Archive for July, 2009

U.S. economy shrinks modestly (Reuters)

Friday, July 31st, 2009 | Finance News

WASHINGTON (Reuters) –
The deepest U.S. recession since the Great Depression showed signs of easing in the second quarter, buttressing hopes for a second-half recovery, though it may be anemic as consumers are still strapped for cash.

Gross domestic product, which measures total goods and services output within U.S. borders, fell at a 1.0 percent annual rate in the second quarter, the Commerce Department said on Friday, after tumbling 6.4 percent in the January-March quarter, the biggest decline since early 1982.

Analysts who had expected a decline in second-quarter GDP of around 1.5 percent said the report, which showed a moderating pace of decline in key areas such as business investment and exports, provided the clearest evidence yet that the 19-month-old recession was almost over.

"The recession is entering its final hours. Today's report shows those green shoots are starting to grow again, and the economy is finally moving down the road to recovery," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York.

It will be a recovery from a low point. The International Monetary Fund in its annual report on the U.S. economy said the recession seemed to be ending but cautioned recovery would be slow.

On a year-over-year basis, second quarter GDP declined a record 3.9 percent. Previously, the government said GDP had fallen at a 5.5 percent annual rate in the first quarter but it revised that to a steeper fall.

Including the second-quarter contraction, GDP has fallen for four straight quarters -- the first time that has happened since records were started in 1947.

A steep drop in consumption spending, the main engine of the economy, fanned fears of a sluggish growth pace assuming the economy does recover as anticipated in the second half.

Consumer spending, which accounts for over two-thirds of U.S. economic activity, fell at a 1.2 percent rate in the second quarter after rising 0.6 percent in the previous quarter. That sliced 0.88 percentage points from second quarter GDP, the department said.

"The increase in growth over the second half of 2009 is likely to be uneven, and the economy won't be firing on all cylinders again until three-quarters of GDP -- consumer expenditures and business capital spending -- start to pull their own weight," said Rupkey.

Investors set aside initial worries over the drop in consumer spending, lifting the Dow Jones industrial average stock index 17.15 points to 9,171.61. Sentiment was also lifted by a report showing business activity in the country's Midwest in July rose to its highest since September.


President Barack Obama, whose poll numbers have been dropping because of concern about the costs of health-care reform and the ailing economy, said the GDP data was a sign the economy was headed in the right direction.

But he also said unemployment remained an obstacle.

"As far as I am concerned we won't have a recovery as long as we continue losing jobs. Today's GDP is an important sign the economy is headed in the right direction," Obama said.

In contrast to the weak consumer reading, business investment improved significantly in the second quarter.

The report showed business investment decreased at an 8.9 percent rate in the second quarter after diving 39.2 percent the previous quarter. Investment in nonresidential structures fell at an 8.9 percent rate compared to a 43.6 percent drop in the first quarter.

Residential investment, which is at the core of the downturn, dropped at a 29.3 percent rate in the April-June period after plummeting by 38.2 percent in the first quarter.

Business inventories continued to be a drag on overall GDP, declining by a record $141.1 billion in the second quarter as firms aggressively cut back on new production to reduce stockpiles of unsold goods.

The drop in inventories shaved 0.83 percentage point from second-quarter GDP, but was seen providing a springboard for the much-anticipated economic recovery in the second half.

"It really sets the stage for a positive third-quarter growth number and maybe now a pretty decent pop to the third quarter given the size of the inventory drawdown," said John Ryding, chief economist at RDQ Economics in New York.

Excluding inventories, GDP fell 0.2 percent in the second quarter compared to a 4.1 percent drop in the first quarter.

A free-fall in exports braked sharply in the second quarter. Exports fell at a 7.0 percent rate after plunging 29.9 percent in the first quarter. There were positive contributions from the federal, state and local governments during the quarter.

Annual benchmark revisions issued by the department showed the economy barely grew in 2008, expanding at an annual rate of 0.4 percent, the smallest since 1991, instead of the 1.1 percent previously estimated.

They also showed the decline since the recession began in 2007 was steeper than previously thought. From the fourth quarter of 2007 to the first quarter of 2009, real GDP fell at an average annual rate of 2.8 percent instead of a 1.8 percent decline.

(Additional reporting by David Lawder and Jeff Mason in Washington; Editing by James Dalgleish)


IMF: Worst over for U.S. but recovery to be slow (Reuters)

Friday, July 31st, 2009 | Finance News

WASHINGTON (Reuters) –
The sharp contraction in the U.S. economy "seems to be ending" but recovery will be slow with risks still looming from the weak labor and housing markets, the International Monetary Fund said on Friday.

The IMF, in its annual report on the U.S. economy, stuck to earlier forecasts that gross domestic product will shrink by 2.6 percent in 2009 and then rise by 0.8 percent in 2010.

The report was prepared before U.S. data on Friday showed the economy contracted by a 1.0 percent annual rate in the second quarter.

"As a result of their increasingly strong and comprehensive policy measures, the sharp fall in economic output seems to be ending, and confidence in financial stability has strengthened," the IMF said in its report, which followed consultations with U.S. officials and institutions.

"Nevertheless, with financial strains still elevated, the recovery is likely to be gradual, and risks are tilted to the downside," it said.

The IMF said unwinding fiscal and monetary stimulus measures

would have to wait until a sustainable recovery is underway. But they need to develop exit strategies from stimulus programs, strengthen financial regulation and in the medium term cut budget deficits.

Charles Kramer, head of the IMF's North American Division, said the United States may need more stimulus measures if economic and financial conditions worsen significantly.

Still, he said, policy-makers should be thinking about how to end the generous fiscal and monetary policy measures put in place over the last 10 months.

"We should emphasize that now is not the time to implement the exit, but it's a good time to be developing and communicating exit strategies to underpin confidence," Kramer told reporters on a conference call.

The IMF's North American division deputy, Marcello Estevao, said rising unemployment is the greatest threat to recovery efforts.

"The weakness in the labor market is going to reflect into the weakness in the housing market. When people lose jobs, wages don't grow as much, it's harder for people to pay their mortgage, Estevao said.

"There is substantial uncertainty exactly how this feedback would play out. And that is one of the reasons we have this very gradual recovery outlook for the U.S."

He said the IMF sees U.S. GDP growing "a little bit" in the second half, with a sustained recovery not starting until the second quarter of 2010.

The IMF's forecast for unemployment was unchanged, seeing 2009 unemployment averaging 9.3 percent and rising to 10.1 percent for 2010.


The IMF directors said the Federal Reserve would need to maintain a diverse set of tools to respond to evolving market conditions, and it recommended that assets it holds from bailed-out financial institutions, known as the Maiden Lane facilities, be transferred to the U.S. Treasury to protect the central bank from credit risk.

The value of assets that the Fed has taken over from American International Group (AIG.N), for example, have been reduced by several billion dollars in recent months.

The IMF welcomed the Obama administration's efforts to revamp the U.S. financial regulatory system, and said this should aim to discourage size and complexity among financial firms to limit potential systemic risks in the system.

The IMF also maintained its view that the U.S. dollar was "moderately overvalued," though Kramer noted the dollar has been volatile because of safe-haven flows into U.S. assets during the crisis and the subsequent unwinding of that as the crisis eased.

(Editing by James Dalgleish)


Executive pay limits advance in U.S. Congress (Reuters)

Friday, July 31st, 2009 | Finance News

WASHINGTON (Reuters) –
Eye-popping Wall Street bonuses could be banned by the U.S. government if pay packages are deemed to encourage "inappropriate risks," under a bill approved on Friday by the U.S. House of Representatives.

The bill would allow regulators to prohibit incentive-based pay packages at large financial institutions if the packages are found to induce excessive risk-taking. Institutions with assets of less than $1 billion would be exempted.

The bill would also give shareholders in public companies the right to cast annual, nonbinding votes on executive pay, offering them a louder, if largely symbolic "say on pay."

In addition, the legislation would require new standards of independence from management for corporate compensation committees and compensation consultants.

Heading next to the Senate, where its outlook is uncertain, the measure raises to a new level Washington's efforts in recent years to restrain the high pay of elite financial managers, a perennial problem in U.S. corporate governance.

House passage of the measure also represents progress for efforts by the Obama administration and congressional Democrats to tighten bank and capital market oversight amid the worst financial crisis in generations and a stubborn recession.

Executive pay is out of control, even as many Americans struggle to stay in their homes and keep their jobs, said Democratic Representative James McGovern, in floor debate.

"Corporate executives are continuing to give themselves multimillion-dollar pay packages ... The misbehavior in corporate America must come to an end," McGovern said.

Republicans criticized the House bill, largely echoing complaints from legions of business lobbyists fighting to block it and other Democratic financial regulation reforms.

Republican Representative Pete Sessions said the bill would "undermine confidence in corporate America" and amount to "a government takeover of the free enterprise system."


The executive commission of the European Union has proposed letting national authorities fine or raise capital requirements on banks whose pay policies encourage too much risk taking.

Germany's lower house of parliament, the Bundestag, last month approved a law placing restrictions on executive pay.

Passage of the U.S. House bill came a day after a report that more than 4,700 bankers and traders got 2008 bonus payments of $1 million or more at large banks bailed out by taxpayers.

In spite of a dismal year on Wall Street, the report by New York Attorney General Andrew Cuomo said bonuses paid at nine bailed-out banks exceeded some of the banks' annual profits.

Calling high pay levels "vulgar," Democratic Representative Brad Miller said, "We are now in the worst economic downturn since the Great Depression and we have been perilously close to a financial collapse ... We know what went wrong, essentially the same things that went wrong in the 1920s. Corporate executives were looting their companies ...

"The idea that corporate executives were acting in the best interest of their shareholders is simply a farce."

Republican Representative Jeb Hensarling said in House floor debate that some of the Democrats' rhetoric on the pay bill "seems like a lot of recycled class warfare to me."


Congress in February restricted bonuses and other forms of pay for top managers at banks and companies that got help under the government's $700-billion financial industry bailout, the Troubled Asset Relief Program, or TARP.

Some banks, such as Citigroup, have not repaid their government aid and must adhere to the limits. Others, such as Goldman Sachs, Morgan Stanley and JPMorgan Chase, have repaid and are now free of the restrictions.

Goldman Sachs this month reported sharply higher quarterly profits and set aside $6.65 billion for compensation, putting its average employee on pace to earn $900,000 in 2009. The firm last year accepted $10 billion of taxpayer aid.

President Barack Obama is pleased with the House pay bill, White House spokesman Robert Gibbs said on Thursday.

The administration has an executive pay proposal, as well, but it does not include empowering regulators to ban too-risky incentive-based pay at banks and other financial firms. It does call for an investor "say on pay" and more board independence.

The House, where Democrats are firmly in control, passed a stand-alone 'say on pay' bill in April 2007, but it died in the Senate, where Republicans hold a stronger minority position.


* FACTBOX-Major US financial regulation initiatives [ID:nN29296976)

* US flood insurance program extended for 6 months [ID:nN29293265]

* INTERVIEW-Senior US Republican vows student loan bill fight [ID:nN29287173]

* US bill would restrict OTC derivatives holdings [ID:nN30370493]

(Editing by James Dalgleish)