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More Americans than projected filed applications for unemployment benefits last week, a sign firings remain elevated even as the economy is expanding.

Initial jobless claims jumped by 37,000 to 464,000 in the week ended July 17, exceeding the highest estimate of economists surveyed by Bloomberg News, Labor Department figures showed today in Washington. The survey median projected claims would climb to 445,000. The number of people receiving unemployment insurance and those getting extended payments dropped.

The figures underscore projections that a lack of jobs will restrain consumer spending, the biggest part of the economy, and lead to slower growth in the second half of the year. It will probably take a “significant amount of time” to restore the almost 8.5 million jobs lost in 2008 and 2009, Federal Reserve Chairman Ben S. Bernanke told Congress yesterday.

“Underlying demand for labor is fairly sluggish,” said Omair Sharif, an economist at RBS Securities in Stamford, Connecticut, who had forecast claims would rise to 460,000. “If that continues, it will have an impact on wages and salaries and clearly have some negative implications for consumer spending.”

Stocks held gains after the report and Treasuries remained lower. Futures on the Standard & Poor’s 500 Index were up 1.2 percent at 8:47 a.m. in New York, and the yield on 10-year notes was 2.91 percent compared with 2.88 percent late yesterday.

Retooling

The rebound in part reflects the unwinding of decreases in the prior two weeks as fewer factories closed for mid-year retooling than the government estimated. The influence of the manufacturing closures will probably take another week or two to wash out of the numbers, a Labor Department spokesman said.

The forecast was based on the median projection of 42 economists surveyed. Estimates ranged from 420,000 to 460,000. The Labor Department revised the prior week’s figure to 427,000 from a previously estimated 429,000.

The four-week moving average, a less volatile measure than the weekly figures, climbed to 456,000 last week from 454,750, today’s report showed.

The number of people continuing to receive jobless benefits dropped by 223,000 in the week ended July 10 to 4.49 million. The figure does not include the number of Americans receiving extended benefits under federal programs.

Those who’ve used up traditional benefits and are now collecting emergency and extended payments decreased by about 368,000 to 3.93 million in the week ended July 3 after Congress failed to pass legislation extending the assistance.

Extended Benefits

The Senate yesterday approved an extension of unemployment insurance that restores aid to 2.5 million people who lost their benefits. The legislation now goes to the House, where a vote is scheduled today. House approval would send the measure to President Barack Obama for his signature.

The unemployment rate among people eligible for benefits, which tends to track the jobless rate, fell to 3.5 percent in the week ended July 10 from 3.7 percent in the prior week.

Thirty-four states and territories reported an increase in claims, while 19 reported a decline. These data are reported with a one-week lag.

Initial jobless claims reflect weekly firings and tend to fall as job growth -- measured by the monthly non-farm payrolls report -- accelerates. That relationship has broken down in recent months as some companies continue to cut staff, while others expand, pointing to an uneven recovery.

Private Jobs

Today’s report reflects jobless applications for the week the Labor Department will survey employers to tabulate July payrolls. In June, private employers added fewer workers than projected by economists, while overall payrolls fell, reflecting a drop in federal census workers.

It may take years to recoup the loss of jobs during the recession that began in December 2007, economists said. The unemployment rate, which reached a 26-year high of 10.1 percent in October 2009, will end 2010 at 9.5 percent, the same as in June, according to this month’s Bloomberg survey.

Bernanke yesterday said central bankers “remain prepared” to act as needed to aid growth even as they get ready to eventually raise interest rates from almost zero and shrink a record balance sheet.

Companies announcing job reductions in July include New Brunswick, New Jersey-based Johnson & Johnson. The health- products company, under U.S. congressional investigation for a recall of children’s medicines, said it’ll reorganize the plant where the withdrawn drugs were made and cut 300 positions.

Workers at the Fort Washington, Pennsylvania, manufacturing plant who lose their jobs will continue to get regular pay and benefits through at least mid-September, then get a severance package based on the number of years they worked, J&J said.

Purchases of U.S. Existing Homes Fell in June

By Bob Willis - Jul 22, 2010

Sales of U.S. previously owned homes in June dropped less than forecast, sustained by a backlog of deals that will dry up when a government credit expires.

Purchases slipped for a second month, falling 5.1 percent to a 5.37 million annual rate, figures from the National Association of Realtors showed today in Washington. Transactions will be “very low” in coming months as the federal incentive ends, the group’s chief economist, Lawrence Yun, said in a news conference.

Other reports showed the economic outlook dimmed and more Americans filed applications for unemployment benefits, reinforcing signs of slowing growth. The data show why Federal Reserve Chairman Ben S. Bernanke reiterated today that central bankers stand ready to take additional action if the world’s largest economy “doesn’t continue to improve.”

“The overall picture is one of a very weak recovery,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc. in New York. “Housing still has a lot of problems, and the labor market is going to be painfully slow. The message from Bernanke is pretty much that they’re not going to do anything on tightening until God knows when.”

Stocks and commodities rallied on improving profit forecasts at companies from United Parcel Service Inc. to AT&T Inc. The Standard & Poor’s 500 Index climbed 2 percent to a 4:00 p.m. close of 1,093.67 in New York. Oil topped $79 a barrel and copper rose for a fourth day.

Exceeds Forecast

Existing home sales were expected to decline to a 5.1 million pace, according to the median forecast of 74 economists in a Bloomberg News survey. Estimates ranged from 4.25 million to 6.2 million. May’s sales rate was 5.66 million, unrevised from the previous estimate.

The Conference Board’s index of leading indicators fell 0.2 percent in June, the second drop in the past three months, according to figures from the New York-based research group. The gauge points to the direction of the economy over the next three to six months.

“We’re looking at a very subdued recovery,” said Harm Bandholz, chief U.S. economist at UniCredit Group in New York, who forecast the 0.2 percent decline. “Companies are still very cautious to hire.”

Initial jobless claims jumped by 37,000 to 464,000 in the week ended July 17, exceeding the highest estimate of economists surveyed by Bloomberg News, Labor Department figures showed. Claims were projected to climb to 445,000, and estimates ranged from 420,000 to 460,000.

Bernanke Testimony

Bernanke, in testimony before the House Financial Services Committee today, said unemployment is “the most important” problem facing the economy. “We are ready and we will act if the economy does not continue to improve, if we don’t see the kind of improvements in the labor market that we are hoping for and expecting.”

Housing is one industry that will probably struggle. In order to receive a tax credit of up to $8,000, homebuyers had to sign contracts by the end of April and initially close deals by June 30. Sales of existing houses are tracked when a deal closes.

The government this month extended the closing deadline to Sept. 30 after the jump in demand through April meant some purchases would not have time to be processed.

“We’re seeing the first stage of the cooling as the tax- incentive purchases fall off,” said Avery Shenfeld, chief economist at CIBC World Markets in Toronto, who projected sales would drop to a 5.38 million pace. “We will see prices retreat as the demand falls off without the tax incentive.”

Climbing Inventory

The number of homes on the market climbed 2.5 percent to 3.99 million. At the current sales pace, it would take 8.9 months to sell those houses, the most since August 2009.

The supply is likely to jump to 10 months or more in coming months as sales slow, said Yun of the Realtor group. The post- tax-credit slowdown may last as long as three or four months, more than he previously estimated, Yun said.

A 10 months’ supply has historically put pressure on home prices, he said. The median price of a previously owned house increased 1 percent to $183,700 from $181,800 in June 2009, the real-estate agents’ group said.

“It’s still a fragile situation in the housing market,” Yun said. “I hope it’s only two months but it could be three to four months with contracts remaining very weak.”

Foreclosures, Short-Sales

Foreclosures and short sales, usually not reflected in the NAR’s data, are boosting the so-called shadow inventory and competing with owners trying to sell properties. Home seizures jumped 38 percent in the second quarter from a year earlier, RealtyTrac Inc. said last week, putting lenders on pace to claim more than 1 million properties this year.

Sales at Miami-based Lennar, the third-biggest U.S. homebuilder by revenue, were running 20 percent to 25 percent lower last month than a year earlier as the expiration of the tax credit sapped demand, Chief Executive Officer Stuart Miller said June 24.

“The new-home market and housing in general still face serious headwinds from current economic and legislative conditions,” Miller said on a conference call with investors. “The prospect of additional delinquencies ahead continues to moderate this recovery as shadow inventory continues to be absorbed.”

Expect lots of government layoffs at state, local level

By Paul Davidson

Here's another headwind for a sputtering job market: State and local governments plan many more layoffs to close wide budget gaps.
Up to 400,000 workers could lose jobs in the next year as states, counties and cities grapple with lower revenue and less federal funding, says Mark Zandi, chief economist for Moody's Economy.com.

The development could slow an already lackluster recovery. Friday, the Labor Department said employers cut 125,000 jobs, mostly because 225,000 temporary U.S. Census workers completed their stints. The private sector added 83,000 jobs, fewer then expected, as the jobless rate fell to 9.5% from 9.7%.

Layoffs by state and local governments moderated in June, with 10,000 jobs trimmed. That was down from 85,000 job losses the first five months of the year and about 190,000 since June 2009.

But the pain is likely to worsen. States face a cumulative $140 billion budget gap in fiscal 2011, which began July 1 for most, says the Center on Budget and Policy Priorities.

While general-fund tax revenue is projected to rise 3.7% as the economy rebounds in the coming year, it still will be 8%, or $53 billion, below fiscal 2008 levels, according to the National Association of State Budget Officers.

Meanwhile, federal aid is shrinking. Money for states from the economic stimulus is expected to fall by $55 billion, says the National Governors Association. And the Senate last week failed to pass a measure to provide states $16 billion for extra Medicaid funding, an initiative that would have extended benefits from last year's stimulus. The House approved $25 billion in enhanced Medicaid funding.

Philippa Dunne, who surveys state financial officials for a newsletter, the Liscio Report, says most plan to intensify layoffs the coming year after relying largely on furloughs.

"The downturn has gone on so long, all the low-hanging fruit has been taken," says Scott Pattison, head of the state budget officers group.

Wells Fargo economist Mark Vitner expects state and local governments to cut about 200,000 workers this year if Medicaid benefits aren't extended. That's largely why Wells Fargo cut forecasts for third-quarter economic growth to 1.5% from 1.9%.

Even if Congress extendsMedicaid subsidies, Zandi expects 325,000 job cuts the next year, though Vitner says losses could be far less.

Among cuts planned and made:

•New York City is planning 4,500 layoffs, and more if the Medicaid subsidies aren't approved, says the Center on Budget and Policy Priorities.

•Washington state would have to chop 6,000 jobs without the Medicaid money.

•The city of Maywood, Calif., laid off all 68 of its employees July 1 and is contracting out police services, partly because of a $450,000 budget deficit.

Office Vacancy Rate in U.S. Climbs to 17-Year High as Jobs Recovery Slows

By Hui-yong Yu - Jul 6, 2010

Office vacancies in the U.S. rose to the highest level since 1993 in the second quarter as the sluggish economic recovery damps demand from corporate tenants, Reis Inc. said in a report.

The vacancy rate climbed to 17.4 percent from 16 percent a year earlier and 17.3 percent in the first quarter, the New York-based research company said today in a statement. Effective rents, the amount tenants actually pay landlords, fell 5.7 percent from a year earlier and 0.9 percent from the previous three months, according to Reis.

Private employers made fewer hires in June than economists had forecast, reinforcing concerns the recovery will weaken, the Labor Department said July 2. The report capped a month of data signaling weakness in housing and a slowdown in manufacturing. Including government, payrolls fell for the first time this year because of a drop in federal census workers. The jobless rate declined to 9.5 percent from 9.7 percent in May as the labor force shrank.

“Although occupancy continues to deteriorate, the rate of decline has clearly slowed,” said Ryan Severino, economist at Reis, in the firm’s report. Rents may turn positive later this year if the economy stabilizes, he said.

A total of 7.7 million square feet (715,000 square meters) of office space was completed last quarter, one of the lowest addition levels since Reis began publishing quarterly data in 1999, the firm said.

Office vacancies increased in 49 of 82 cities tracked by Reis, while effective rents fell in 60 markets. The growing number of cities with declining rents reflects concessions granted by landlords, Reis said.

Washington, D.C., remained the city with the lowest office vacancy rate, at 10 percent, according to the firm. New York vacancies stayed at 11.7 percent. Detroit had the highest vacancy rate, at 26.3 percent, amid declining employment in the auto industry, Reis said.

German Unemployment Declines for 12th Straight Month as Economy Recovers

By Rainer Buergin and Christian Vits - Jun 30, 2010

German unemployment fell for a 12th month in June as business confidence improved, putting the nation’s export-led economic recovery on a broader footing.

The number of people out of work declined a seasonally adjusted 21,000 to 3.23 million, the lowest since December 2008, the Federal Labor Agency in Nuremberg said today. Unemployment was forecast to fall 30,000, according to the median of 29 estimates in a Bloomberg survey. The adjusted jobless rate remained at 7.7 percent.

The German economy, Europe’s biggest, is showing signs of evading the worst of the euro region’s sovereign debt crisis, which has forced governments across the 16-nation bloc to step up spending cuts. Consumer confidence will hold steady next month, market research company GfK SE said June 23, a day after the Ifo institute said its business climate index unexpectedly rose to the highest in two years.

“The German labor market performance remains impressive and clearly is the showcase of German crisis management,” Carsten Brzeski, an economist at ING Group in Brussels, said in a note to investors. “The recent performance is remarkable as it coincides with a gradual decline in short-term work schemes, underlining the strength of the labor market.”

On an unadjusted basis, unemployment fell 88,200 to 3.15 million, according to the agency. It said the labor market improved on the back of the economic recovery.

Euro

The euro remained higher against the dollar after the report and was up 0.6 percent to $1.2262 as of 11:51 a.m. in Berlin. It has fallen 14 percent this year as the region’s debt crisis undermined confidence in the currency.

The decline is benefiting the German economy by boosting export competitiveness outside the euro region. Industrial production increased more than economists forecast in April and factory orders unexpectedly jumped for a second month.

The Essen-based RWI institute on June 23 raised its 2010 growth projection to 1.9 percent from 1.4 percent, saying government austerity measures won’t hurt the recovery. Ifo raised its forecast the same day to 2.1 percent from 1.7 percent.

Even so, the outlook for the German labor market is still “surrounded by uncertainty,” Labor Agency head Frank-Juergen Weise told reporters in Nuremberg today. While the current economic recovery won’t fully offset the negative effects from the financial crisis, there’s still “a chance” that less than 3 million people will be unemployed by the end of the year, Weise said.

Hiring Rise

German companies plan to take on more workers in the second half of the year as economic growth picks up, Ifo said in a survey of executives for WirtschaftsWoche magazine published June 26. Unemployment will fall to 2.9 million by November and 2.8 million a year later, a 20-year low, Allianz SE Chief Economist Michael Heise said.

Daimler AG has hired 1,800 temporary workers and added Saturday shifts at German assembly plants making the Mercedes- Benz SLS gull-wing sports car, GLK sport-utility vehicle and E- Class convertible. Bayerische Motoren Werke AG has hired 5,000 temporary workers.

Siemens AG, Europe’s largest engineering company, yesterday predicted “continued strong profitability” in its third quarter as demand rebounds for factory automation gear, health- care products and light bulbs. New orders and sales in the quarter will exceed year-earlier figures, it said.

While Germany’s economy shrank 4.9 percent last year, the most since World War II, the government limited the increase in unemployment with incentives for companies to retain workers. Chancellor Angela Merkel’s Cabinet in April extended the job incentives program until 2012, having earlier extended it to the end of this year.

According to Organization for Economic Cooperation and Development data, Germany’s jobless rate was 7.1 percent in April. The equivalent rate in France was 10.1 percent and the U.S. rate was 9.9 percent.

Asia-Pacific region embraces use of credit and debit cards

By Kathy Chu

The credit and debit card revolution is spreading across Asia.
In Hong Kong, consumers are now paying for everything from a pack of gum to a BMW with plastic. Credit cards are becoming the new status symbol in India. And in South Korea, millions of consumers are pulling out cellphones equipped with card information to pay for purchases.

Asia's growing appetite for credit and debit is the start of a powerful shift in how consumers here are thinking about spending. The development is particularly meaningful considering the region's historical aversion to debt, and is likely to have indelible consequences on nations' growth. While cash and checks remain the most popular forms of payment, that's quickly changing amid rising income levels, aggressive financial marketing and a push by Asian governments that see credit cards and other electronic payments as a good way to grow the economy.

"In most Asian economies, savings rates are very high, and consumption is very low," says Mark Zandi, Moody's Economy.com chief economist. Governments want to stimulate consumer spending, and "this is a way to do it."

In Asia-Pacific, card transactions — credit, debit, charge and other payment cards — surged 158% to $1.8 trillion from 2004 to 2009, approaching nearly a quarter of global card volume, says Euromonitor, a research firm. Debit transactions are growing more quickly than credit in this region, says Elizabeth Buse, group executive, international, for Visa. Debit has grown steadily even while some consumers pulled back on credit during the recession, she notes.

As electronic payments catch on, they bring with them the promise of fast, efficient payments for consumers and more revenue for Asian governments. They help eliminate some of the underground economy, in which cash transactions aren't recorded — or taxed. Partly because of this, electronic payments have cumulatively added $1.1 trillion to global GDP from 2003 to 2008, says a study by Economy.com for Visa payment network.

Yet electronic payments have the potential to take a heavy toll on Asian consumers — and economies — judging by the experience of the U.S. and parts of Europe, where steep fees mired the most vulnerable segment of the population in debt. Banks' acceleration of abusive practices during the global downturn led the U.S., among other nations, to impose severe restrictions on credit and debit cards.

While Asia is an attractive market for electronic payments, "If people borrow too heavily, it could create a very significant economic problem," undermining the benefit to consumers and governments, Zandi warns.

Card use often begets higher spending: "It's a proven fact that if you can make people move from cash to electronic payment, then the average (amount spent) will increase, along with the average number of transactions," says David Robertson, publisher of the Nilson Report, a payments newsletter.

New technologies such as cellphone and contactless payments — in which you pass your card over an electronic reader rather than swipe it — promise to speed up Asian consumers' adoption of debit, credit and even prepaid cards, which allow money to be loaded for purchases. Citibank plans to roll out mobile-phone payments in several Asian markets within the next year. In this debt-averse region, "You can't underestimate the power of cool technologies" to spur card use, says Megan Bramlette, a managing associate at Auriemma Consulting Group.

Hong Kong resident Desmond Cheung, 37, uses his Citibank credit card to pay for public transit, movies and soft drinks. He waves the card, equipped with a smart chip, in front of an electronic reader, and it completes the transaction in a second or two. "The pace is really quick in Hong Kong, so people don't like to wait for anything," he says.

Similar technology has been rolled out in the U.S. but hasn't caught on as quickly. In mature credit card markets, it takes time to replace legacy technologies such as magnetic-swipe machines with new innovations.

As Asia becomes more of an electronic society, the changes are being felt from India to South Korea.

•India. On a busy roundabout in Mumbai, Phillips Antiques shop beckons visitors with the promise of an afternoon of treasure hunting among old maps, Indian art and sculptures. Farooq Issa, the 150-year-old shop's owner, says customers generally spend about $200 if they use a credit card. When they use cash, they spend only half as much.

Future Group, one of India's largest retailers, reports that 50% of sales — about $6.5 million worth of transactions daily — at its 1,100 supermarkets, department and other stores are now made with cards. By comparison, only about 1% of India's overall consumer spending comes from debit, credit and other cards, Euromonitor data show.

"There used to be a fear that (card payments) may not be very secure," but that's changing, says Sandip Tarkas, the company's president of customer strategy.

Meanwhile, passengers on India's government-owned train system are increasingly purchasing tickets online with credit and debit cards, forgoing lines at the station, says Sanjay Aggarwal, general manager at Indian Railway Catering and Tourism Corp.

Still, only one in 50 consumers in India have credit cards. But these cards are catching on, especially in urban areas, partly because getting one "is not a difficult job," says Satyan Kapur, 26, who keeps one in his wallet for emergencies. Also, "Having a platinum card is a status symbol."

•South Korea. Credit cards are widespread here, partly due to an unusual government push in the late '90s to boost personal consumption after the Asian crisis, says Neil Katkov, a Tokyo-based senior vice president at Celent, a financial research firm. The government offered tax deductions to consumers for credit card spending and tax benefits to merchants for card acceptance.

South Korea's experience, though, provides a cautionary tale for Asian nations as electronic payments explode across the region. Issuers' lax underwriting hobbled financial institutions and roiled the economy. Credit card lending in Hong Kong and Taiwan also followed a boom-to-bust pattern, unlike the steady growth in Malaysia, Singapore and Thailand, says Guonan Ma, a senior economist at the Bank for International Settlements.

In South Korea today, more than 97 million credit cards are in circulation, two for each person. Including debit and other forms of payment cards, South Koreans have an average of four cards per person, the Bank of Korea says, rivaling the U.S.' card numbers.

Mobile phone payments are helping to drive credit card use among Koreans. Currently, about 2 million subscribers of SK Telecom— which services 50% of the country's mobile-phone users — are paying using phones equipped with Visa card information in convenience stores and public transit, says Heesang Ju, manager of SK Telecom. Koreans are also starting to redeem coupons and store loyalty cards on their phones.

•Japan. Cellphone payments are taking hold in Japan and are expected to make inroads elsewhere in the region. "If you look out over the horizon in Asia, at what's going to drive growth, it's mobile technology," predicts Visa's Buse.

In Japan, cell technology is gaining popularity partly because workers travel for hours daily on the train, giving them time to use phones for different applications, says Vicky Bindra, president of Asia-Pacific, Middle East and Africa for MasterCard Worldwide.

But unlike other parts of Asia, Japanese consumers' aversion to debt remains steadfast. Debt per credit card averages a measly $9 in Japan, compared with nearly $500 in Singapore and more than $1,300 in the U.S., Auriemma Consulting Group data show.

In debt-shy countries, issuers may find it more effective to pitch cards with a message of, "This is going to help you buy things faster and easier, rather than buy things you can't afford," says Auriemma's Bramlette.

American Express offers only charge cards — which need to be paid in full each month — in Japan. Yet these cards are gaining popularity throughout Asia and "experiencing a renaissance" globally as consumers become more fiscally conservative, says Tracey Bowra, a senior vice president at American Express.

•China. From 2004 through 2009, credit card adoption has been growing an average of 40% annually, says Euromonitor International.

This rapid increase could soon make China Asia's "most important card market," says a 2009 report by McKinsey consulting firm.

Credit cards have grown especially quickly in China's coastal areas during the past five years, "a clear illustration of the upside potential" of the market, says Emmanuel Pitsilis, a senior partner who heads McKinsey's financial institutions practice in the greater China region.

The penetration of credit cards is directly related to consumers' affluence, says Ivy Cheung, a Hong Kong-based executive director for Synovate, a market-research firm. So as Chinese consumers' spending power grows, so will the size of the card market, she predicts.

The government fueled the growth of plastic during the Beijing Olympics by encouraging merchants to accept card payments. As more stores allowed electronic payments, more Chinese consumers wanted a card.

In emerging Asian economies, including China, "There lies huge potential to increase the use of credit cards, mortgages and other loans," says Arpitha Bykere, a senior research analyst at Roubini Global Economics.

But expect other forms of electronic payments to continue ramping up in a continent with more than 50% of the world's population, adds Chris Yeo, a general manager for FIS Asia, a payment services company.

Original Article at REUTERS BLOGS

The $5 trillion rollover

JUN 29, 2010 13:30 EDT
By: James Saft

Banks around the world must refinance more than $5 trillion of debts in the coming three years, a massive rollover that poses threats to financial stability and growth.

The need to replace these debts, which are medium and long term, will place pressure on bank profit spreads and in turn may either prompt deleveraging, where banks sell assets that they can no longer economically finance, or simply lead to a bout of credit rationing, where borrowers must pay more to borrow, thus crimping investment and economic growth.

For banks in the UK, according to the Bank of England Financial Stability Report, the refinancings amount to about $1.2 trillion by the end of 2012.

If banks in Britain raise funds at the same pace they have been this year, they will only collect half of their needs in time. This is even before the fact that the banks need desperately to turn some of their riskier short-term funding into more reliable funding with a longer maturity.

“If funding costs increase dramatically, which is perfectly possible in what could be pretty febrile market conditions, that will hit profitability (and the banks ability to raise capital organically) until they are able to re-price loans and facilities,” according to Richard Barwell, an economist at the Royal Bank of Scotland in London.

“And to the extent that banks are unwilling or unable to roll over funds that would trigger forced deleveraging. Both outcomes imply a sharp contraction in credit conditions for those within and outside financial markets, putting considerable downward pressure on activity and asset prices.”

Banks outside of Britain are perhaps doing marginally better in meeting their needs, but still face an uphill struggle.

U.S. banks have issued $230 billion of debts in the first five months of the year, about 60 percent of the rate they need to achieve over the three year period. Euro zone banks have issued $133 billion, or about 70 percent of their needed run rate.

One easy to see consequence is that, all things being equal, the cost for banks to issue debt should rise, as should competition among banks for consumer deposits. It is possible that a global desire to save more helps to blunt this effect, but even so the macroeconomic effect and the effect on asset prices will both be strongly downward.

BANKS WILL HAVE THEIR FUNDS

The track record of the past three years tells us one thing is likely: the banks will get their money, courtesy of government support if needed.

Unless there is a profound sovereign debt crisis, we can count on governments taking the needed steps to see that the banking system does not fall over for lack of funding. So, if liquidity or support schemes need to be extended or invented anew, they will be.

But a banking system that has not fallen over, while a precondition for strong economic growth, is not in and of it self sufficient to cause strong economic growth. Expensive funding and a rising term premium will stunt growth and they will impose a haircut on risk asset prices.

Viewed another way, however, higher funding costs for banks is really nothing other than the market demanding a different capital structure from banks.

It is not simply that a lot of money needs raising all at the same time, but rather that the people who have in the past supplied the money have a new appreciation of the risks in lending to banks, or should that simply be of the risks of lending.

The Financial Stability Report also looks at the costs and benefits of higher amounts of capital in banking. The benefits are straightforward: a reduced chance of systemic crises. Costs are thornier, but also quite high. The BOE used an assumption that for every 7 basis points of additional lending spread charged by banks should create a 0.1 percent permanent reduction of GDP. On their estimates upping capital in banking by one percent then equates to present value cost of about 4.0 percent of UK GDP.

This puts into perspective not just how challenging it will be to create growth going forward, but just how artificially growth during the boom was goosed by very loose and easy lending.
For the UK and for Europe, this will be happening at the same time that fiscal austerity programmes will be dampening growth.

Something has to give, and it will probably be monetary policy. Look for extraordinarily low rates for a very long time, and for new and bigger quantitative easing programmes.

Original Article at REUTERS BLOGS

Case Says U.S. Housing Starts ‘Dead Flat in the Mud’: Tom Keene

June 29, 2010, 1:52 PM EDT
By Alex Kowalski and Tom Keene

The U.S. housing market “is still bouncing along the bottom” as vacancy rates outpace historically low construction, said economist Karl Case, co- creator of the S&P/Case-Shiller home-price index.

The S&P/Case-Shiller index showed today that home prices in 20 U.S. cities rose 3.8 percent in April from a year earlier, the biggest year-over-year gain since September 2006. Sales got a boost from a tax credit aimed at reviving the industry that triggered the worst recession since the 1930s.

While the report was “fairly positive,” Case said, home building, which has driven the economy during past economic expansions, “is dead flat in the mud.” Housing starts have been at 15-year lows for the past 18 months, and vacancy rates are increasing, he said.

“The unwritten story here is what’s going on with household formations and the pattern of them,” the Wellesley College economics professor said today in an interview with Tom Keene on Bloomberg Surveillance. “The census is telling us that households are being formed, but they don’t seem to be showing up.”
Case attributed this disconnect to fewer immigrants and more emigrants, as well as the “doubling-up phenomenon” where more people choose to live together or reside with their parents.

California Effect

Compared with the prior month, 18 of the 20 areas covered in the S&P/Case-Shiller home-price index showed an increase on an unadjusted basis for April, led by a 2.4 percent gain in Washington and a 2.2 percent increase in San Francisco. Miami and New York were the only two cities showing a monthly decrease.

San Francisco could be reviving the U.S. housing market, Case said, if it is able to propel California, which comprises 25 percent of the national market. California accounted for the most national foreclosures during March, April and May.
“Some of the institutions out there were lending money at rates that were beyond belief,” Case said. “If we can stabilize that market alone, it will help a lot.”

Case is retiring tomorrow after more than 30 years at the Wellesley, Massachusetts-based college.

The New Ideological Divide

By Peter Schiff

Despite the apparent deficit-cutting solidarity that emerged from this weekend’s G-20 meeting in Toronto, it is clear that the great powers of the industrialized world have not been this philosophically estranged since the end of the Cold War. Ironically, in this new contest, the former belligerents have switched sides – the capitalists are now the socialists, and vice versa.

We now are witnessing a struggle between two camps that I playfully call the “Stimulators” and the “Austereians.” Both warn that a worldwide depression will ensue if governments now make the wrong choices: the Stimulators say the danger lies in spending toolittle and the Austereians from spending too much. Each side also has their own economic champion: the Stimulators follow the banner of Nobel Prize-winning economist Paul Krugman, while the Austereians are forming up behind the recently reformed former Fed Chairman Alan Greenspan. (It is cold comfort to witness “The Maestro” belatedly returning to the hard-money positions that characterized his earlier years.)

In a recent Wall Street Journal editorial, Greenspan argued that the best economic stimulus would be for the world’s leading debtors (the United States, UK, Japan, Italy, et al) to rein in their budget deficits, a strategy dubbed “austerity” by the press. Greenspan explains that because lower deficits will restore confidence, diminish the threat of inflation, and allow savings to flow to private-sector investment rather than public-sector consumption, the short-term pain will lead to gains both in the mid- and long-term. Rather than redistributing a shrinking pie, this approach allows the pie to grow. Greenspan’s Austereian view has been echoed loudly in the highest policy circles of Berlin, Ottawa, Moscow, Beijing, and Canberra.

Meanwhile, in several articles for his New York Times column, including one today, Krugman has argued that those who push for austerity in the face of recession are either doing so for political expediency or out of a “crazy” fealty to archaic economic views. Krugman has apparently judged inadequate the trillions of dollars worth of deficit spending unleashed by the United States and European governments in the last 24 months. He believes our only remedy is to spend more – no matter how much debt results. Absent this, he claims, millions of workers “will never work again.” Unfortunately, Washington has clearly aligned itself with Krugman and the Stimulators.

Reading straight from the Keynesian playbook, Krugman argues that cutting government spending now will simply send the economy back into recession. He asserts that by flooding the economy with money, i.e. “stimulus,” governments can encourage consumers to spend. Once the spending creates better conditions, so the argument goes, the economy will be better positioned to withstand the spending cuts, tax hikes, and higher interest rates necessary to address the staggering deficits left behind.

Krugman proposes an enticing argument that is nevertheless built on rubbish. Economies do not grow because consumers spend; consumers spend because economies grow [for a detailed explanation of how this works, read my latest book: How an Economy Grows]. Investment capital comes from savings, and when governments borrow, savings are diverted from private investment. While it is possible for governments to invest as well, it is much more likely that the money will be spent on entitlements or “invested” in projects that may be politically advantageous but economically useless.

Any money spent by governments is not available to the private sector to invest. The Stimulators don’t make this connection because they believe money grows on trees and that a printing press is a legitimate creator of wealth. However, printing money merely encourages people to spend their savings now rather than wait for it to lose value through inflation. This is okay to Stimulators, because stimulating “demand” by any means necessary is the only goal they can see.

What really grows an economy is not more demand, but more supply [also explained in my book]. The Austereian argument is that reductions in government spending will allow the private sector to generate the additional supply of goods and services. Europe seems to understand this; unfortunately, the US does not. Judging by the recent weakness of the dollar – not only against gold, but other fiat currencies, including the pound and the euro – the markets are coming to the same conclusion.

As sovereign-debt worries initially spread throughout Europe, the dollar benefitted. However, now that Europe has demonstrated a willingness to reduce its debts, while we have committed to make ours even larger, the sovereign-debt worries are moving west.

If Greenspan and the Austereians are correct, the stimulus will fail and leave us in a much deeper hole. As long as governments create bigger deficits, we will never have a sustainable recovery. Instead, we will be chasing our tail, and wearing ourselves out in the process. When we finally realize the folly of this approach, the austerity measures that we will then be forced to adopt will make those currently proposed by the Europeans seem relatively painless.

My guess is that before year-end, our stimulus-induced recovery will falter, prompting Obama and Congress to administer even more stimulus. After all, the Stimulators have no other answer. However, given the adverse reaction this will produce in the currency and debt markets, this next jolt will likely vindicate the Austereians, as the world witnesses its greatest power careen into inflationary depression.

BP Oil Disaster Costs U.S. State Pensions $1.4 Billion in Value

By Dunstan McNichol - Jun 22, 2010

The California Public Employees’ Retirement System lost $284.6 million in value as the largest oil spill in U.S. history erased more than $1.4 billion from BP Plc shares held by 42 state retirement accounts, data compiled by Bloomberg show.

BP, the biggest producer of oil and gas in the U.S., has lost 47 percent of its value since a Gulf of Mexico well blew out April 20, destroying the Deepwater Horizon drilling rig, killing 11 of its crew and polluting beaches from Louisiana to Florida.

The declines come as public pension funds are struggling to recover from investment losses that averaged 21 percent last year, according to Wilshire Associates of Los Angeles. U.S. public pension systems held more than 300 million shares of London-based BP, according to Bloomberg data through May 1.

Calpers, the largest U.S. public pension at $210 billion, held 58.2 million shares of BP on April 20, more than any other state pension, and saw the value fall to $301 million from $585.7 million, according to Bloomberg data.

“Calpers has a well-diversified portfolio and long-term investment strategy to weather these ups and downs, even those caused by unusual circumstances such as this one,” said Brad Pacheco, a spokesman. “We will be engaging BP on corporate governance to discuss the impact of the crisis on the value of the company.”

Stock Price

The Gulf of Mexico oil spill sent BP’s stock price to 349.5 pence in London trading yesterday from 642.5 on April 19.

The $1.4 billion in value lost by the pensions is a fraction for funds that manage more than $2.4 trillion, the estimate for the 100 largest public pensions at the end of 2009, according to the Census Bureau. The top 100 funds account for more than 89 percent of total public pension value, the bureau reported.

“This will be less than one-half of a percent of our international holdings,” said Laura Ecklar, spokeswoman for the $58 billion Ohio State Teachers’ Retirement System, referring to the $59 million in BP shares in that fund’s $14 billion international portfolio. “If we put it against all holdings, we’re into a lot of decimal points.”

Among public retirement funds with large holdings of BP, the California State Teachers’ Retirement System, known as Calstrs, ranked second in value lost, at $104.8 million, followed by Florida at $87.8 million and the Texas Teachers Retirement System at $84.5 million, according to Bloomberg data.

Texas Holdings

The Texas fund, which reported a market value of $96.7 billion and record investment returns of 35 percent for the year ending March 31, said in a statement that sales of 8.1 million BP shares before and after the Deepwater accident lowered the total loss of value to $39.7 million since September, 2009.

“The $39.7 million reduction in the market value of its BP holdings is the equivalent of 0.04 percent of the total TRS fund,” spokesman Howard Goldman said in an e-mail response to questions from Bloomberg. “Developments related to BP have had no material impact on the fund.”

New Jersey’s Division of Investment gained $5.2 million on its BP holdings because it began selling off its 52 million- share stake in January, according to Treasury Department spokesman Andrew Pratt.

New Jersey Profit

The state realized profits of about $12 million before the Deepwater Horizon explosion. New Jersey sold its last 20 million shares at a loss of $9.1 million between April 29 and May 11, Pratt said.

Calpers last week asked for a $600 million increase in the state’s contribution toward benefit costs during the fiscal year that starts July 1.

Other affected funds, such as New York state’s $129 billion Common Retirement Fund, which holds 17.5 million BP shares according to spokesman Robert Whalen, and the Pennsylvania School Employees Retirement System, whose BP holdings declined in value by about $30 million, according to spokeswoman Evelyn Tatkovski, are planning to cut retirement benefits and seek higher payments from taxpayers to offset investment losses.

The 100 largest public funds lost a total of $165 billion in the nine months that ended March 31, 2009, according to the Census Bureau.

Concerns about BP’s share value and prospects prompted funds such as New Jersey and the $26 billion Retirement Systems of Alabama to sell all their BP holdings.

‘Moving Parts’

“We’re headed in that direction,” said Marc Green, Alabama’s director of investments, who said the system has been selling off its 6.25 million BP shares as opportunities arise, because of uncertainty about BP’s liability in the spill. “There’s a lot of different moving parts that we can’t get our arms around.”

In New Jersey, the Deepwater accident accelerated a sales pattern that was already under way, Pratt said.

The Division of Investment “took their profits at a reasonable level and when they started to have problems, they got rid of the shares,” Pratt said in a telephone interview June 14. “This is conservative, responsible portfolio management, combined with some luck.”

The collapse of BP’s shares highlights the importance of a broad portfolio, said Keith Brainard, a researcher for the Louisiana-based National Association of State Retirement Administrators.

“There’s a great lesson that public pension funds are learning, and that’s the importance of diversification,” he said. “I would expect the effect on public pension funds to be minimal.”

Bond Defaults Stalk Wealthiest Michigan Communities as Development Crashes

By Darrell Preston and Jeff Green - Jun 23, 2010

Michigan’s auto-industry collapse, which led to the worst home-price drop among U.S. states, has forced some of its wealthiest and fastest-growing communities to seek state aid to prevent municipal bond defaults.

Detroit, slammed by the state’s 74 percent housing-price decline, warned of bankruptcy when it borrowed in March to cover part of a $280 million deficit. Now, nearby communities in Livingston County such as Hartland Township and Howell Township may need legislation to help make bond payments.

Falling property values and job losses stripped away the ability of communities to repay debt after auto-industry bankruptcies and the worst recession since the 1930s left the state with 13.6 percent unemployment, the second-highest rate in the U.S. after Nevada’s.

“We’re trying to stem the bleeding,” said Representative Bill Rogers, a Livingston County Republican and cosponsor of some of the legislation. “There’s no way they could pay these with no income coming in.”

As Detroit struggled to close its deficit, the city’s school system and three cities, including Pontiac, have had emergency financial managers appointed by Governor Jennifer Granholm since 2008. Taxable property in the state fell 9.2 percent to $385 billion this year, said Caleb Buhs, spokesman for the Michigan treasury department. The lower values are reducing property tax revenue and forcing municipalities to cut spending.

Tax Assessments

Local governments have sold about $1.5 billion of bonds backed by special tax assessments, said Eric Scorsone, senior economist with the Michigan Senate Fiscal Agency, a nonpartisan legislative group. The debt is typically backed by property tax assessments for sewers, water lines and other infrastructure for new housing developments.

Legislative staff members and local finance officials have created a committee to try to figure out how much of the debt may face default because of the declining assessments, Scorsone said. The first meeting is set for this week.

“It’s developed into a problem in newly developed areas,” said Bill Anderson, legislative liaison for the Lansing-based Michigan Townships Association. “Everybody is trying to figure out how to get through this.”

The automotive industry’s downward spiral that led to bankruptcy reorganizations of General Motors Co. and Chrysler Group LLC cost the state 230,000 jobs last year, the largest decline in 53 years of published data, according to a report by University of Michigan economists. The state has lost 837,600 jobs since employment peaked in June 2000, according to data compiled by Bloomberg.

Rolling Hills

Livingston County, marked by rolling hills and lakes in Michigan’s Lower Peninsula west of Detroit, is dominated by farming and auto-related manufacturing, according to the county’s Economic Development Council. It was Michigan’s fastest-growing county from 2000 to 2009, when the population expanded 16.7 percent, according to U.S. Census data. Livingston was also one the wealthiest, with a median household income of $72,090, about 48 percent higher than the state average of $48,606, the data show.

Livingston’s townships sold assessment-backed bonds during the decade it was the state’s fastest-growing county, said Dianne Hardy, the treasurer, in a telephone interview.

‘It Just Stopped’

“As soon as they would fill one development they’d start another, and then one day it just stopped,” Hardy said. “Now the ground is not worth what it cost to put the infrastructure in.”

The number of property-sale related paperwork jobs handled by Hardy’s office has fallen to 200 to 300 per month from 600 to 700 before the recession, she said.

A record $14.6 billion of obligations defaulted in 2008 and 2009 in the $2.8 trillion U.S. municipal bond market, according to Distressed Debt Securities, a newsletter in Miami Lakes, Florida. About $1 billion more has defaulted through May.

Michigan’s housing market didn’t experience the same rise in housing prices as the rest of the U.S., said Alex Villacorta, senior statistician with Truckee, California-based Clear Capital, which tracks real-estate values. Michigan’s house prices fell 74 percent from their peak in late 2005 to early 2009, the most for any state, followed by Nevada and Arizona, which had seen some of the largest increases.

‘Hardest-Hit State’

“Michigan has been the hardest-hit state,” Villacorta said. The median price of a house fell to $72,000 in January from a peak of $140,000 in 2005, according to Clear Capital.

Livingston County housing prices have plunged 49 percent from their peak in 2005, according to Clear Capital. Some developers that owned lots haven’t paid assessments and few new residents have moved in to generate property tax revenue, Hardy said.

The county said in its 2010 budget that it might have to bail out townships. Some Hartland Township property tax payments “will ultimately be uncollectable,” according to the report.

“Concern must be raised regarding the ability of a number of townships to meet annual debt service obligations,” county officials wrote in a budget document released Nov. 5. “Livingston county may very well find itself in a position where it must fund the debt in order to preserve its credit rating.”

Hartland Township, with about 15,000 residents 50 miles (80 kilometers) northwest of Detroit, came up $951,000 short in collecting special assessments last year, representing 40 percent of what it is owed on debt service, according to a April 2009 report by Standard & Poor’s.

Delinquent Assessments

Livingston County’s median home price fell to $136,000 earlier this year from a peak of $240,000 in the second quarter of 2005, according to Clear Capital.

“The township’s very weak sewer system operations could have a negative effect on general fund operations if it does not collect a large portion of special assessment delinquencies,” S&P said in its report.

Trading in some of the communities’ debt hasn’t fully reflected the weakening tax base.

The price of a Hartland Township special assessment water bond sold in 2001 and maturing in 2021 fell to about $100 on June 21, from $101.32 in January, according to Bloomberg data. The bond, insured by Financial Guaranty Insurance Co., yielded 4.59 percent, which compares to a yield of 3.25 percent for top- rated municipal debt with 11 years to maturity, according to Municipal Market Advisors data.

FGIC, which is no longer rated, was ordered last year by the New York Insurance Department to stop paying claims because of its statutory deficit, according a company financial statement. The company is attempting to restore its capital, according to a financial statement.

State Auction

Livingston County may find out how much it will collect from unpaid taxes in coming months when property with delinquent taxes will be auctioned by the state, said James Wickman, Hartland township’s manager.

While the county advances the municipality money for delinquent property levies, the township must repay the sum, as well as its bond obligations, if property sales don’t generate enough to cover the loan.

“We still have to make the bond payments,” said Wickman. “It may be an issue that we don’t have enough money to make that payment.”

Hartland Township will use loans from reserves to cover bond payments if taxes don’t generate enough revenue to cover debt service, he said.

In Howell Township, also in Livingston County, “stalled development projects have also negatively affected” property tax collections, Fitch Ratings said in a 2009 report.

Howell Township Treasurer Larry Hammond didn’t return a telephone call seeking comment.

Loan Fund

County officials began meeting with state lawmakers last year, which led to the package of bills that would help townships with debt, said Rogers. The legislation would create ways to help the municipalities pay debt service, such as creating a revolving loan fund for districts that haven’t been able to collect property taxes to repay debt holders.

“The legislation would put counties in a position to help municipalities,” said Wickman.

The legislation has been assigned to a House committee. Rogers said he’d like to see the four bills pass this year.

Cities are also pushing legislation that would let them refinance bonds to extend their maturity and spread out debt- service payments over five to 10 years, said Summer Minnick, director of state affairs for the Ann Arbor-based Michigan Municipal League. At least a dozen cities are supporting the measure, she said.

Prison Shutdown

The legislation might help Standish, a city of 1,954 in northern Michigan, where a state-prison closure last year cost the community 300 jobs. The facility accounted for 45 percent of water and sewer revenue.

“The rest of the ratepayers will have to pick up the tab, forcing them to raise rates by 40 percent,” said Representative Jeff Mayes, a Bay City Democrat, who sponsored the measure. “In the long run it may cost more but it will help them avoid big rate increases.”

Original Article on THE NEW YORK TIMES

Britain Unveils Emergency Budget

By JOHN F. BURNS and LANDON THOMAS Jr.
Published: June 22, 2010

LONDON — Setting the scene for years of potential strife with the powerful public-sector unions and their allies in the Labour Party, Britain’s new coalition government on Tuesday unveiled the most severe package of spending cuts and tax increases since the early days of Margaret Thatcher’s era.

After only six weeks in office, the government of Prime Minister David Cameron took what his coalition of Conservatives and Liberal Democrats acknowledged was a historic gamble: that austerity measures will help balance the government’s books without pitching the country into a double-dip recession.

The cuts and tax increases, including average budget reductions of 25 percent for almost all government departments over the next five years, will make Britain a leader among European countries, including Ireland, Greece and Spain, competing to show they can slash spending and appease investors worried about surging debt. But the sharp reductions defy conventional economic wisdom, which holds that governments should increase spending to stimulate growth when the private sector is weak.

The steps outlined to the House of Commons by George Osborne, the chancellor of the Exchequer, would cut the annual government deficit by nearly $180 billion over the next five years, shrinking Britain’s public sector and instituting tough reductions in public housing benefits, disability allowances and other previously sacrosanct aspects of the country’s $285 billion welfare budget.

Only health and international aid spending would be protected from the 25 percent cuts for government departments by 2015, the steepest fiscal spending reductions since the 1930s. Mr. Osborne also announced a two-year wage freeze for all but the lowest paid among Britain’s six million public servants and a three-year freeze on benefits paid to parents for rearing children, in addition to new medical screening for people claiming disability benefits, part of a bid to cut $16 billion from the annual welfare budget.

Mr. Osborne also announced a raft of tax increases, though he was at pains to say that the government’s plan to sharply reduce the country’s $1.4 trillion national debt would rest on making roughly four pounds in spending cuts for every pound in tax increases, a point of considerable political weight in a country that is already among the highest-taxed in Europe.

The new taxes include an increase next year to 20 percent from 17.5 percent in the value-added tax on most goods and services, and an increase in the capital gains tax, to a new high of 28 percent, to curb what Mr. Osborne described as rich people in Britain “paying less tax than the people who clean for them.” At the same time, changes in income tax will remove nearly 900,000 of Britain’s poorest people from the income tax system altogether, and corporate taxes will also be reduced over a five-year period, to 24 percent from 28 percent.

“I am not going to hide the hard choices from the British people,” Mr. Osborne said in a speech in which he accused the former Labour government of understating the impact of its 13 years of deficit spending. But he said the new coalition government, which should have little difficulty enacting the new measures with its Parliament majority, had striven to make the austerity fair.

“Over all, everyone will pay something,” he said, but the poor would pay less than the rich.

The concerns about the budget stringencies seemed likely to reverberate well beyond Britain, pitching the Cameron government squarely into the political and economic dispute about the best way to navigate world economies out of the worst recession since the 1930s.

Last week, President Obama wrote to the leaders of the so-called Group of 20 nations, including Britain and other major economies, saying that while “credible plans” to cut national deficits were important, cutting them too quickly could lead to “renewed hardships and recession.” The letter was seized upon by the Cameron government’s opponents in Britain, who cited it on Tuesday in condemning the Osborne budget.

“It’s back to the economics of the 1930s,” Ed Balls, a left-wing Labour figure who is one of five candidates running to succeed the former prime minister, Gordon Brown, as Labour leader, said in a BBC interview.

But the Conservatives believe they can repeat the Thatcher-era revival, when sharp budget cuts — even during a recession — restored market confidence in Britain’s future and helped spark a strong economic expansion through the decade.

Mr. Osborne, at 39 the youngest person in more than a century to preside over Britain’s public finances, said the cuts were made necessary by years of Labour profligacy. “We’ve had to pay the bills of past irresponsibility,” he said.

Calling the new measures “reckless,” Labour Party leaders, still nursing their wounds from their May defeat, appeared to be readying for a rerun of the bitter politics of the Thatcher years, when Britain was hit by widespread labor strife.

Original Article on THE NEW YORK TIMES

Purchases of U.S. Existing Homes Unexpectedly Dropped in May

By Shobhana Chandra - Jun 22, 2010

Sales of U.S. previously owned homes unexpectedly fell in May as demand began to slip even before a government tax credit expires.

Purchases of existing houses, which are tabulated when a contract closes, decreased 2.2 percent to a 5.66 million annual rate, figures from the National Association of Realtors showed today in Washington. To receive a government incentive worth as much as $8,000, buyers must have signed contracts by the end of April and need to complete deals by the end of this month.

Builder shares dropped on concern the end of government stimulus, mounting foreclosures and unemployment may cause renewed weakness in the industry that precipitated the worst recession since the 1930s. Delays in processing contracts from last-minute buyers rushing to qualify for the tax break may also have contributed to the decrease, the agents’ group said.

Sales “will be pretty soft for the next few months,” said Scott Brown, chief economist at Raymond James & Associates Inc. in St. Petersburg, Florida, whose sales forecast was the closest among economists surveyed. “Ultimately, you’re going to need job growth to see a sustainable recovery in housing.”

Stocks fluctuated between gains and losses after the report as a positive sales report from Apple Inc. triggered a rally in technology shares, helping to overcome the housing data. The Standard & Poor’s 500 Index was little changed at 1,112.84 at 1:04 p.m. in New York. The S&P Supercomposite Homebuilder index fell 0.4 percent.

Less Than Forecast

Existing home sales were forecast to rise to a 6.12 million rate, according to the median forecast of 74 economists in a Bloomberg News survey. Estimates ranged from 5.2 million to 6.5 million. The group revised April’s sales rate up to 5.79 million from the 5.77 million previously reported.

Purchases of existing homes increased 18 percent compared with a year earlier prior to adjusting for seasonal patterns.

The median price climbed 2.7 percent to $179,600 from $174,800 in May 2009.

The number of previously owned homes on the market dropped 3.4 percent to 3.89 million. At the current sales pace, it would take 8.3 months to sell those houses compared with 8.4 months at the end of the prior month.

Declines in inventories have slowed in recent months, posing a risk for the market, Lawrence Yun, the group’s chief economist, said in a press conference. Yun said this “overhang” in supply is a concern and may lead to further declines in property values in coming months.

Processing Delays

There may be as many as 180,000 buyers who will not be able to close on deals by this month’s deadline in order to qualify for the tax credit, Yun said, calling on the government to push the expiration date back.

A proposal to move the closing deadline to Sept. 30 from the end of this month is part of legislation extending unemployment benefits and providing $24 billion in aid to state governments that has stalled in Congress.

Last month’s drop in sales was led by an 18 percent plunge in the Northeast. Purchases in the Midwest were little changed, while those in the West climbed 4.9 percent and demand in the South increased 0.5 percent.

Federal Reserve policy makers, who begin a two-day meeting today, are forecast to commit to keeping interest rates near zero to help wean the world’s largest economy off government stimulus. The hazard posed by the European debt crisis, joblessness and a lack of inflation add to the reasons why central bankers will focus on sustaining the U.S. rebound.

Falling Orders

Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, said orders fell 17 percent in the quarter ended April 30 from a year earlier, and contract signings slowed in May, indicating the tax credit helped pull some sales forward.

“The expiration of the federal homebuyer tax credit, the lack of job growth and a potential increase in foreclosures all pose risks to a housing industry recovery,” Ara K. Hovnanian, chief executive officer, said in a June 2 statement.

The window of opportunity for the tax credit has already passed for purchases of new houses, which are tabulated at contract signings and are considered a timelier barometer of the market. A Commerce Department report tomorrow will show new home sales plunged 19 percent to a 410,000 annual pace last month, according to the median forecast of economists surveyed.

Existing homes account for about 90 percent of the market.

Builders are being hurt by competition from foreclosed properties that are depressing property values. Foreclosures jumped to a record for the second consecutive month in May as lenders stepped up property seizures, according to RealtyTrac Inc., an Irvine, California-based data seller.

Cheaper borrowing costs are helping mitigate the damage. The average rate on a fixed 30-year mortgage was 4.75 percent last week, just shy of the record-low 4.71 percent reached in early December, according to data from Freddie Mac, the mortgage-finance company being supported by the U.S. government.

Demand for imports helps widen trade deficit

Martin Crutsinger, AP Economics Writer, On Thursday June 17, 2010

WASHINGTON (AP) -- Higher oil prices and stronger demand for imported goods have widened the broadest measure of the U.S trade deficit in the first three months of the year. The result is viewed as a positive step for the recovery.

Even though America is sending more money overseas than it is taking in, the stepped-up spending on foreign goods and services was a sign of growing confidence among consumers.

But economists worry that the European debt crisis could dampen demand for U.S. exports. And a stronger dollar would make U.S. goods more expensive overseas.

"The U.S. recovery will continue to pull in more imports while the stronger dollar and the ongoing European sovereign debt crisis will act as a drag on exports," said Gregory Daco, an economist at IHS Global Insight.

The deficit in the current account increased to $109 billion in the January-March period, compared to a revised $100.9 billion in the fourth quarter of last year, the Commerce Department said Thursday.

The current account deficit narrowed to $378.4 billion in 2009, down a sharp 43.4 percent from the 2008 deficit. The big drop reflected a deep recession in the United States, which cut demand for imported goods. But with the U.S. economy recovering, analysts believe the trade deficit will increase this year.

Daco predicted that the current account deficit would widen to as high as $430 billion this year, up 14 percent from last year.

He said that the European debt crisis is hurting U.S. exports in two ways -- it has dampened growth prospects in Europe which cuts into U.S. sales and it has caused the dollar to strengthen against the euro, which makes U.S. products less competitive in European markets.

The 8 percent increase in the first-quarter deficit marked the third straight quarterly increase in the deficit, which now stands at the highest point since the final three months of 2008.

The current account is the broadest measure of foreign trade because it measures not only trade in goods and services, which are tracked by the government on a monthly basis, but also investment flows between countries.

The figure is watched closely by economists because it is a measure of how much the United States must borrow from foreigners to finance its balance of payments imbalance.

In the first quarter, exports of U.S. products rose by 5.2 percent, reflecting gains in sales of chemicals and heavy machinery and equipment. However, imports of foreign goods increased faster, rising by 6 percent, with much of this increase reflecting a larger foreign oil bill.

Manufacturing has been the standout performer so far in the recovery as U.S. companies benefit not only from rising domestic demand, but increased global sales. But the worry is that the European debt crisis and the rising value of the dollar could undercut further export gains.

The 2009 deficit represented 2.7 percent of the total economy as measured by the gross domestic product, the lowest level since 1998. The current account deficit hit a high of 6 percent of GDP in 2006.

That had raised concerns over whether foreigners would continue to be willing to finance America's huge trade deficits. Now the bigger concern is over foreigners' willingness to purchase U.S. Treasury securities to finance America's soaring federal budget deficits.

For the first quarter, the deficit in goods and services increased by $10.5 billion to $115.3 billion, reflecting higher-priced oil imports and increased imports of manufactured goods.

Offsetting this increase slightly was a rise in income earnings of $6.6 million to $41.7 billion. However, unilateral transfers, which include foreign aid, rose by $4.2 billion to $35.5 billion.

Economists believe that the current account deficit will continue to widen this year but will not climb to the previous record levels.

But there is some concern that the trade deficit could widen further than currently expected if the European debt crisis worsens, depressing economic activity more in a key U.S. export market.

For the moment, America's big exporting companies are optimistic that strength in other parts of the world such as Asia will be able to offset some of the weakness in Europe.

Caterpillar Inc., the world's largest maker of construction and mining equipment, announced earlier this month that it was boosting the company's quarterly dividend by 5 percent, reflecting in part a brighter outlook for its sales because of the global economic recovery.

The company said it had ramped up production to meet higher demand for its heavy equipment, especially in developing countries.

Original Article on USA TODAY

U.S. prices could rise with Chinese workers' salaries

By Kathy Chu

Rising wages in China are stoking concerns that U.S. consumers will ultimately pay more for Chinese-made products from iPads to Levi's.

For years, foreign companies have contracted with Chinese suppliers to make products, drawn by the low-cost labor. But as local Chinese governments raise minimum-wage requirements — and workers clamor for higher salaries — it's becoming more expensive to do business in the country.

Honda recently agreed to a wage increase after striking workers shut down plants that make its auto parts. Foxconn, which makes electronic components for Apple, Dell and Hewlett-Packard, doubled assembly-line workers' pay amid criticism of factory conditions and a spate of employee suicides. KFC, owned by the USA's Yum Brands, reportedly agreed to increase worker salaries this month in Shenyang, China, as part of a collective bargaining agreement, China's news agency, Xinhua, reported.

If wages continue to go up, "inevitably, companies like Apple will have to pass along some increased costs to customers," says Victor Shih, associate professor of political science at Northwestern University. U.S. consumers are probably already seeing higher prices, though it's difficult to pinpoint exactly how much is due to China's rising wages, says Gareth Leather, China analyst for the Economist Intelligence Unit.

Apple, Dell and Levi Strauss, among other U.S. companies that make products in China, declined to comment. Andrea Resnick, a spokeswoman for leather goods maker Coach, says the company has no plans to raise prices because it can offset higher labor costs by shifting production outside of China.

Other U.S. companies have also considered moving production to emerging markets such as Vietnam and Bangladesh, or from coastal areas of China to inland regions, where labor costs are typically lower. China's rising wages "will accelerate the process of companies reassessing what is the best place for production," says Bart van Ark, chief economist for the Conference Board, which has more than 1,200 corporate members around the world.

Generally, when costs go up, "Someone has to pay the bill," says Andreas Lauffs, head of the employment law group at Baker & McKenzie law firm. Chinese manufacturers can absorb them or pass them along to U.S. companies, which then have to decide whether to raise prices .

In the textile industry, labor can make up as much as a third of overall production expenses, according to the Economist Intelligence Unit. But labor costs in other industries may represent only a small percentage — 3% to 5% by some estimates — which could make it easier for U.S. companies to bear one-time increases. Worker productivity is also rising, a development that will help offset higher wages.

Original Article on USA TODAY

Swiss parliament approves US tax deal on 2nd try

Eliane Engeler, Associated Press Writer, On Tuesday June 15, 2010

GENEVA (AP) -- The Swiss parliament on Tuesday approved a treaty with the United States that will hand thousands of files on suspected tax cheats to U.S. authorities, but obstacles remain that could delay the deal for several more months.

The government hopes the agreement will eventually end UBS AG's three-year battle with U.S. tax authorities that culminated in revelations the bank had for years helped American clients hide millions of dollars in offshore accounts.

Under the treaty that was painstakingly crafted by Bern and Washington last year after months of negotiations, Switzerland has agreed to divulge the names of 4,450 UBS clients suspected of tax evasion.

Swiss authorities have already transmitted the names of about 400 UBS clients who signed waivers as part of the Internal Revenue Service's voluntary disclosure program, according the Swiss Federal Tax Administration. A further 100 UBS clients gave their consent directly to Swiss authorities.

Lawmakers in Switzerland's lower house voted 81 to 61 in favor of the government-backed deal, and 53 abstained.

The vote passed after the powerful Swiss People's Party dropped its opposition. The nationalist party and the left-wing Social Democrats blocked a first attempt last week to have parliament approve the treaty, which has been portrayed by some as a nail in the coffin for Swiss banking secrecy.

But details remain to be ironed out that could yet hold up the deal.

Parliament's lower house decided Tuesday that the treaty can be put to the Swiss public in a referendum before it finally becomes law. The upper house has yet to approve such a referendum and has until Friday to deliberate.

A popular ballot would make Switzerland miss a late August deadline to hand over all 4,450 names because the vote would be held in November at the earliest.

Frank Keith, a spokesman for the Internal Revenue Service, said the U.S. tax agency expects Switzerland to honor an agreement to divulge the names of UBS clients suspected of tax agency. He added that the U.S. is "prepared to use all available options, including the U.S. courts, should the present efforts fail."

The deal is crucial to UBS, which has faced intense pressure from U.S. authorities since 2007. Last year the bank agreed to turn over hundreds of client files and pay a $780 million penalty in return for a deferred prosecution agreement. But Washington has signaled that unless UBS reveals the further 4,450 American names demanded in the U.S.-Swiss agreement, it may face a crippling civil investigation just at a time when the bank is recovering from the subprime crisis and seeking to rebuild its U.S. business.

UBS spokesman Jean-Raphael Fontannaz said the bank will not comment as long as the decision-making process in parliament is still ongoing.

Justice Minister Eveline Widmer-Schlumpf tried to disperse fears of some lawmakers that the treaty might open the door to the United States -- or other countries -- receiving client data from other Swiss banks.

"This is about a single agreement ... on a clearly defined group of clients who allegedly committed tax fraud or tax evasion," she told parliament, adding that it will have "no impact on future cases."

Widmer-Schlumpf said she was confident that the United States would accept a delay in handing over the names if the Swiss people were asked to vote on the deal in a referendum.

But William Sharp, a tax lawyer who represents some American UBS clients, said he would be surprised if the U.S. passively accepted a further delay.

"The deferred prosecution agreement may be revisited in a more aggressive context, the settlement agreement may be deemed in breach, or the U.S. may seek to move Switzerland to 'black list' status, among other choices," Sharp said.

Shares of UBS closed up 1.97 percent in trading Tuesday, reaching 15.51 Swiss francs ($13.6) on the Zurich exchange.

The Swiss business organization economiesuisse said Tuesday's vote was an important step for Switzerland and showed it was living up to its commitments toward the U.S.

Business groups have warned that failure to ratify the deal risked losing thousands of jobs should Washington decide to retaliate.

Associated Press Writer Frank Jordans contributed to this report.

Original Article on GUARDIAN.CO.UK

US military warns oil output may dip causing massive shortages by 2015

By: Terry Macalister - April 11, 2010

The US military has warned that surplus oil production capacity could disappear within two years and there could be serious shortages by 2015 with a significant economic and political impact.

The energy crisis outlined in a Joint Operating Environment report from the US Joint Forces Command, comes as the price of petrol in Britain reaches record levels and the cost of crude is predicted to soon top $100 a barrel.

"By 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day," says the report, which has a foreword by a senior commander, General James N Mattis.

It adds: "While it is difficult to predict precisely what economic, political, and strategic effects such a shortfall might produce, it surely would reduce the prospects for growth in both the developing and developed worlds. Such an economic slowdown would exacerbate other unresolved tensions, push fragile and failing states further down the path toward collapse, and perhaps have serious economic impact on both China and India."

The US military says its views cannot be taken as US government policy but admits they are meant to provide the Joint Forces with "an intellectual foundation upon which we will construct the concept to guide out future force developments."

The warning is the latest in a series from around the world that has turned peak oil – the moment when demand exceeds supply – from a distant threat to a more immediate risk.

The Wicks Review on UK energy policy published last summer effectively dismissed fears but Lord Hunt, the British energy minister, met concerned industrialists two weeks ago in a sign that it is rapidly changing its mind on the seriousness of the issue.

The Paris-based International Energy Agency remains confident that there is no short-term risk of oil shortages but privately some senior officials have admitted there is considerable disagreement internally about this upbeat stance.

Future fuel supplies are of acute importance to the US army because it is believed to be the biggest single user of petrol in the world. BP chief executive, Tony Hayward, said recently that there was little chance of crude from the carbon-heavy Canadian tar sands being banned in America because the US military like to have local supplies rather than rely on the politically unstable Middle East.

But there are signs that the US Department of Energy might also be changing its stance on peak oil. In a recent interview with French newspaper, Le Monde, Glen Sweetnam, main oil adviser to the Obama administration, admitted that "a chance exists that we may experience a decline" of world liquid fuels production between 2011 and 2015 if the investment was not forthcoming.

Lionel Badal, a post-graduate student at Kings College, London, who has been researching peak oil theories, said the review by the American military moves the debate on.

"It's surprising to see that the US Army, unlike the US Department of Energy, publicly warns of major oil shortages in the near-term. Now it could be interesting to know on which study the information is based on," he said.

"The Energy Information Administration (of the department of energy) has been saying for years that Peak Oil was "decades away". In light of the report from the US Joint Forces Command, is the EIA still confident of its previous highly optimistic conclusions?"

The Joint Operating Environment report paints a bleak picture of what can happen on occasions when there is serious economic upheaval. "One should not forget that the Great Depression spawned a number of totalitarian regimes that sought economic prosperity for their nations by ruthless conquest," it points out.

Original Article on GUARDIAN.CO.UK

`Debt Trap' Prompts Edinburgh Money Managers to Scrutinize U.S. Deficit

By Rodney Jefferson - Jun 9, 2010

Edinburgh’s two biggest fund companies have a warning to investors: don’t overlook the U.S. when scouring the world for nations with too much debt.

Standard Life Investments is questioning when President Barack Obama’s administration can reduce borrowings, said Andrew Milligan, the company’s head of global strategy. Scottish Widows Investment Partnership sold U.S. stocks in March on concern an eventual reduction in spending would weigh on economic growth. The amount of total marketable U.S. debt outstanding has risen to $7.96 trillion from $4.4 trillion in mid-2007.

“I don’t know how long the U.S. can afford not to focus on the issue and take action,” Ken Adams, the top strategist at Scottish Widows, said in an interview. “It’s like Greece. It’s very hard to pick the point at which confidence suddenly goes.”

The companies, which together oversee about 300 billion pounds ($436 billion), are trying to fathom where risks could next unnerve markets in what Milligan called the “aftershocks” of the financial crisis.

The euro lost 17 percent against the dollar this year amid speculation a possible default in Greece might trigger debt crises in other parts of Europe, such as in Spain and Portugal.

A Hungarian government spokesman last week warned his country was in a “very grave situation,” roiling markets and sending the euro to a four-year low before officials in Budapest came out and reversed the comments.

‘Under-Estimating’

Credit default swap rates, a gauge of how investors view debt risks, may be “under-estimating” potential fiscal problems in the U.S., according to Adams.

The U.S. budget deficit stood at 9.3 percent of gross domestic product at the end of March, compared with 3.3 percent for Germany, an average of 6.3 percent for the euro area and 7.4 percent for Japan, data compiled by Bloomberg show.

Default swaps protecting against losses on U.S. government debt for 10 years cost 48.5 basis points, less than half that of Japan and France and lower than Germany, according to prices from CMA DataVision.

“Yes, the U.S. has the benefit of the dollar, and yes, the U.S. is a slightly faster-growing economy, but does this mean it can escape the debt trap which so many people are talking about in Japan and Europe?” Milligan said at his office in the Scottish capital. “The arithmetic is really very similar.”

GDP in the U.S. grew an annual 2.5 percent in the first quarter versus 0.6 percent for the 16 nations sharing the euro.

‘Least Dirty Shirt’

Bill Gross, manager of the world’s biggest bond fund and co-chief investment officer at Newport Beach, California-based Pacific Investment Management Co., called the U.S. the world’s “least dirty shirt” in a June 4 Bloomberg Radio interview.

Obama is starting to scale back borrowing. The government is selling $70 billion of notes and bonds this week, down from $78 billion at the last sale of similar securities. The drop in the total amount is the most since credit markets collapsed.

The debt crisis and the lowest inflation rate in four decades in the U.S. has driven investors to buy government bonds, making them expensive compared with other investments, Milligan and Adams said.

The 10-year yield was one basis point higher at 3.2 percent as of 9 a.m. in London, down from this year’s high of 4.01 percent reached on April 5.

U.S. Treasuries have returned 4.7 percent this year, compared with 7.3 percent for German bonds, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. The Standard & Poor’s 500 Index has lost investors 3.9 percent, while the Stoxx Europe 600 Index posted a negative return of 3.1 percent, or 19 percent in dollar terms.

Scottish Widows cut its holding of U.S. stocks to “neutral” from “overweight,” meaning it holds an amount equivalent to the proportion of the securities in the indexes where it measures its performance. The money went into cash and was then reinvested in U.K. stocks in the final week of May, Adams said. He didn’t give details on his bond holdings.

To contact the reporter on this story: Rodney Jefferson in Edinburgh at r.jefferson@bloomberg.net

Orininal Article at REUTERS

U.S debt to rise to $19.6 trillion by 2015

June 8 (Reuters) - The U.S. debt will top $13.6 trillion this year and climb to an estimated $19.6 trillion by 2015, according to a Treasury Department report to Congress.

Reporting by Donna Smith; Editing by Kenneth Barry - Tue Jun 8, 2010 6:19pm EDT

The report that was sent to lawmakers Friday night with no fanfare said the ratio of debt to the gross domestic product would rise to 102 percent by 2015 from 93 percent this year.

"The president's economic experts say a 1 percent increase in GDP can create almost 1 million jobs, and that 1 percent is what experts think we are losing because of the debt's massive drag on our economy," said Republican Representative Dave Camp, who publicized the report.

He was referring to recent testimony by University of Maryland Professor Carmen Reinhart to the bipartisan fiscal commission, which was created by President Barack Obama to recommend ways to reduce the deficit, which said debt topping 90 percent of GDP could slow economic growth.

The U.S. debt has grown rapidly with the economic downturn and government spending for the Wall Street bailout, the wars in Afghanistan and Iraq and the economic stimulus. The rising debt is contributing to voter unrest ahead of the November congressional elections in which Republicans hope to regain control of Congress.

The total U.S. debt includes obligations to the Social Security retirement program and other government trust funds. The amount of debt held by investors, which include China and other countries as well as individuals and pension funds, will rise to an estimated $9.1 trillion this year from $7.5 trillion last year.

By 2015 the net public debt will rise to an estimated $14 trillion, with a ratio to GDP of 73 percent, the Treasury report said.

Orininal Article at REUTERS

As China’s Wages Rise, Export Prices Could Follow

By DAVID BARBOZA
Published: June 7, 2010

Original Article at THE NEW YORK TIMES

SHANGHAI — The cost of doing business in China is going up.Coastal factories are increasing hourly payments to workers. Local governments are raising minimum wage standards. And if China allows its currency, the renminbi, to appreciate against the United States dollar later this year, as many economists are predicting, the relative cost of manufacturing in China will almost certainly rise.

The salaries of factory workers in China are still low compared to those in the United States and Europe: the hourly wage in southern China is only about 75 cents an hour. But economists say wage increases here will eventually ripple through the global economy, driving up the prices of goods as diverse as T-shirts, sneakers, computer servers and smartphones.

“For a long time, China has been the anchor of global disinflation,” said Dong Tao, an economist at Credit Suisse, referring to how the two-decade-long shift to manufacturing in China helped many global companies lower costs and prices. “But this may be the beginning of the end of an era.”

The shift was illustrated Sunday, when Foxconn Technology, one of the world’s largest contract electronics manufacturers and the maker of well-known products that include Apple iPhones and Dell computer parts, said that it was planning to double the salaries of many of its 800,000 workers in China, beginning in October. The new monthly average would be 2,000 renminbi — about $300, at current exchange rates.

The announcement follows a spate of suicides at two Foxconn campuses in southern China and criticism of the company’s labor practices.

Foxconn, based in Taiwan and employing more than 800,000 workers in China, said the salary increases were meant to improve the lives of its workers.

Last week the Japanese automaker Honda said it had agreed to give about 1,900 workers at one of its plants in southern China raises of 24 to 32 percent, in hopes of ending a two-week strike, according to people briefed on the agreement. The new monthly average would be about $300, not counting overtime.

And last Thursday, Beijing announced that it would raise the city’s minimum monthly wage by 20 percent, to 960 renminbi, or about $140. Many other cities are expected to follow suit.

Analysts say the changes result from the growing clout of workers in China’s economy, and are also a response to the soaring food and housing prices that have eroded the spending power of workers from rural provinces. These workers, without factoring in the recent wage increases by some employers, typically earn $200 a month, working six or seven days a week.

But there are other reasons. Analysts say Beijing is supporting wage increases as a way to stimulate domestic consumption and make the country less dependent on low-priced exports. The government hopes the move will force some export-oriented companies to invest in more innovative or higher-value goods.

But Chinese policy makers also favor higher wages because they could help ease a widening income gap between the rich and the poor.

Big manufacturers are moving to raise salaries because they are desperate to attract new workers at a time when many coastal factory cities are struggling with labor shortages.

A Foxconn executive said last week that the turnover rate at its two Shenzhen campuses — which employ over 400,000 people — was about 5 percent a month, meaning that as many as 20,000 workers were leaving every month and needed to be replaced.

Marshall W. Meyer, a China specialist at the Wharton School at the University of Pennsylvania, says that demographic changes in China are reducing the supply of young workers entering the labor force and that this is behind some of the wage pressure.

“Demography will do what the Strategic and Economic Dialogue hasn’t: raise the cost of Chinese goods,” he said, referring to United States-China talks on Chinese currency reform and other economic issues. “There is no way out.”

Economists say many of the same forces that were at work in 2007 and 2008, when China’s economy was overheating, have returned and even intensified this year.

Local governments have stepped up enforcement of labor and environmental regulations, driving up production costs.

And perhaps most troubling for companies here is the prospect of an appreciating Chinese currency, which would make their exports more expensive overseas.

Beijing has long promised to allow its currency to fluctuate more freely. But when the global financial crisis shuttered many Chinese factories, the government effectively repegged the renminbi to the dollar to protect exporters.

Pietra Rivoli, a professor of international business at Georgetown University and the author of “The Travels of a T-Shirt in the Global Economy,” says the effects of rising labor costs will vary by industry, perhaps with lower-valued goods like garments being forced to move to western China or even to Vietnam and Bangladesh.

But she says high-end electronics like smartphones are likely to remain, because they command high profit margins and because China has built a sophisticated infrastructure and quality-control system.

“Labor is such a small piece of the pie for them,” Professor Rivoli says of the electronics brands. “The money’s all in the design, the marketing and the complicated distribution system, including retail outlets. Like with Apple, they have those rents in the shopping malls, fancy stores and all those hip people working there. That costs a lot.”

Still, salary increases are expected to affect many stages of the supply chain and force some companies to raise prices. For many exporters who simply produce on contract for global brands, profit margins are already razor-thin, and raising prices could hurt business.

“They’re going to have to find a way to pass this on to the end user,” says Mr. Tao at Credit Suisse.

Economists say a necessary restructuring is under way, one that should allow the nation’s huge “floating population” of migrant workers to better share in the benefits of growth and stimulate domestic consumption.

United States and European Union officials have been pressing China to help improve the global economy by consuming more and reducing the country’s huge trade surpluses.

Rising labor costs here are not the end of cheap production in China, analysts say, but they are likely to help change the country’s manufacturing mix.

“China isn’t going to lose its manufacturing base because it’s got a huge domestic market,” said Mary Gallagher, director of the Center for Chinese Studies at the University of Michigan. “But it will move them toward higher-end goods. And that matches the Chinese government’s ambition. They don’t just want to be the workshop of the world. They want to produce high-tech goods.”

Original Article at THE NEW YORK TIMES

Nation's Debt hits $13 Trillion

By Stephen Dinan - Wednesday, June 2, 2010

Original Article on WASHINGTON TIMES

The federal government is now $13 trillion in the red, the Treasury Department will announce Wednesday -- marking the first time the government has sunk that far into debt.

Lawmakers and staffers on Capitol Hill have been awaiting the milestone with macabre fascination for more than a week, and its arrival is likely to complicate efforts for Democrats as they try to pass several emergency spending bills this month.

The department's website on Wednesday showed that the outstanding public debt hit $13.051 trillion as of Tuesday, leaping nearly $60 billion since Friday, the previous day for which figures were released. The department always posts figures a day behind and skipped Monday because it was a federal holiday. A down-to-the-penny tally of the debt will be released by the department Wednesday afternoon.

Several unofficial debt clocks showed the debt crossing the $13 trillion threshold a week ago, based on imprecise estimations, prompting several lawmakers to jump the gun in lamenting its implications for the country's fiscal future.

At $13 trillion, that works out to an obligation of more than $42,000 for every U.S. resident.

Earlier this year, Congress and President Obama raised the country's debt limit to $14.3 trillion, hoping it would to give the government enough room to spend through the end of this year.

The single biggest day for debt came on June 30, 2009, when the government added $186.9 billion in obligations. The last days in fiscal quarters often see major debt increases.

Total public debt includes two pots of money. One is normal government debt held in the hands of consumers, such as Treasury bills and bonds, while the other is intragovernmental holdings, or money that one part of the government borrows from another agency. That includes money borrowed from the Social Security trust funds.

Original Article on WASHINGTON TIMES

Buffett Says He Expects `Terrible Problem' for Municipal Debt

By Andrew Frye and William Selway - Jun 2, 2010

Warren Buffett, whose Berkshire Hathaway Inc. has been trimming its investment in municipal debt, predicted a “terrible problem” for the bonds in coming years.

“There will be a terrible problem and then the question becomes will the federal government help,” Buffett, 79, said today at a hearing of the U.S. Financial Crisis Inquiry Commission in New York. “I don’t know how I would rate them myself. It’s a bet on how the federal government will act over time.”

Berkshire’s investment portfolio included municipal bonds valued at less than $3.9 billion as of March 31, down from more than $4.7 billion at the end of 2008. The company had a maximum of $16 billion at risk in derivatives tied to such debt, according to the company’s annual report for 2009.

Buffett, Berkshire’s chairman and chief executive, has previously warned about the risks of insuring municipal bonds. In his annual letter to shareholders in 2009, he said public officials may be tempted to default on bonds whose payments are guaranteed by insurance companies rather than push through needed tax increases. He said guaranteeing municipal bonds against default “has the look today of a dangerous business.”

Local governments rely on the $2.8 trillion municipal bond market to raise money for construction projects and fund other budget items. The financial crisis and recession battered governments across the U.S. by cutting into tax collections and causing pension-fund losses. Some governments failed to set aside enough money to cover retirement benefits promised to employees, which may place increasing strain on public finance.

Rescue for Governments?

Buffett said last month that the U.S. may feel compelled to rescue a state facing default after the government committed $700 billion to bail out financial firms and automakers.

“It would be hard in the end for the federal government to turn away a state having extreme financial difficulty when they’ve gone to General Motors and other entities and saved them,” Buffett told shareholders in Omaha, Nebraska, at Berkshire’s May 1 annual meeting. “I don’t know how you would tell a state you’re going to stiff-arm them with all the bailouts of corporations.”

A report by the Pew Center on the States in February estimated that by the end of the 2008 budget years, states had $1 trillion less than needed to pay for future pensions and medical benefits, a gap the center said was likely compounded by losses suffered in the second half of 2008.

Defaults

About $14.5 billion of municipal bonds defaulted in 2008 and 2009, according to Income Securities Advisor Inc., a Miami Lakes, Florida-based company that publishes a newsletter tracking distressed debt. Many those were securities backed by revenue from nursing homes, property developments and other projects without claim to government tax revenue.

Defaults by local governments with the power to raise taxes are less common. Jefferson County, Alabama, defaulted on more than $3 billion of bonds backed by sewer fees after the deals grew more costly in the wake of the credit crisis in 2008. Vallejo, California, filed for bankruptcy in 2008 after its tax revenue tumbled.

Buffett set up a municipal bond insurance company in December 2007 as competitors, including Ambac Financial Group Inc. and MBIA Inc., struggled to maintain top ratings. Berkshire has scaled back sales as Buffett said the rates that bondholders are willing to pay don’t match the risk.

Original Article on YAHOO FINANCE

G20 to Talk About Averting Armageddon - Again

By: Patrick Allen - June 3, 2010

Original Article on CNBC

Remember April 2009 when the G20 met in London? Gordon Brown was hosting world leaders and claiming he had saved the world while protests brought large parts of the UK capital to a halt.

The equity rally from the March lows was well underway as investors stopped worrying about Armageddon and praised global leaders for averting it.

Fast forward 15 months and G20 finance ministers are preparing to meet in Busan to discuss how we avert Armageddon yet again.

A draft of the G20 communiqué ahead of a meeting, quoted by Dow Jones, says the world’s major economies will do whatever it takes to ensure strong, sustainable and balanced growth.

“We remain on a constant state of alertness and are continuously pursuing well coordinated economic policies," the press release says.

The high hopes of 15 months ago have been dashed, Stephen Lewis from Monument securities said, as many of the problems faced last year remain, with a few more to boot.

“The chief imbalance in the global economy, between the USA and China, is arguably as dangerous now as it was before the financial crisis erupted in 2007," Lewis said.

"Though the US trade balance showed some improvement as long as US gross domestic product was contracting, the deficit is increasing again now that domestic demand is rebounding,” he noted.

Lewis expects little or no discussion of this point and sees China building up even more holdings of US Treasurys as a result. Instead of focusing on the world’s major imbalance, talk will turn to the European crisis.

“It is not at all clear what the G20 can say about this," he said.

"They will hardly point out that the US economy might now be performing as badly as the euro zone's, if policymakers there, and the financial markets generally, had taken the US fiscal deficit as seriously as they take the deficits of some euro zone member-states.”

Cut Spending but Only in Europe

As a result, the G20 will back plans to significantly cut back on government spending in Europe.

“EU policymakers strongly suspect that the euro is a target for speculative selling. They are unlikely to countenance a policy that might increase the amount of ammunition that could be marshaled against their currency,” Lewis said.

Original Article on CNBC

Canada Raises Interest Rates

Rob Gillies, Associated Press Writer, On Tuesday June 1, 2010, 2:24 pm EDT

TORONTO (AP) -- Canada on Tuesday became the first Group of Seven nation to raise interest rates since the global financial crisis, but said any further hikes would depend on global economic conditions.

The Bank of Canada increased its key interest rate by a quarter point to .50 percent from a record-low rate of .25 percent.

The bank said thus far the impact of Europe's sovereign debt crisis in Canada has largely been limited to a modest fall in commodity prices.

It said the decision to raise rates still leaves considerable monetary stimulus in place.

Economists widely expected the central bank to raise rates after the country's economy grew 6.1 percent in the first three months of this year, emerging from the global downturn faster than the U.S.

Canada withstood the global economic crisis better than most developed countries. Canada has not experienced the failure of any major financial institution, and there has been no crippling mortgage meltdown or banking crisis due to greater regulation.

"While Canada joined with other countries in taking interest rates down to virtually zero the sense of crisis was never as great here," said Avery Shenfeld, chief economist at CIBC World Markets.

The government recently tightened some mortgage rules over concerns low rates could lead to a bubble. A hot housing market fueled by low rates and rising inflation factored into the rate hike.

The bank noted the robust 6.1 percent growth of Canada's economy led by housing and consumer spending. But Canada's economy, a resource-rich economy dependent on oil and other commodity prices, remains vulnerable to a global downturn.

Shenfeld pointed out that the central bank didn't include the usual statement about further rate hikes being required.

"They've left themselves an out to stop after one trivial move if financial markets and commodity markets continue to tell them that the global economy is going in the other direction," Shenfeld said.

Canada's dollar fell 0.64 to US95.19 cents after the announcement. The central bank said economic conditions around the world are uneven and there's the possibility of renewed weakness in Europe.

"Given the considerable uncertainty surrounding the outlook, any further reduction of monetary stimulus would have to be weighed carefully against domestic and global economic developments," the bank said

Royal Bank Chief Economist Craig Wright noted that although Canada is the first of the G-7 countries to raise rates it is a very modest move. The G-7 includes the United States, the United Kingdom, France, Germany, Italy and Japan.

Australia's central bank left its key interest rate unchanged at 4.5 percent Tuesday, citing increased caution among investors in the wake of Europe's sovereign debt crisis. Australia, which like Canada is heavily dependent on commodity exports, has increased the interest rate six times since October.

Wright said Canada's central bank's statement shows that further rate hikes are not assured.

"It's probably well warranted given the uncertainties out there," he said.

Mark Carney, the head of Canada's central bank, had pledged in April, 2009 to hold rates at the historic-low through mid-2010, but said in his last statement in April that the need for record-low rates is now passing and it is appropriate to begin to lessen the degree of monetary stimulus.

Carney is a former Goldman Sachs executive who took the central bank's top post on Feb. 1, 2008.

Original Article on YAHOO FINANCE

Greece urged to give up Euro

by: Robert Watts - May 30, 2010

Original Article on TIMES ONLINE

THE Greek government has been advised by British economists to leave the euro and default on its €300 billion (£255 billion) debt to save its economy.

The Centre for Economics and Business Research (CEBR), a London-based consultancy, has warned Greek ministers they will be unable to escape their debt trap without devaluing their own currency to boost exports. The only way this can happen is if Greece returns to its own currency.

Greek politicians have played down the prospect of abandoning the euro, which could lead to the break-up of the single currency.

Speaking from Athens yesterday, Doug McWilliams, chief executive of the CEBR, said: “Leaving the euro would mean the new currency will fall by a minimum of 15%. But as the national debt is valued in euros, this would raise the debt from its current level of 120% of GDP to 140% overnight.

“So part of the package of leaving the euro must be to convert the debt into the new domestic currency unilaterally.”

Greece’s departure from the euro would prove disastrous for German and French banks, to which it owes billions of euros.

McWilliams called the move “virtually inevitable” and said other members may follow.

“The only question is the timing,” he said. “The other issue is the extent of contagion. Spain would probably be forced to follow suit, and probably Portugal and Italy, though the Italian debt position is less serious.

“Could this be the last weekend of the single currency? Quite possibly, yes.”

Original Article on TIMES ONLINE

Geithner tells Europe: emulate China

May 28, 2010

Original Article on THE SYDNEY MORNING HERALD

US Treasury Secretary Timothy Geithner said on Thursday Europe should follow China's lead and boost growth since US consumers can no longer support the global economy alone.

Geithner also said ahead of a summit of the G20 group of leading economies in Canada in late June that the United States and Europe were in "broad agreement" over the need to put into place tighter lending rules for banks.

"If the world is going to grow at its potential then we are going to have a more balanced pattern of growth globally," Geithner said after talks in Germany, Europe's biggest economy.

"In the United States we are trying to make sure that growth ... comes with more savings, more private investment. US consumers are going to be less of a source of demand for the world in the future."

He pointedly drew the contrast between Europe and China.

"You can see China recognising that imperative and putting in place a very strong program of reforms to make sure that growth is coming more from domestic demand ... Already consumption is growing much more rapidly.

"The broad challenge of making sure that global growth in the future is more balanced and more sustainable is important and something leaders all agreed and committed to."

But Geithner, who held talks with his German counterpart Wolfgang Schaeuble, sounded a conciliatory note after criticism that austerity cuts by European governments to reduce deficits were jeopardising global growth.

"We all understand and we all agree that part of global recovery, part of making sure our economies are growing ... is to commit to clear objectives for reducing our fiscal positions to sustainable levels over the medium term," Geithner said.

"That is absolutely essential, we all agree on that," he said.

"We are going to get there at somewhat different paces, the magnitude of adjustment will differ, as we all come to this from different positions, with different underlying growth rates, different overall debt burdens."

Alongside Greece, Portugal and Spain -- all of whom have seen their borrowing costs rise sharply in recent months as investors fret over their solvency -- other EU members like Italy and Britain are slashing spending.

Germany is also set to follow suit, while France also wants to tighten its belt.

Geithner met Jean-Claude Trichet, president of the European Central Bank in Frankfurt late Wednesday and Bundesbank head Axel Weber on Thursday. On Wednesday he held talks in London with George Osborne, Britain's new finance minister.

The flurry of meetings is in preparation for a get-together of G20 finance ministers and central bank chiefs in Busan, South Korea on June 4-5 and the leaders' summit in Toronto on June 26-27.

The main aim is to agree on tighter and better coordinated financial regulation in the wake of the financial crisis, with the focus on a possible levy on banks, tougher capital requirements for lenders and improved transparency on financial products.

Geither said that preparations were proceeding well, and that the world was "in a very good position to put in place a much better system than we had going into this crisis."

But he added that some countries had "slightly different approaches" and that there remained some areas where further talks were needed.

"I don't think we will know yet what separates us until we get to the next stage of discussions... I think we all agree we want to have more conservative restraints on capital and leverage," he said.

"We want to design them carefully in a way that makes the system more stable in the future but doesn't create a risk of financial headwinds to the recovery we are seeing happening."

AFP

Original Article on THE SYDNEY MORNING HERALD

U.S. Spending on Food Stamps at All-Time High, Sparking Debate Over Welfare

By Jim Angle
Published May 26, 2010

Original Article on FOXNEWS.COM

The U.S. is now spending more on food assistance than at any time in its history, sparking a debate over whether the roughly 40 million people now receiving the latest version of food stamps at a cost of $73 billion a year are a symptom of a weak economy or are part of a long-term expansion in welfare and related programs.

Food stamp supporters say the record-high spending is simply a reflection of the economic downturn over the last two years.

"The program is expanding because we are realizing a significant downturn in the economy," said Ambassador Eric Bost, who ran the food stamps program in the first years under President George W. Bush. "The food stamp or the SNAP program, as it's referred to now, responds to the changing economic conditions of the country."

"Unemployment is the worst it's been in over 30 years," added Sheila Zedlewski, an expert on poverty policy at the Urban Institute. "The poverty rate is rising. Some people project it will be 15 percent. That would be the highest it has been since the 1960's."

But critics say this and other welfare programs were growing long before the recession and that food stamp usage has exploded over the last decade.

"The number of food stamp recipients has more than doubled since 2000, and the cost of the program has more than tripled," said Chris Edwards, an expert on federal and state tax issues at the libertarian Cato Institute.

Though no one quibbles about the need for more forms of assistance during times of high unemployment, Edwards fears there is more going on here, that there is an effort to just keep expanding such programs.

Some government figures show that only 10 million people have a serious problem with hunger, Edwards said.

"The number of people on food stamps is four times higher than the number of people with a serious hunger problem," he said.

But Bost defended the food stamp program, saying it helps the most vulnerable.

"Forty nine percent of the people that are participating in this program are children," he said. "Ten percent are elderly and a vast majority of the other persons that are participating in the program do work. They just don't earn enough money to meet all of their nutritional needs."

Melissa Boteach, a poverty policy expert at the liberal Center for American Progress, said that last year, nearly 1 in 4 children were in a household struggling against hunger.

"And nearly 50 million Americans overall lived in households struggling against hunger so this is a serious problem in this recession," she said.

Bost, the food stamp administrator during the Bush administration, said the numbers should fall as the economy gets better.

"When there's a significant downturn you see an increase in the number of people participating and enrolled in the program when the economy is strong and doing well you see fewer people," he said.

But some critics are not so sure.

"You certainly expect the food stamp program to go up during a recession, that's not a bad thing," said Robert Rector, a poverty expert at the conservative Heritage Foundation. "What we should be concerned about is even before the recession the food stamp program was increasing dramatically, because the government was reaching out to bring people into the program and then make them dependent."

If the program were to return to the levels of the early 2000's, he said, that would be ok, but he fears that is not what's going to happen.

Looking beyond just food assistance, Rector looks at some 70 programs aimed at assisting the poor and points to President Obama's spending projections for them in the years to come.

"If you look at Obama's own projections, he's projecting to spend over $10 trillion on assistance to the poor over the next decade and that's without the cost of Obamacare, the new health care program that he's created," he said. "This is something that the United States simply cannot afford."

He argues that Obama has no intention of letting assistance to the poor shrink even when the economy is healthy again and says he intends to expand such spending by more than a third over usual levels.

"He's creating a permanent spread-the-wealth-state funded through deficits and borrowing from the Chinese," Rector said.

Original Article on FOXNEWS.COM

Japanese Exports Rise for Fifth Month on Asian Demand

By Keiko Ujikane - May 26, 2010

Japan’s exports rose more than economists estimated in April, the first sign that the nation’s trade-led expansion extended into the second quarter.

Shipments abroad advanced 40.4 percent from a year earlier, the fifth straight increase, compared with 43.5 percent in March, the Finance Ministry said today in Tokyo. The median estimate of 17 economists surveyed by Bloomberg was for a 38.3 percent gain.

Growing demand in China and developing Asia is bolstering business for companies from Canon Inc. to Komatsu Ltd., prompting them to forecast higher earnings. While those sales fuel the nation’s expansion, a deepening sovereign-debt crisis in Europe is also destabilizing stock and currency markets and may cloud Japan’s growth prospects in coming months.

“So far, the recovery’s been driven by exports, and we’re likely to see a continuation of that” this quarter, said Noriaki Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “Some kind of moderation is unavoidable, but we’ll continue to see growth.”

Last month’s gain was fueled by demand for cars, auto parts and electronic equipment. Asia and the U.S. led the increase, while growth in shipments to Europe slowed, signaling the region’s debt crisis may already be damping demand.

Europe’s woes caused the yen to touch its highest level against the euro in eight years this week, threatening the competitiveness of Japanese exporters. The yen has gained about 14 percent versus the euro this month and 4 percent per dollar.

Yen, Stocks

Japan’s currency traded at 90.08 per dollar at 10:16 a.m. in Tokyo from 89.97 before the report, and was 110.02 against the euro from 109.52. The Nikkei 225 Stock Average fell 0.2 percent. It slid to the lowest since November earlier this week.

Imports climbed 24.2 percent from a year earlier, leaving a trade surplus of 742.3 billion yen ($8.2 billion), the ministry said. That’s about 15 times bigger than the 49 billion yen surplus posted in April 2009, when Japan was beginning to emerge from its worst postwar recession.

Export growth accelerated to a seasonally adjusted 2.3 percent in April from March’s 1 percent, and imports rose 3.4 percent.

A surge in exports drove most of Japan’s 4.9 percent annualized growth in the first quarter. Much of that demand came from developing markets in Asia.

Canon, Komatsu

Canon, the world’s biggest maker of cameras and office equipment, last month raised its full-year forecasts for profit and revenue, as Asian sales drive growth. Komatsu, the world’s second-biggest maker of construction equipment, said profit will almost triple this year as Chinese orders jump.

Global sales of excavators may rise 25 percent because of demand from China, parts maker Kayaba Industries Co. said last week, twice as much as the Japanese company’s forecast.

Exports to China, Japan’s biggest market, climbed 41.4 percent from a year earlier to 1.15 trillion yen, a record amount for the month of April. Shipments to the U.S. advanced 34.5 percent, accelerating from 29.5 in the previous month. Sales to Europe increased 19.8 percent, slowing from 26.7 percent in March.

While Europe isn’t Japan’s largest market, the nation’s trade will be affected when indirect exports routed through Europe are taken into account, Morgan Stanley MUFG Securities Co. said this week.

Passed ‘Sweet Spot’

Japan’s “economic activity has now passed the sweet spot, and we may well see renewed stagnation,” Morgan Stanley economists Takehiro Sato and Takeshi Yamaguchi wrote in a report on May 25. It’s “dangerous to dismiss the impact of Europe on Japan’s trade.”

Only 12 percent of Japan’s shipments abroad went to the European Union in the year ended March 31, compared with 19 percent to China and 16 percent to the U.S., according to the Finance Ministry.

Matsuoka at Daiwa Asset said he’s most concerned about how a drop in China’s exports to Europe might affect Japan. Europe is China’s biggest market.

Not everyone is convinced Europe’s crisis will hamper Japan’s recovery. The Bank of Japan raised its economic assessment this week, citing signs the country’s rebound was becoming more sustainable.

Central bank Governor Masaaki Shirakawa said on May 21 that Europe’s debt woes have had a “limited” effect on Japan’s expansion so far, though any escalation would become a “downside factor.”

Sales of New Homes Jump to Two-Year High on Tax Credit

By Bob Willis and Timothy R. Homan - May 26, 2010

Purchases of new homes in the U.S. jumped in April to the highest level in two years as buyers rushed to qualify for a government tax credit before it expired at the end of the month.

Sales climbed 15 percent to an annual pace of 504,000, the most since May 2008, after surging a revised 30 percent the prior month, figures from the Commerce Department showed today in Washington. The median sales price dropped 9.5 percent from the same month last year, which may reflect increased demand from first-time buyers seeking the government incentive.

To receive a tax credit worth as much as $8,000, contracts had to be signed by the end of April, meaning demand will probably wane in coming months. Rising foreclosures and falling stock prices caused by concern over the European debt crisis may hamper any recovery in sales and construction into the second half of the year.

“This is very volatile with the end of the tax rebate,” Yanick Desnoyers, assistant chief economist at the National Financial Bank Group in Montreal, said before the report. “You’ll see a drop in the level of activity” after the credit effect fades.

Economists forecast sales would rise to a 425,000 annual rate in April, according to the median of 75 projections in a Bloomberg News survey. Estimates ranged from 370,000 to 450,000. The March sales pace was revised up to 439,000 from a previously reported 411,000.

Factory Expansion

Orders for durable goods rose in April for the fourth time in five months, pointing to strength in U.S. manufacturing at the start of the second quarter, another Commerce Department report showed. The 2.9 percent increase in bookings for goods meant to last at least three years was the biggest in three months and followed little change in March.

Orders excluding transportation unexpectedly fell 1 percent last month, coming off a revised 4.8 percent March jump that was the biggest in almost 5 years.

Home sales increased in three of four U.S. regions last month, led by a 32 percent jump in the Midwest. Purchases in the Northeast were little changed.

The median price of a new home decreased to $198,400, the lowest level since December 2003. The jump in sales was concentrated in houses costing less than $300,000, perhaps reflecting demand from first-time buyers.

The supply of homes at the current sales rate dropped to 5 month’s worth, the lowest level since December 2005, from 6.2 months in March. There were 211,000 new houses on the market at the end of April, the fewest since 1968.

Existing Homes

A report May 24 from the National Association of Realtors showed sales of existing homes jumped to a higher-than-forecast 5.77 million rate in April, while the number of unsold homes on the market surged by the most in a decade.

The Obama administration extended an incentive for first- time homebuyers in November and expanded it to include some current owners. The deadline for signing contracts was the end of April, and transactions must close by June 30.

Purchases of new houses are tabulated upon contract signings, meaning April was the last month in which the credit could affect demand.

Sales of previously owned homes, which account for more than 90 percent of the housing market, are tabulated at contract closings, so the credit may still influence demand through June.

Foreclosures, Prices

New home sales have seen their share of the entire home purchase market shrink relative to existing home sales, whose prices have been driven down by mounting foreclosures.

Foreclosures may reach a record 1.1 million this year, Lawrence Yun, chief economist at the National Association of Realtors, said this week in an interview. Another 600,000 may change hands in so-called short sales, in which banks agree to accept less than the full value of the mortgage, he said.

Some homebuilders are seeing a pickup. D.R. Horton Inc., the second-largest U.S. homebuilder by revenue, posted its second straight quarterly profit in the first quarter, boosted by a 55 percent gain in orders.

About 80 percent of the closings were ”spec” homes built in anticipation of customer orders, a strategy that paid off as buyers rushed to beat the tax deadline, President and Chief Executive Officer Donald R. Tomnitz said in a conference call with investors April 30.

“We have continued to sell strong on these specs through the month of April,” he said. “If we see strong sales, we will probably put some more specs out there to meet that demand.”

New Government Posts Record April Deficit Before June 22 Emergency Budget

By: Craig Stirling

Britain posted its largest April budget deficit since monthly records began in 1993, highlighting the scale of the squeeze to come as Chancellor of the Exchequer George Osborne prepares to deliver an emergency budget.

The 10 billion-pound ($14.4 billion) shortfall compared with 8.8 billion pounds a year earlier, the Office for National Statistics said in London today. The result was below the 10.9 billion-pound median forecast in a Bloomberg News survey.

The report sets the scene for what economists say will be the sharpest cuts in public spending for a generation. Osborne has ordered departments to find 6 billion pounds of savings this year and will set out further measures in his June 22 budget.

“This is a hole that they’ll have to fill not just by spending cuts but also by tax rises,” said Peter Dixon, an economist at Commerzbank AG in London. “They have no room for maneuver.”

The pound was little changed against the dollar at $1.4371 as of 1:52 p.m. in London.

Conservative Prime Minister David Cameron and his Liberal Democrat deputy Nick Clegg yesterday said their coalition government is united over the need for immediate action to reduce the deficit, which reached a post-war high of 11.1 percent of gross domestic product in the fiscal year to March.

The newly created Office of Budget Responsibility, headed by former Bank of England policy maker Alan Budd, will produce new forecasts for the deficit before the emergency budget.

Signs of Recovery

The public finances typically get a boost in April as quarterly installments of tax on company profits come in, and there are signs the recovery is starting to feed through.

Current receipts rose 7.2 percent from a year earlier. In cash terms, VAT soared 34 percent, corporation tax gained 13 percent and national insurance contributions, a payroll tax, increased 22 percent. Government spending climbed 6.5 percent.

There was also a 7.5 billion-pound downward revision to the deficit in the last fiscal year, 5.5 billion pounds of which came in March alone as higher receipts in April accrued to previous months.

Net borrowing was 145.4 billion pounds rather than 152.8 billion pounds first reported. Excluding financial interventions, the Treasury’s main forecasting measure, the deficit was 156.1 billion pounds instead of 163.4 billion pounds.

Budd’s Assessment

The scale of budget cuts will depend on the view Budd and his colleagues take on the permanent damage done to the public finances by the financial crisis and record recession, said Gemma Tetlow, an economist at the Institute for Fiscal Studies in London. The last government estimated that hole to be 69 billion pounds.

“The undershoot in borrowing last year in isolation might reduce this estimate, although many other factors such as their assessment of the amount of spare capacity in the economy will influence their final verdict,” Tetlow said. “The government will then have to decide how fiscal policy should respond.”

The looming deficit-cutting drive has overshadowed prospects for consumer spending. Osborne has pledged to cut the deficit at a faster pace than Gordon Brown’s Labour government had planned and refused to rule out raising the rate of value- added tax, a 17.5 percent levy on sales of goods and services.

Next Plc, the second-largest U.K. clothing retailer, said on May 5 that it was “very cautious” on the outlook for households because “whatever form this action takes, it is likely that it will act to restrain growth in consumer spending.”

A measure of cash entering and leaving the public sector showed an 8.8 billion-pound deficit in April. Economists predicted a 7 billion-pound shortfall, according to the median forecast in a Bloomberg survey. Net debt climbed to 893.4 billion pounds, or 62.1 percent of GDP.

To contact the reporter on this story: Craig Stirling in London at cstirling1@bloomberg.net.

Sweden Emerges as `Safe Harbor' From Europe Debt Woes

By Niklas Magnusson and Adam Ewing

When the Baltic countries’ economies collapsed, investors fled Sweden because of its banks’ investments there. Today, they’re flocking to the Nordic country as a refuge from debt-ridden southern Europe.

Banks in Sweden, including Nordea Bank AB and SEB AB, have less at risk in Greece, Italy, Portugal and Spain than most western European countries, Danske Bank A/S figures show. That lending amounted to 2.6 percent of Sweden’s gross domestic product at the end of 2009, compared with 43 percent for Ireland and 35 percent for France, according to Danske.

The modest exposure of Sweden, which hasn’t adopted the euro, to southern Europe’s debt crisis, coupled with the smallest budget deficit in the European Union has instilled confidence in investors. Matters were different in 2008 and 2009, when the Baltics suffered the steepest recession in the EU, sending Swedish bank stocks and the krona slumping.

“Scandinavia is viewed by many investors as a safer place to put money considering the debt crisis affecting the euro-zone countries,” said Espen Furnes, a fund manager at Storebrand ASA in Oslo, which oversees about $54 billion. “Nordic banks have been a defensive play, given their balance sheets are much cleaner, and they are a lower-risk investment compared to many other rivals. They seem a safe place to invest right now.”

Stock Markets Rise

Swedish banks have about $10 billion at risk in Greece, Italy, Portugal and Spain, according to the Bank for International Settlements in Basel, Switzerland, and Danske Bank. Denmark’s $3 billion exposure represents 1.2 percent of its economic output.

The benchmark stock indexes in Denmark and Sweden are the best performers in the developed world this year, up 12 percent and 0.1 percent, respectively, the only developed markets to gain this year. Finland is ranked fourth. That compares with a slump of 28 percent in Greece and a 22 percent drop in Spain.

Sweden’s Svenska Handelsbanken AB, SEB AB and Swedbank AB, the largest Baltic lender, have outperformed the 11 percent decline in the 52-member Bloomberg Europe Banks and Financial Services Index this year. Danske Bank is the eighth-best performer on the index after advancing 5.5 percent.

In the first quarter, all major Nordic banks reported profit that beat analysts’ estimates. Sweden’s four largest banks, Copenhagen-based Danske Bank and DnB NOR ASA of Oslo reported a combined profit of $1.9 billion after loan losses dropped.

‘Safe Harbors’

Nordea shares advanced 1.4 percent to 62.35 kronor in Stockholm trading, while Swedbank gained 2.4 percent to 70.5 kronor. SEB rose 2.6 percent to 41.19 kronor, and Danske Bank increased 0.3 percent to 121.9 kroner.

Investors are seeking “safe harbors,” said Haakan Frisen, an analyst at SEB AB in Stockholm. Sweden’s public finances make it unlikely there’ll be any “financial mistrust” toward Sweden, he said.

“Investors are looking for secure alternatives outside the euro zone and Sweden and Norway are such countries, with a strong state-financial situation and a good industrial structure that benefit from the global recovery and with a large exposure to the U.S. and Asia,” Frisen said, adding that Nordic banks’ small exposure to southern Europe also benefits the region.

The yield on Sweden’s 10-year note is the lowest in 15 months, at 2.56 percent, data compiled by Bloomberg show. That’s less than the 2.72 percent rate Germany pays to borrow for 10 years. The yield on Greek 10-year government bonds stands at 7.83 percent. The cost of insuring against a default by Norway, Finland and Sweden are the lowest in the EU, credit default swaps show.

Southern Europe

Sweden, Denmark and Finland are benefitting from investor concerns about the fiscal problems in southern Europe and doubts that the EU will solve the Greek debt crisis and prevent it from spreading to countries such as Spain, Portugal and Italy.

Some investors aren’t convinced Sweden will prove a safe haven if the sovereign debt crisis leads to a global stock market rout. Sweden’s OMX stock index has dropped 4.3 percent this week, while the krona lost 2.1 percent against the euro and 2.5 percent against the dollar.

In the first quarter of last year, Swedbank slumped 38 percent while SEB, the second-largest lender in the Baltic countries, plummeted 57 percent. Swedbank reported a net loss of 10.5 billion kronor ($1.3 billion) in 2009 after loan losses and provisions in Estonia, Latvia and Lithuania soared. In the first quarter of 2010, it had net income of 536 million kronor, the first quarterly profit in more than a year.

Small Deficits

Sweden is likely to have the smallest budget deficit in the EU in 2010 and 2011, according to EU forecasts. Sweden, Bulgaria and Estonia are the only EU members forecast this year to meet the euro-region requirement of a budget deficit below 3 percent of GDP, even though none of the three countries use the euro.

“In a backdrop of extreme volatility, the Nordic region is a safe place to put your money,” said Karen Olney, a London- based strategist at UBS AG, adding that it may be time to sell Nordic shares and buy shares of exporters in euro countries. “We are not making a wholesale move out of the Nordic or Scandinavian markets, but we suggest taking profits along the way given there are many to take.”

To contact the reporters on this story: Niklas Magnusson in Stockholm at nmagnusson1@bloomberg.net Adam Ewing in Stockholm at aewing5@bloomberg.net.