Wall Street and Fallujah

This is a partial transcript from "Your World with Neil Cavuto," April 27, 2004, that was edited for clarity.

Watch "Your World w/Cavuto" weekdays at 4 p.m. and 1 a.m. ET.

NEIL CAVUTO, HOST: As we have been saying, what happened in Fallujah (search) Tuesday would certainly rattle Wall Street, but today it did not, which may bring solace to my next guest, who is no stranger to the markets or the economy.

Joining us now is the chairman and CEO of McGraw-Hill Companies, Terry McGraw. The company out with some boffo earnings today across all segments, strength in all segments despite what has been going on halfway across the globe. Good to see you, Terry.

TERRY MCGRAW, MCGRAW HILL CHAIRMAN AND CEO (MHP): Good to see you, Neil.

CAVUTO: What do you make of the Fallujah developments today?

MCGRAW: Well, I think the event of itself is a very difficult one, in trying to get information and intelligence as to what actually is happening, is where we all are at, at this point. But I believe what your last guest just said. We’ve got to stay committed, we’ve got to keep our resolve and we have got to stay behind our president. And this is not going to be a short-term situation.

You’ve got a number of Arab countries that have a lot of coming- together that needs to be done and a lot of people that don’t want to see that happen. So I think that what we have started is the right thing to do, and we have just got to stay very committed and stay confident.

CAVUTO: Not only are you the folks behind "Business Week" and the great advertising environment you are seeing there, but you’re big in classrooms and books and college textbooks, and on and on, publishing, S&P, market stuff, all of this stuff that has been very, very strong for you. And throughout what has been a protracted war now in Iraq, do you see that continuing?

MCGRAW: Yes, I think the economic recovery that is well under way now is a lot stronger than a lot of people think. The effect of all of the tax cuts and fiscal stimulus.

CAVUTO: So you do credit the tax cuts for that.

MCGRAW: Absolutely, without question.

CAVUTO: You’re not in the camp that says they didn’t do squat.

MCGRAW: No, I can give you some idea, let’s see, if you take a look at the structured finance market, which is so, so strong, in March we saw another pickup in the asset-backed area, what is coming from that? Those are auto loans, those are student loans, those are credit card and receivables. The consumer continually has been very, very, very confident and stayed in the market, and is spending.

And we are seeing it play out in some of those kinds of ways. I think the numbers that we are starting to see now show that this recovery is going to be a lot stronger than a lot of people thought. You are going to start to see upward revision of numbers. We are seeing that in terms of something like, for education, states and their state funding issues, they are stronger today than they had anticipated they would be at this point.

CAVUTO: And they are pouring it into education...

MCGRAW: Exactly right.

CAVUTO: ...where they have been skimping in the past. There is the flip-side, where there is strength, there are higher interest rates, do you worry that that puts the kibosh on all of this?

MCGRAW: Well, you know, I think at this point we were originally saying that interest rates wouldn’t probably go up, the Fed wouldn’t be pushing interest rates up until after the election. I think now, and many people have revised that, and I think you are looking at somewhere a movement probably between June and August, somewhere around there. But, any interest.

CAVUTO: Movement being what, a quarter-point hike and just grin and bear it? Yes, I think so, I don’t think it’s going to be much more than that, maybe a half. But I think that would probably be more like a quarter and then there would be an adjustment period to see where it goes, but any movement in interest rates is going to be a reflection of an upward revision of economic growth.

CAVUTO: And that trumps higher rates.

MCGRAW: That is correct.

CAVUTO: Let me ask you, you see the advertising environment closer than many, certainly in your publications and what have you. Do you see strength across the board? Are people who were advertising or reluctant to advertise in the past advertising now and what is the trend?

MCGRAW: Well, as we went through the fourth quarter last year we started seeing lots of fits and starts. We saw certain sectors come back and then they disappeared again, there was some large product-specific advertising for "Business Week" and then it went away again. So there was no leadership.

As we came into this year, January and February were very mixed, and I was concerned. We were not starting to see a real ad recovery that way, March changed it all. March alone for "Business Week" was up 12 percent. We are up 10 percent in April now. And the question is, is if you start connecting the dots, you know, do we have a trend here?

And we have to see, you know, another six weeks, you know, of sustained activity to say that we have got a very strong trend. But the numbers in March, I mean, the economic factors, equipment spending now is up to about 14 percent, all of those things, those are going to play very, very well.

CAVUTO: All right, great read from the corporate boardroom from Terry McGraw, the man, the chairman, the president and CEO of McGraw-Hill Companies has it all on one card, all on one card.

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