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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 US Existing Homes Fell in June

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 Goverment Layoffs at State, Local Level

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 Card

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

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

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 Pnesions $1.4 Billion Value

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

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

US Prices Could rise with Chinese Workers' Salaries

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

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.