laboring over the last 12 months. His stock is only up a 2%. Finally, though, investors were happy to see that. It's just core businesses. You know, the cloud division was growing and that their work division

that encompasses Microsoft 365 products had solid revenues. It was just kind of like a return to form for Microsoft for investors. And then we got more big tech news coming down in the pipeline because Apple, Amazon, are posting their earnings today. And then also that gives us a better look into, you know, the physical hardware portion of big tech. This was more, you know, not so much the physical products. Starbucks's turnaround is looking like a tall order. Not tall like the size of a Starbucks order.

That is small, but tall like actually tall. Whatever. You guys get it. The coffee chain stock dropped nearly. 6% yesterday after reported second quarter earnings that disappointed, leading to some question marks about hot shot CEO Brian Nichols' turnaround plan. Average ticket size actually rose 3% in the U.S., but total transactions fell 4% as tumbling foot traffic offset any gains that came from people loading up their drink trays.

In China, another important and struggling market. It was the opposite. More customers visited Starbucks's, but they spent less money, which led to sales as flat as a flat white, which honestly is a win for Starbucks given the previous four quarters of sales declines an intense competition it is facing over there. Also waiting on Starbucks is coffee bean prices, which hit a 50-year high in the quarter due to weather-related shortages. Despite all of that, execs are confident that their turnaround plan can work. Nickel is trying to speed up order times, hire a lot more baristas, and introduce more seating to cafes. Nicol's only been at the helm since

September deal, but investors may already be growing a little antsy. Pressure's on. I mean, this guy was brought in after turning around Chipotle, and before that, he turned around Taco Bell. So he is this turnaround artist who's been known as the messy of the restaurant industry. They paid a pretty penny for him. Stock Awards up to $113 million, which was four times larger than the guy who ran Starbucks before him. And even he said he was disappointed in this quarter's results because of the second time he's got up. in front of investors and said, you know, just give me time. I need some patience. And sure, turning around a massive chain like Starbucks probably takes a little more than six months. But the

results we're seeing show that it is still a very much a work in progress. He's trying to strike this very interesting balancing act because he wants people who go into Starbucks to get it, to get coffee to go to get their orders much faster. Meanwhile, at the same time, he wants people to go into Starbucks who want to sit and chill, be able to do that and linger longer. He wants to put new seating in and add ceramic cups and make that a more pleasurable experience. So there's kind of two different diverging strategies that you're trying to walk this tightrope on. And we were laughing because you found two headlines back to back yesterday, one from the Wall Street Journal that said Starbucks's new technology can cut in-store wait times by up to two minutes.

And then this other headline from The Guardian said, Starbucks says cutting shop staff in favor of automation has failed, which on the service seemed like two totally different things. And Nickel did say over the last couple of years, I think we had the hope that equipment could offset the removal of labor, which we were finding out that wasn't an accurate assumption when that played out. But then it is also piloting this new technology in its stores. Then it has shaved off minutes from the time it takes to make beverages.

A lot of that is actually this algorithmic thing that says which orders you make at which time. Instead of just doing first-come, first-served basis, its new algorithm anticipates how long a mobile order will take to pick up. And so it's just refining the edges of. of that and causing wait times to fall. And then the final aspect of Starbucks we have to talk about is how is it fairing tariffs? And Starbucks actually is relatively tariff-resistant because, one, only 15% of Starbucks's cost of goods comes from actually buying coffee itself, which seems low.

We were remarking earlier that that seems like a pretty low amount. So it doesn't have that much input cost. And those beans come in from mostly Latin American countries, which are seeing slightly lower tariffs than something like a company who sources primarily from Asia. So oddly enough, it is seemed rather tariff resistant, at least when it comes to importing goods that they need to make and sell their products. Up next, we got Neal's numbers. Not loving your AT&T or T Mobile Bill?

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Welcome to Neal's numbers, the segment where I share three stats from the week's news that will turn you into a human Wikipedia. For my first number, I got a little pop quiz for everyone. What country do you think has the most CFA chart holders and Bloomberg terminals per capita? In other words, what country is mad about finance? You might be thinking maybe Luxembourg or Switzerland or Singapore, but actually the country with the most Bloomberg terminals per capita is tiny Vatican City. According to Rob Lankrick of the CFA Institute, the Vatican has four CFA chart holders, or credentialed financial analysts, out of 882 total people, and those four all work at the same company, Instituto per Le Operate de Religione.

Meanwhile, the country has 17 Bloomberg terminals, which are those super expensive software systems that finance pros need like oxygen, costing about $24,000 per year. With 17 of those rigs, Vatican City has four times the Bloomberg terminals per capita than second place Luxembourg. Toby, everyone's learning a lot more about the Vatican after Pope Francis's death and the upcoming conclave to choose a new pope. And we're learning that they are serious financial bald-knowers.

I saw so many different means of like this is who you're trading against. It was just Cardinals hunched over a Bloomberg terminal. But also, it shouldn't really be a surprise that the Vatican has a very surprising. sophisticated asset management operation. Obviously, the church brings in a lot of money and has a sizable amount of money to manage. But also, banking and accounting as we know it, basically emerged from Renaissance era papal banking. The papacy needed sophisticated financial networks to manage the revenue. It was bringing in all the way back, you know, the 1400s, 1500s. They were rolling in dough. They had the ties. They had donations coming in from all over Europe.

They had land holdings. They had they collected rent. So to handle this, Vatican worked with merchant banking families. I feel like we're back in, you know, U.S. or history class in high school right now, like the Medici family who essentially served as the Pope's bankers. And so a lot of the financial, you know, institutions, innovations that we rely on today were born in that time, double bookkeeping entry systems. That was codified by a Franciscan friar back and 14 at 94. So you had the need. You had people actually writing stuff down for really the first time. And so of course they have a lot of Bloomberg terminals. There's a direct through line to those Bloomberg terminals.

Of course, would you have gotten that answer correctly? Well, any per capita, you know, questions usually lead back to all roads lead back to the smallest country. All right. My next number is 34 seconds, which is the new shortest song ever to enter the Billboard Hot 100 chart. Steve's Lava Chicken, as the goofy jingle is called, was sung by none other than Jack Black for the Minecraft movie and debuted at number 78 on the chart this week. It swiped the previous shortest song on the Hot 100 record from Kid Cuddy's Beautiful Trip, which clocked in at 37 seconds. Other really short songs that have also entered the charts are Deck the Halls by Nat King Cole,

one minute and six seconds, and Pete Davidson by Ariana Grande, one minute and 13 seconds. Steve's Lava Chicken was no doubt fueled by social media virality, having been used in more than 280,000 videos on TikTok, which led to nearly 22 million streams on Spotify, and it further cements Jack Black as kind of a movie soundtrack God because he's no one-hit wonder. His song Peaches for the Super Mario Brothers movie back in April 2023 peaked at 56 on the Billboard chart, as Dewey Finn would say, that's one way to stick it to the man. You know what pays me, though, is that Jack Black has all these great songs for movie lore.

Like, obviously Peaches was fine. Chicken lava is fine. But School of Rock is a masterpiece. Like, I wish some of those songs charted. So what's the lesson here? Sing songs about lava. No, it's actually just shorter songs are getting more and more popular. I mean, streaming economics, we've talked about this, how Spotify pays per stream, not per minute. So it doesn't necessarily matter exactly how long the songs are. Then you factor in just the TikTok economy and how artists are writing to try to go viral on TikTok. That compresses songs as well. You don't need to fill a CD anymore. Like there's no maximum amount of time an album needs to be.

So all of these factors have compressed songs. And, you know, this is obviously an extreme case, but now we got a song about chicken getting douse and lava charting on the Billboard 100. My final number is 50 years, which is how long it's been since the release of Monty Python and the Holy Grail. Fans of the influential, infinitely quotable comedic masterpiece

have been reminiscing about the movie's legacy for its 50th birthday this week. And one of the most surprising details about Holy Grail is who financed it. Rock legends Led Zeppelin, Pink Floyd, Elton John and Jethro Toll. Go back to 1973, and the pythons are shopping around this absurdist parody of King Arthur's quest for the Holy Grail, but no studios were interested, so instead they turned to their

musician friends for money, pitching it as a beneficial tax write-off. The rock stars were sold. According to a 2021 tweet by Eric Idol, a member of Monty Python, Led Zeppelin contributed more than 3,100 pounds, about $385,000 in today's money. Pink Floyd forked over $21,000. and Jethro told frontman Ian Anderson sent 6,300 pounds out of his own pocket. It wouldn't be the last time the Pythons phoned a musical friend for help financing a movie. When EMI films pulled its support for the life of Brian a few years later,

Idle called up his buddy George Harrison of the Beatles for a lifeline, and Harrison came through in the clutch. Toby, thank God. Eric Idle was just friends with literally the most famous rock stars in the planet. Because if not, we wouldn't be celebrating the 50th birthday at one of the world's most beloved movies. And also, I was just digging into Monty Python lore because there's so much of it. It is so influential. There are seven asteroids named after Monty Python or its members just floating around in this space. The term spam, as in unsolicited emails, is derived from their 1970 sketch spam.

The Python programming language, which underwrites, you know, a huge part of the internet is named after the comedy troupe. It is named after that. That's crazy. And then obviously just its influence on comedy in general, you can't overstate it. I mean, everything from SNL to South Park kind of derived its sketch formats from Monty Python. Tina Faye put it very well. She says sketch endings are overrated. Dirkie was to do something as long as it was funny.

And then just stop and do something else. And you can see so much of that influenced in modern comedy today. So just it was shocking to me going through really how much that they've influenced culture. and it all leads back to these rock stars, which is another great, you know, fun fact. Let's spread to the finish with some final headlines. The icy U.S.-Ukraine relationship had a major thawing out after the two countries signed a landmark deal

that would give America access to Ukraine's mineral wealth. The highlight of the agreement is the creation of an investment fund called the United States Ukraine Reconstruction Investment Fund, which will focus on rejuvenating Ukraine's economy that has been battered by Russia's invasion. The deal is being hailed as a win-win for both. sides. The U.S. boosts its business interests in Ukraine, which has 20 strategic raw materials, while Ukraine gets an implicit security guarantee from the U.S. for future military aid.

Treasury Secretary Scott Bassett said this agreement signals clearly to Russia that the Trump administration is committed to a peace process centered on a free, sovereign, and prosperous Ukraine over the long term. And what are these minerals that are at play here? We've talked about it a little bit before on the show, but Ukraine has an estimated of 5% of the world's critical. raw materials. They have a lot of graphite. They have 19 million proven tons, proven reserves of that key mineral, which is used in batteries for electric vehicles. They also have significant deposits of titanium lithium. Where it gets a little bit cloudy is when it comes to rare earth metals.

That's the 17 elements that are used to produce everything from weapons to electronics, to wind turbines. Those claims are a little bit disputed exactly how much of those rare earth metals they have, but clearly it's a priority for the U.S. we've talked about trying to wean off the supply chain that comes in from China, which is why this deal was kind of struck in the first place. But as they kind of go about developing those minerals, we'll see just how much Ukraine actually has. Speaking of gaining access to a rare resource,

Bill Belichick and his 24-year-old girlfriend, Jordan Hudson, have made too many headlines to ignore at this point. The six-time Super Bowl-winning head coach, now they had honcho at North Carolina's college program, has found himself wrapped up in a whirlwind of controversies tied to Hudson, who has quickly ingrained herself in Belichick's personal and business lives, and dubbed herself the chief operating officer of Belichick productions. First, there was the awkward segment with CBS Sunday morning,

where Hudson interrupted the interview to kill a question posed to Belichick about how they first met. In a statement, Belichick said that the interjection came because he and his team wanted to keep the interview focused solely on his upcoming book, but then CBS fired back with a statement of their own, stating that no such preconditions or limitations were established. Then the Athletic reported on Tuesday that Hudson was also instrumental in killing a UNC version of HBO's Hard Knocks docus series that was on the precipice of being announced, which caused the university to lose out on $200,000 in facility fees

and a lot more money in exposure. So, Neil, one story after another is emerging about how Hudson is exerting control over various parts of Belichick's life, leading to some questions about just how much influence the chief operating officer of Belichick productions should have. I mean, this is really weird. But UNC hired Belichick, who is considered the greatest coach of all time in the NFL, they paid him $10 million a year back in December. They build their program, which has been not so great overall, their football program.

They say they're going to run it like the 33rd team in the NFL, breaking to the top of the ACC. This is a huge and expensive hire, and they're getting a little more than they asked for with Belichick's girlfriend, who's 49 years, his junior, really weaseling her way into the operations of this massive athletic department. Belichick requested that some top administrators copy Hudson on an email. She's scuttled this deal for hard knocks. She's making all kinds of headlines with this book tour that he's going on. They're getting into fights with major networks like CBS. It's just all a lot, and you wonder how it is going at the top levels of UNC who hired

Belichick a few months ago. They didn't really anticipate this, and I'm sure it's not the last week here of this particular story. Okay, let's wrap it up there. Thanks so much for starting your morning with us and have a wonderful Thursday. For any questions, comments, or feedback on the show, send an email to morning brewdaily at morningbrew.com. Let's roll the credits.

Emily Milliron is our executive producer. Raymond Lou is our producer, our associate producers, our Olivia Graham, and a Olivia Lake. Scoop's Nardaris is on audio. Hair and makeup is out today with a flesh wound. Devin Emery is our president and our show is a production of Boring Brew. Great. So today, Neil. Let's run it back tomorrow.