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Jeremy Owens: Hello, and welcome to On Watch by MarketWatch. I’m Jeremy Owens. The next iPhone is expected to be a watershed moment that convinces consumers to adopt generative artificial intelligence. So did Apple live up to that hype in its introduction of the smartphone in its a features this week? Not quite, we’ll discuss. Then we’ll jump back into the job market, which is not a great place for workers right now. After more revisions of past numbers, we asked an economist if we can really trust what the government is telling us about the labor market right now. Plus, we’ll take a quick look at the news stories we are watching right now and how they’ll affect your wallet.
Apple showed the world the next iteration of the iPhone on Monday, and it looked a lot like the last iPhone, but with a new camera button, that’s not so surprising. New iPhones have largely received underwhelming iterative updates for years now, but the big new feature everybody was waiting for was Apple Intelligence. The company’s dive into generative AI, so will the features that Apple showed off for that effort lead to a so-called super cycle of iPhone purchases that will justify Apple’s $3 trillion valuation? To talk about that, I called up Alex Kantrowitz host of The Big Technology podcast.
Alex Kantrowitz: So I watched along as Apple introduced the iPhone 16 on Monday, and I have to say I was pretty underwhelmed. This has been billed as the sort of Apple intelligence phone where you’re going to need to buy this phone to be able to access all the great Apple Intelligence features. But the features that were talked about were either not there yet or just kind of lackluster. I don’t think it will make anybody really run out and say, “I need the latest phone to be able to search my photos in natural language. And in fact, if you’ve been using iPhones that you’ve probably been able to do most of what you’re aiming to do with natural language already. So to me it was a standard set of iPhones that look a lot like the last generation and a software feature that was supposed to make this a must have device that’s just not ready for primetime yet.
The most exciting stuff that they talk about is being able to use Siri to do different actions on your phone or do things that you just simply couldn’t use natural language to search your photos or complete payments, and Apple’s track record with Siri is just terrible.
Jeremy Owens: Yeah, I mean that thing’s been around since the iPhone 4, we’re on the iPhone 16, but the complaints about Siri definitely outnumber the compliments, I would say.
Alex Kantrowitz: Exactly. And okay, so you have a new technology, let’s admit that, but there have been waves of new technology throughout the life cycle of Siri that have allowed the competitors to make Siri look bad, I’m talking about Amazon Alexa or the Google Home or whatever it might be. And Apple has missed on each one of these, and I don’t think it’s because of lack of trying. Remember they released the HomePod a few years ago to try to compete with the Echo and it didn’t do anything.
So are we now all of a sudden going to trust Apple that it’s gotten its ducks in order and said, “Okay, we figured out generative AI, we’re going to live up to these whiz bang demos that we’ve rolled out over the past few months,” and be able to roll it out, I would say, show me first before I believe you. And I think there’s mounting evidence that it’s going to take way longer than Apple promised. We think that a lot of the big Siri transformations are going to wait until 2025 to hit. So there were a bunch of analysts that were predicting, “Oh, we have this super cycle coming up with the iPhone 16,” and I think we can now say, that’s not going to happen. And if it does happen, it’s not going to be on the back of Apple Intelligence, it’s mostly going to be like a traditional upgrade cycle.
Jeremy Owens: What I expected to see was them increase the price on some of their iPhones, at least like the lower band of iPhones that didn’t get an increase last year and at least try to start making money off of the Apple Intelligence to put money back into development of more Apple Intelligence features, but we just didn’t see that. And for an investment perspective, I just don’t see what we saw on Monday ends up being much more money for Apple.
Alex Kantrowitz: Well, there’s really two things that are going on here. First of all, we know that Apple has had revenue to clients and more quarters than you want. And in fact, for the first three quarters of this year, product revenue has gone down compared to product revenue in the first three quarters of last year. So do you want to then raise prices? I don’t know if that’s the case, maybe you want to do what you can to try to sell as many phones as you want, especially as we head into what looks like a slowing economy. So that’s one reason why I think prices haven’t gone up that much. And then the second thing is that Apple is slowly but surely becoming a services company, or at least a company who’s second-biggest product outside of the iPhone is services.
So you actually have this really interesting phenomenon where product revenue for Apple is going down, but the company is increasing its margins and we’re starting to see that some of these things that it’s doing on the software side are starting to really matter for its bottom line. The iPhone makes up 68% of all Apple product sales. So the company’s going to live and die on basically the iPhone and services. The price of the phone is one thing, but really you want to have as many devices as possible in circulation so you can continue to pump up that services revenue.
Jeremy Owens: And the software and services revenue is high margin as you bring up. And generative AI is going to be basically a service, a part of the software, but it’s not one they typically will charge for. That’s kind of where this is not a service, and we have not gotten to the point where generative AI services are really a pay service. Google is kind of gotten toward that or suggested they would get toward that. And I have serious doubts that consumers are really going to pay for generative AI services as they stand now.
Alex Kantrowitz: I think to me, the key in what you just said is as they stand now, the services as they stand now are not going to generate a ton of money. But I think if you think about it in that five year timeframe, for instance, maybe there’s a way where Apple does figure out that personal assistant, it does have the AI talent and it does build the products that are going to make people want to pay for it. That’s one possibility. Also, we shouldn’t discount the fact that a good chunk of the services revenue for Apple is coming from Google, and that’s just money that Google pays to be the default in search. Now we know there’s a whole DOJ issue-
Jeremy Owens: That might not last long, Alex, we’ve seen the Google antitrust trial and that might be an issue. Yeah.
Alex Kantrowitz: Yes, and then so what do you do? Well, you say, “Hello, Sam Altman. We have a new surface that you might be interested in and maybe we can just take a cut of that ChatGPT money as people upgrade to premium once we expose it to the people in our products.” So that could open up a line of revenue for Apple, but is this going to be as big as the Google revenue for Apple? I don’t think so. But if you’re an investor, if you’re working within Apple, you got to dream a little bit. So maybe that’s your dream.
Jeremy Owens: And I don’t want to spend too long on the investment side of it because I do want to talk about the consumer side. There is a good story in that they did not raise the price and you have to assume they’re going to raise the price next year once all the Apple intelligence features are out there. So I would think that the real consumer thing to take away from Apple’s iPhone event is it’s not more expensive. You can get an iPhone. And they actually made a real point to point out the trade-in values and the way to upgrade and the way this does become a super cycle, which I doubt it will, but the way it does is people going, “Well, I want to get in now before they raise the prices next year.” And a lot of people get these new phones before that next year.
Alex Kantrowitz: Yeah, but the economy is also slowing. I don’t know, I think that in this economic climate, at least until we get out of this moment of slowing, they have to keep the prices where they are. Maybe the idea of the Apple super cycle is a thing of the past, whereas maybe back in the day they would go from iPhone 6 to iPhone 10 or whatever and people would race to buy it because they would see how much improved a device is. And I’m sitting here with the iPhone 15 Pro today, and I watched Apple’s presentation and saw that the new devices are going to be 30% faster than the phone I have. That’s super fast, but I’m not running to the Apple Store to get a new device because this is fast enough. And for a lot of people it is fast enough. In fact, I heard yesterday that the average time people hold their devices is about 42 months now. So you’re going from a place where people would upgrade every two years to now people upgrading every three and a half years, and maybe that’s just the new reality for Apple.
Jeremy Owens: We’ve already seen the voice assistants come around. We had a huge round of that in the last decade. There was a lot of hype and there wasn’t a lot of money in that. And again, look at the finances of this and the amount of increased valuation because of hope and hype around generative AI. And I still haven’t seen how even if it does get to a point where the voice computing becomes a big hit, how that makes money.
Alex Kantrowitz: That is a great question. I mean, I think you might have subscriptions, but I think that the technology as it stands right now isn’t worth it for most people. So I will posit that what’s going to make this worth paying for is just going to be increased improvement through the technology. Anyone who’s in it every day can see how impressive it is already, but it’s still a bit of a struggle to use it. And this is kind of going back to the Apple thesis, if it could become an always on assistant that understands who you are and what you want to do and helps make your life easier, there is definitely going to be a market for that.
Jeremy Owens: Thank you so much for joining us. We really appreciate you Alex, the host of The Big Technology podcast. Again, thank you so much for joining us.
Alex Kantrowitz: Thanks so much for having me. This was fun.
Jeremy Owens: Coming up, why you maybe shouldn’t trust the most recent Jobs Report and what you should watch instead. Stay with us.
Welcome back to On Watch by MarketWatch. Before the break, we talked with Alex Kantrowitz about the new iPhone. Now we welcome Richard Moody, chief economist at Regents Financial to talk about the most recent Jobs Report. The Bureau of Labor Statistics reported last Friday that the US more than 140,000 jobs in August, but there is real reason to doubt that number. In the same report, more than 80,000 jobs that were included in the June and July reports were wiped away in revisions. That follows a massive revision of numbers provided in 2023 and early 2024 that wiped away more than 800,000 reported jobs. So how much can we trust these numbers, which tend to be over counted when the economy is in a downtrend? What numbers should we be watching instead as we enter the September hiring surge? And why is the stock market reacting so strongly to the job reports? These are the questions we asked Richard Moody who characterized this job market as one where not a lot of companies are hiring, but they’re also not firing, yet.
Obviously we got the Jobs Report for August, and the number one thing I thought of when I saw it was actually not in the headline number, “142,000 jobs gained in August,” it was the revisions for the previous two months that wiped away more than 80,000 jobs from the June and July original reports. Now the government tends to over count jobs when the economy is slowing down, so my thought on that 142,000 number was can we even trust this or is that going to be revised in the September Jobs Report?
Richard Moody: Probably, it will be revised. And to your broader point, this pattern of downward revisions has actually been apparent since the beginning of 2023. So there have been downward revisions between the first and third estimates in every single month since then with one exception. So it’s a pretty good bet that the initial estimate of August job growth will be revised lower as well.
Jeremy Owens: We definitely have seen a slowdown in the overall job market. And beyond that, it seems uneven, Richard. We’re looking at healthcare, leisure and hospitality and government basically driving the jobs train right now. And everybody else just seems kind of a long for the ride. What do you take from that?
Richard Moody: Well, that’s actually been the case for some time now, Jeremy. And the thing to remember is that those three industry groups that you mentioned, they were laggards in terms of adding back the jobs lost during the pandemic. So if you go back and look at the job growth numbers for 2022 and 2023, those industry groups were either still losing jobs or adding jobs at a very slow rate and what was driving job growth then, transportation, warehousing, construction, retail trade, information services. And it made sense that as those industry groups reverted to their pre-pandemic peaks then job growth would transition to what had been the laggard. So that’s when we really start to see these three industry groups take off in terms of driving job growth late last year. Now that they’re back to their pre-pandemic peaks, it makes sense that hiring in these industry groups would slow down. But then the problem is that given the extent to which they have been driving job growth, then the slowdowns we’re seeing in these three industry groups are really weighing on overall job growth.
Jeremy Owens: Yeah, I read your note you wrote as a result of this Jobs Report, we’d say that it’s just kind of stagnant. Companies are being very slow in hiring, but it’s not big layoffs yet, though. The question is what happens now?
Richard Moody: Well, and that’s a key point to remember. Is that it always made sense to expect the pace of job growth to slow once all the distortions from the pandemic and the policy response to it began to fade from the economy. And really that’s kind of what we think is happening in the broader economy is we’re normalizing back towards that kind of 2% trend growth world we were in the decade prior to the pandemic. And so the slowing pace of job growth we’re seeing is consistent with that. And it’s a very important distinction to make that the slowdown in job growth is being entirely driven by a slower pace of hiring as opposed to a rising pace of layoffs. If you look at layoffs, the rate at which workers are being laid off is still below the pre-pandemic rate.
Now to your point, that is something that obviously a lot of us are watching for is whether or not we’re going to start to see layoffs. And thus far firms have been very hesitant to let workers go, which just reflects how costly and expensive it’s been over the past few years for them to not only find labor, but to retain labor. So really to us, that’s a key for the labor market and the broader economy going forward is whether or not we start to see a sustained and broad-based increase in layoffs.
Jeremy Owens: Yeah, it’s really tough for the average American worker right now, Richard. The one piece of good news I would have for everybody there is that we’re now in September, which tends to be the busiest month for hiring out of the year. My question is the seasonal adjustments that the government is going to make, knowing that September is usually a big hiring month, if we don’t get that big bump, could that actually work against us and show a very weak job market because they’re used to seeing that spike in September?
Richard Moody: That’s a great point, and one that if you hadn’t raised I was going to, is that the seasonal adjustment is trained to see bigger job growth in the fall months into the early winter months, and I think it’s unlikely that we see the rate of hiring this year that we typically see in these months. So the seasonally adjusted data could make things look worse.
We have been saying for a while now that the single most important labor market indicator we’re watching, the weekly data on initial claims for unemployment insurance, but the not seasonally adjusted number as opposed to the seasonally adjusted number. And if you look at the unadjusted data we have for each of the past three weeks, seeing initial claims below 200,000, which is an extraordinarily low number, the labor market is still, it’s more in balance now than it has been in quite some time and we expect to see the pace of wage growth come down as the pace of job growth continues to slow.
But what we look at as being far more important than average hourly earnings is growth and aggregate labor earnings, which consists of the number of people working, the number of hours they work and what they earn for each hour they work. And that is the biggest component of personal income. What we’ve seen over this entire period of elevated inflation is that aggregate labor earnings have been growing at a rate faster than inflation, so that’s supporting growth and real income, which is the floor under which households are standing when it comes to consumer spending. So that to us has been an underappreciated indicator during this whole episode of elevated inflation. It’s helped at least to us account for why consumer spending has held up better than a lot of people thought would’ve been the case.
Jeremy Owens: That’s great, Richard. We typically talk about what metrics we should be watching to really get a full understanding of the economy. And it sounds like from the Jobs Report, this aggregate earnings figure you were just talking about is a really good one to keep an eye on for actual wage growth. And the other one you mentioned is the weekly unemployment claims that that may tell you more about this job market, which has not seen any layoffs yet. If we start to see a rise there, that’s a warning sign. So thank you for those.
And I also want to talk about the stock market, which seemed divorced from the economy for a long time. In fact, when there was bad economic news for a long time there, the stock market would go higher because it would mean that the Fed was probably going to cut sometime soon. And we’ve now seen the stock market fall on the Friday of the Jobs Report two straight months. So it does seem like bad news in the economy is bad news for the stock market again. Why is that? Do you think that’s a permanent change?
Richard Moody: Well, I think maybe the connection between the performance in the economy and earnings is becoming more relevant as opposed to things being priced on perceptions of what the FOMC may do with interest rates. So ultimately, at the end of the day, if the economy slows significantly or falls into a recession, that’s not going to be good for earnings, obviously, regardless of what the FOMC does with interest rates. So I think that before there had been some disconnect between perceptions of the economic data and earnings based on expectations for interest rates. I think that connection may be coming back into focus, particularly with people maybe being concerned about valuations in the equity markets.
I think just there’s a lot of uncertainty right now about the path of the economy and really the question that we’re all trying to answer, whether we’re analysts, market participants, or even the central bankers of the world, is whether what we’re seeing is just kind of a normalization to that pre-pandemic trend rate of growth or something less benign that’s going to end with recession. And unfortunately, there is no quick or easy answer to that question, but it almost seems as though every single economic data release that hits the wires, it’s being scoured as though it contains the definitive answer.
Jeremy Owens: Richard, thank you so much for coming on.
Richard Moody: Sure, Jeremy. Thanks for having me.
Jeremy Owens: Before we go, it’s time for what we are watching, a look at the news you need to know for the rest of the week and beyond. In potentially the only debate between the two major presidential candidates Before November’s election, Kamala Harris and Donald Trump argued about tariffs, tax cuts and oil production Tuesday evening. The markets seem to suggest that Harris won with Trump media and technology stock falling Wednesday along with Bitcoin, while solar stocks rose and betting odds of a Harris win jumped to more than 50%.
Inflation fell at 2.5% in August, the lowest reading of year-over-year price increases in more than three years. Core inflation rose slightly more than expected month to month, however. The Consumer Price Index reading was in line with the Fed’s preferred inflation gauge, the personal consumption expenditures price index after the two had split in recent months. That suggests the true rate of inflation is around 2.5%, higher than the Fed’s target of 2%, but well lower than what the US has experienced for much of the last three years. Economists suggested that inflation reading would lead the Fed to opt for a quarter point interest rate cut next week instead of a half point cut, that pushed the market lower on Wednesday as hopes for a larger cut eroded. The Fed will meet next Wednesday to make the final decision on a rate cut and we’ll talk a little bit about it next week.
And that’s it for this episode. Thanks to Alex Kantrowitz and Richard Moody. To keep following the latest on AI and the economy head to marketwatch.com. You can subscribe to the show wherever you get your podcasts, and please do. If you like what you heard, please leave us a rating or review, it really helps others discover the show. And let us know what you want to hear from us. You can reach us at OnWatch@MarketWatch.com. The show is hosted by me, Jeremy Owens, and produced by Alexis Moore and Jackson Kantrow. Isaac Gaines mixed this episode. Melissa Haggerty is the executive producer. We’ll be back next week. Until then, we’ll be watching.
