In the end, pay czar Kenneth Feinberg’s hardest case was AIG.
The troubled insurer lobbied hard to let three of its executives keep their bonuses.
AIG told Feinberg that three executives, who were entitled to large retention payments, were particularly critical to the company’s long-term financial success and should be able to keep their bonuses.
Feinberg said Thursday that he relented in the case of AIG even though he was able to pare down similar pay clauses at the other six companies in his purview.
Feinberg was appointed by President Obama in June to oversee executive compensation at companies getting bailout funds. On Thursday he unveiled a sweeping plan to rein in pay for top executives at the seven most heavily bailed out companies.
When it came to AIG’s request, Feinberg said he thought long and hard.
In finally agreeing to the special cases, he said that paying those employees bonuses was in the public interest, since they were needed to help AIG pay back the government.
"We listened very, very carefully to [AIG CEO Robert] Benmosche," said Feinberg on Friday at George Washington Law School in Washington. "AIG compensation practices are unique. They are on the cusp. We took into account independent, very credible opinions of others to come up with a package that we think will help AIG thrive."
In exchange for allowing them to keep their retention bonuses, Feinberg trimmed their 2009 salaries for the last two months of the year and for 2010.
"AIG had one very thorny situation," said Feinberg at a media briefing on Thursday. "In that particular case, I gave a it a lot of thought and decided that if AIG wants these contracts enforced in cash, they’re entitled to those contracts enforced in cash."
It appears from a table provided by Feinberg’s office that the three employees will receive bonuses of about $4 million, $5 million and $7 million. Feinberg did not identify the executives by name or salary.
"The fact of the matter is, I met with AIG officials; there is clearly an understanding that the contracts are valid," Feinberg told CNN on Thursday. "Since those contracts are valid, I did take dollars into account for setting compensation for 2009 and 2010."
A spokeswoman for AIG said Thursday the company was still looking into the matter.
CEO pay OK, other bonuses get dropped
In addition to those three executives, Feinberg also ruled on ten others at AIG.
One of them was chief executive Robert Benmosche, who joined AIG in August. The pay czar had already approved the CEO’s pay package on Oct. 2. The new CEO will receive $10.5 million in annual compensation, including $3 million in cash, $4 million in stock options and $3.5 million in annual performance bonuses.
For executives at AIG’s Financial Products division, the unit that was responsible for the insurer’s near-collapse, Feinberg ruled that they should only receive their base salaries and no other compensation "of any kind."
AIG had proposed bonuses for those employees, but Feinberg shot them down.
"The performance of AIG Financial Products has contributed significantly to the deterioration in AIG’s financial health," Feinberg wrote in his letter to AIG explaining his pay decisions. "Accordingly, the Special Master has determined that AIG’s proposed compensation structures for these employees are inconsistent with the public interest."
CEO tells employees pay czar’s reach ‘quite limited’
The news comes a day after Benmosche sought to assure his staff that the pay czar’s reach will be limited, according to a memo that the CEO sent employees late Wednesday.
In the memo, Benmosche said that Feinberg does not have the jurisdiction to adjust the compensation of the vast majority of AIG employees.
Benmosche said early reports on Feinberg’s ruling on AIG’s compensation were inaccurate but did not say which contracts in particular he was referring to.
"It is important for all of you to know that the Special Master’s jurisdiction is quite limited," said Benmosche in the memo. "He specifically has advised us that he is not requiring any retroactive salary adjustments."
Separately, AIG has asked Feinberg to make a recommendation on how to proceed with the remaining $198 million in controversial bonuses to employees of its Financial Products division. There was a great deal of public uproar after AIG paid employees of that division $168 million in bonuses in March, and AIG indicated it wanted the government’s seal of approval for the next payment.
Those bonuses were contracted in late 2008, with half to be paid in 2009 and half in 2010. Even though those bonuses fall outside his jurisdiction, Feinberg has the ability to issue recommendations on bonuses that were contracted before February 2009.
According to a recent report from Neil Barofsky, the special inspector general of the $700 billion bailout program, Feinberg has recommended to AIG that the full $198 million not be paid out in full.
Feinberg has not yet made a specific recommendation to AIG about how much the insurer should reduce the payments, according to Barofsky.
–CNNMoney’s Jennifer Liberto contributed to this report.
China’s economic growth picked up last quarter as expected as a combination of breakneck investment and buoyant bank lending more than made up for a slump in exports.
But the 8.9% growth rate fell short of some of the more optimistic predictions in the market, and the government promptly said it would stick to the ultra-loose policies it has been following for the past year.
Andy Rothman, a macro strategist for brokerage CLSA in Shanghai, described the figure as strong but not strong enough to trigger a policy tightening, which he said was unlikely until the second half of 2010 at the earliest.
"China has begun, however, to implement its ‘exit strategy’, which is a gradual reduction in the level of stimulus (credit and infrastructure spending) in response to rising private investment and consumption," Rothman said in a note to clients.
Last quarter’s year-on-year growth exactly matched the forecast of a Reuters poll and was up from 7.9% in the April-June period and just 6.1% in the first three months of 2009 in the depths of the global downturn.
Goldman Sachs said quarter-on-quarter growth had in fact slowed to around 10.2% from the second quarter’s annualized pace of 16.5%.
But with GDP expanding 7.7% in the first nine months, the government said it would now easily reach its target of 8% average growth for the year as a whole, widely regarded as the minimum needed to keep a lid on unemployment.
"We can say with certainty that achieving 8% GDP growth this year is completely assured. Without doubt," said Li Xiaochao, the spokesman of the National Bureau of Statistics, which released the figures.
Li, though, quickly reaffirmed the policy status quo.
"We have stressed a proactive fiscal policy and appropriately relaxed monetary stance to keep consistency and stability in economic policy — according to my understanding, that means no change in policy," he said, restating the thrust of a cabinet statement issued on Wednesday.
A breakdown of growth so far this year showed just how effective Beijing’s 4 trillion yuan ($585 billion) pump-priming package has been in galvanizing investment and putting the once-fanciful 8% growth goal target easily in reach.
Capital spending contributed 7.3 percentage points to headline growth of 7.7% in the first three quarters, while consumption accounted for 4.0 percentage points. Net exports, meanwhile, subtracted 3.6 percentage points.
Domestic demand
With the United States and Europe emerging from recession with huge debt burdens that will weigh on consumption, global policymakers are looking to China to pull more weight by expanding domestic demand.
Thursday’s data showed China doing just that.
Fixed-asset investment in urban areas, which has been the main driver of China’s double-digit growth of recent years, rose by a third in the first nine months.
Whereas investment in the first half of the year was overwhelmingly government-led, capital spending by mostly private real estate developers is now surging in response to the ready availability of credit and growing confidence in the economy.
That confidence is being buoyed by rising incomes. Urban Chinese had 10.5% more disposable income in the first nine months, after adjusting for inflation, than a year earlier.
Retail sales rose 15.5% in the 12 months to September, accelerating from August’s reading of 15.4% and exactly in line with market forecasts.
Industrial production growth quickened to 13.9% in the 12 months to September from 12.3% in August, beating the median market forecast of 13.3%. Daily steel output in September matched August’s record, while iron ore production scaled a new high.
"Good figures. Economic growth has picked up very swiftly. said Wang Hu, an analyst at Guotai Junan Securities in Shanghai.
Stronger next year?
Most economists expect even stronger growth in 2010 given this year’s relatively low base of comparison, the likelihood of a partial recovery in net exports and the fiscal stimulus already in the pipeline.
The median forecast of a Reuters poll published on Oct. 18 was for 9% growth in 2010, but several banks have since taken an even rosier view.
In the currency market, non-deliverable forwards (NDF) over the past week had priced in a faster pace of yuan appreciation, partly in anticipation of a sparkling set of data.
But the yuan lost a little ground in the NDF market after the figures and the Shanghai stock market was also underwhelmed. The main index ended the morning down 0.05 percent.
Although the economy has perked up, China is still mired — technically — in deflation. The consumer price index fell 0.8% in September from a year earlier, while producer prices were down 7%. Both figures were exactly as expected.
Both gauges have shown prices rising steadily month on month since July, but Li, the NBS spokesman, said inflation was not a problem for now.
Bruce Wasserstein, chief executive of asset management firm Lazard, died Wednesday. He was 61 years old.
He was hospitalized with an irregular heartbeat on Monday, according to reports, but the cause of death was not immediately known.
The Lazard board of directors named vice chairman Steven J. Golub interim chief executive officer effective immediately.
The board said Wasserstein "has put into place a long term-strategy as well as a broad and deep leadership team, in whom we have confident and who will sustain his vision."
Wasserstein headed Lazard (LAZ) since 2002, taking the firm public in May 2005. The investment banker was known for his ruthless, high-stakes dealmaking. He initiated many hostile takeovers and redefined how mergers and acquisitions could be accomplished.
Wasserstein’s most high-profile deal was Kohlberg Kravis Roberts’ 1988 leveraged buyout of RJR Nabisco, on which he advised. The takeover was the subject of the book "Barbarians at the Gate."
During his career, Wasserstein famously advised activist investor Carl Icahn in his attempted takeover of CNNMoney.com parent company Time Warner (TWX, Fortune 500) in 2006.
"Wasserstein taught a generation how to do deals, and was a big brother of sorts to so many investors nationwide," said Michael Williams, dean of Touro College’s Graduate School of Business in New York. "He established the model for mergers and acquisitions. He was just remarkable."
Prior to his tenure at Lazard, Wasserstein was the co-head of investment banking at The First Boston Corp., and he served as an attorney at Cravath, Swaine & Moore. Wasserstein graduated from Harvard Business School and earned a law degree from Harvard Law School.
Wasserstein also was chairman of Wasserstein & Co., a private merchant bank, and he owned a group of media publications, including New York Magazine and TheDeal Magazine.
Airfares are at their lowest levels in years, so airlines are trying to find new ways to make money. And that means extra fees — more than $1 billion from last year alone, according to the Department of Transportation.
The latest add-on is a $10 surcharge for flying on some of the busiest travel days of the year, most of which fall right around the holidays:
The extra charge applies to three days: Nov. 29, which is the Sunday after Thanksgiving, and Jan. 2 and 3. The carriers have added 10 more peak days through 2010.
Five carriers, including U.S. Airways (LCC, Fortune 500), AMR Corp.’s (AMR, Fortune 500) American Airlines,UAL Corp.’s (UAUA, Fortune 500) United Airlines, Continental Airlines (CAL, Fortune 500) and Delta Air Lines (DAL, Fortune 500), recently added the surcharge to holiday flights.
Airlines have historically raised their fares during the holiday season, rather than impose additional charges. But experts say that adding a fee is less disruptive than a fare increase.
"It’s interesting that they’re doing it this way," said Anne Banas, executive editor of travel site SmarterTravel. "I think they’re just easing the consumers into paying more incrementally. They’re inching it up, like they did with baggage."
The holiday surcharge joins the slew of fees that many airlines began charging in 2008 for once-free amenities such as checked baggage, curbside check-in, pet travel, ticket re-scheduling and oversized bags, as well as food, soda and juice.
Prepaying for checked baggage
For passengers who are willing to prepay baggage fees in a big lump sum, United recently unveiled a tweaked version of its baggage fees.
Its Premier Baggage Subscription costs $249 a year, and covers the first two checked bags for a single traveler, and up to eight friends or family members included in the ticket purchase, according to United Airlines spokesman Rahsaan Johnson.
"If you’ve got a family of nine going to a family reunion, you could save the $249 [in one flight]," he said.
Normally, United charges $15 for the first bag and $25 for the second. So a single traveler with two checked bags would have to travel seven times in one year to save money with the subscription.
Business travelers who have to foot their own travel bills could benefit, according to said George Hobica, founder of the Airfarewatchdog.com, but he doubted that too many fliers fit the family profile described by Johnson.
Paying more for priority boarding
In another bid to make money, some airlines are selling optional benefits to upgrade service.
United’s Premier Travel program now extends its Premier membership benefits, such as priority boarding and security line access, to passengers who pay $47 for one day.
United passengers can also buy into its Red Carpet Club for a day. For $50 at the door or $39 online, they wait in a luxury lounge with passengers who pay $525 for the annual membership.
The one-day Premier Travel offer could work for travelers who "know they’re going to go through a busy airport with lots of security lines" and want to streamline the process, Hobica said.
He added that the Red Carpet Club could also be useful if you’re suddenly confronted with a canceled or delayed flight. "If the airport is in chaos because of weather, I would definitely do the [Red Carpet,] because it’s much more comfortable waiting."
Southwest Airlines recently added an optional $10 early-bird priority boarding fee, according to company spokeswoman, Brandy King, who said this will allow passengers to check in 36 hours ahead of the flight, instead of the typical 24.
"I can’t imagine that they’ll make much money from that," said Banas. For most travelers, she said early boarding fees are just not worth it.
Hobica dismissed the plan as "a timid effort to raise their fees without offending anyone."
Deals are still out there
One fee that is coming down is pet transport. Hobica said that United reduced the cost to $125 from $175 in August, and Delta lowered its fees to $100 from $150.
"United had some of the highest fees, and that’s why they took them back," he said, noting that United also eliminated its fee for booking frequent flier tickets 21 days or less ahead of a flight.
Airlines "can’t really charge for much more, to be honest," according to Rick Seaney, Chief Executive of Farecompare.com.
But 2009 is still a great year to fly, he noted, pointing out that fares are 15% cheaper than they were last year. "Domestic flights are as low as they’ve been since we started tracking them seven or eight years ago," he said.
Given those low fares, Hobica said the fees have become a necessity for the struggling airline industry.
"What does the public expect?" he said. "Do they want them to go out of business? The airline industry is in crisis right now and I think they need to cut them slack and let them make some money."
The fees come with an inherent public relations problem, which happens anytime you charge for something that used to be free said Seaney. But those fees can add up to as much as 7% of an airline’s revenue, he said, which is well worth the flack.
President Barack Obama won the Nobel Peace Prize for 2009, making him the 108th recipient of the prestigious award.
The Norwegian Nobel Committee said Friday it chose Obama because of his "extraordinary efforts to strengthen diplomacy and cooperation" among nations. The committee also called out the president’s efforts to rid the world of nuclear weapons.
"The vision of a world free from nuclear arms has powerfully stimulated disarmament and arms control negotiations," said the committee in a statement. "Thanks to Obama’s initiative, the USA is now playing a more constructive role in meeting the great climactic challenges the world is facing."
The announcement was a surprise — Obama’s name had not been mentioned among front-runners — and the roomful of reporters in Oslo, Norway, gasped when he was named.
Former Finnish President Martti Ahtisaari, last year’s Peace Prize laureate, said it was clear the Nobel committee wanted to encourage Obama on the issues he has been discussing on the world stage.
The award comes at a crucial time for Obama, who currently has administration officials dispatched on global peace missions.
Obama’s envoy to the Middle East, George Mitchell, has returned to the region to advocate for peace negotiations between Israelis and Palestinians.
Mitchell met Thursday with Israeli President Shimon Peres. He plans to meet Friday with Prime Minister Benjamin Netanyahu before talking with Palestinian leaders in the West Bank pay day loan lenders.
Secretary of State Hillary Clinton starts a six-day trip to Europe and Russia on Friday to generate international cooperation in moving Iran and North Korea toward ending their nuclear programs.
Obama is only the fourth U.S. president to win the Nobel Peace Prize and the third one to be given the prize while still in office. Jimmy Carter received the award in 2002 for his "decades of untiring efforts" toward peaceful solutions in conflicts around the globe.
Woodrow Wilson, who was president from 1913 to 1921, won the prize in 1919 for developing a 14-point plan for worldwide peace talks.
Theodore Roosevelt, who was in the White House from 1901-1909, won the award in 1906 for his role in mediating a bloody dispute between Russia and Japan that resulted in the Treaty of Portsmouth.
This year’s Peace Prize nominees included 172 people and 33 organizations, the highest number of nominations ever.
The Nobel recipient receives a prize of about $1.4 million. The Peace Prize has been awarded 89 times since 1901. On 19 occasions, including during World War I and World War II, no prizes were awarded.
– CNN Wires contributed to this report.
Larry Ellison does not have a hankering to add Brocade Communication Systems to his long list of acquisitions.
At least that is what he told investors at Oracle’s annual shareholder conference Wednesday. "We have no interest in buying Brocade," the Oracle (ORCL, Fortune 500) chief said in response to a question from an investor.
Brocade (BRCD), which makes switches, routers and software used in networking, has quietly put itself up for sale, according to a recent story in the Wall Street Journal. The report pointed the finger at Hewlett Packard (HPQ, Fortune 500) and Oracle as likely acquirers.
Shares in Brocade are up about 18% since the news hit. You can almost imagine someone, somewhere rubbing their hands together and cackling as their plan unfolds exactly as planned.
Is Brocade for sale? Sure it is, and always has been for the right price. The company, which had net income of $167 million on revenue of $1.5 billion in its fiscal 2008, does have the heft and product diversity to continue as an independent company.
But with a wave of consolidation going on in technology and recent takeout premiums as high as 60%-plus to share prices, now is a good time for Brocade to "quietly" make its intentions known to everyone.
"Interest in Brocade is picking up, and it is unlikely the company put itself up for sale in the absence of third-party interest," Goldman Sachs analyst Min Park told clients. "Brocade is a likely strategic fit for a number of potential acquirers." Park includes Hewlett Packard, Juniper (JNPR), Dell (DELL, Fortune 500), IBM (IBM, Fortune 500) and Oracle among those.
If the trend in pricing for similar strategic companies continues, demonstrated most recently by the 61% premium Dell offered for Perot Systems (PER), and the 34% bonus above the 12-month high EMC (EMC, Fortune 500) bought Data Domain for (which, if you look at it another way, was 222% higher than the stock’s 12-month low), an offer price for Brocade could come anywhere in a range of $10 to $15 a share on line pay day loans. That is, of course, if Brocade can get a bidding war going.
Goldman Sachs’ Min, who has a "buy" rating on the stock, upped his 12-month target price to $10.50 from $9.50 based on the potential acquisition news, he estimates there is a 30% probability on a 35% acquisition premium to Brocade’s current share price.
So who is most likely to jump at Brocade? Dell has Perot Systems to digest, so it may not be in the mood. It would be a stretch for Juniper financially. HP certainly has the cash, and its EDS acquisition is well underway. So it’s a strong possibility. IBM has the wherewithal too, though perhaps not the stomach for more hardware.
And what about Oracle? It’s possible that Ellison means exactly what he says — that he’s not interested, especially given his focus on Sun (JAVA, Fortune 500). But you can never count him out. If this is the beginning of some M&A courtship involving multiple suitors, there is no one better than Ellison at walking away with the prize (especially if he can make IBM’s life miserable in the process).
Not interested? Not yet, maybe.
The skies haven’t been too friendly lately to parking lot operators near Lambert-St. Louis International Airport.
Soft demand for air travel has resulted in fewer people leaving fewer cars, and has forced public and private parking operators to adapt to tough times.
Last week, Lambert officials announced they would raise daily parking rates by $1 across the board after parking revenue took a plunge last year. Parking revenue at Lambert was $13.7 million in the fiscal year that ended June 30, compared with $17.5 million in fiscal 2008, said airport spokesman Jeff Lea.
Airport Director Richard Hrabko said he hoped that move would generate about $4 million to $5 million a year.
But operators of the private parking lots that dot the mostly industrial area surrounding Lambert say they’ve taken different steps to deal with a downturn in air travel. Some have leased spaces to airport and airline employees, and stepped up promotions to put more cars in their lots.
Some have taken steps to keep their costs down.
"It’s tough. Very tough," said Daniel Adalberti, general manager at Skypark Airport Parking LLC in St. Ann. "The main thing we have done is adapt to the situation, and we have adapted by trying to provide the best value."
Skypark is situated just off Pear Tree Lane and boasts one of the lowest prices in the airport area — about $7 a day for self-park and $11.50 a day for valet parking. The only lower rate is Lambert’s economy lot at $6. But that will go to $7 when the new rates take effect Sept. 1.
Operators of the 2,000-space Skypark have occasionally dropped the daily self-park rates to $6 or lower.
With companies slashing their travel budgets, parking lot operators are courting the leisure traveler. And those customers tend to be driven more by the cost.
"Right now, price is king," said Tom Lombardi, president of AirportParkingReservations.com.
The Suffield, Conn., company helps travelers reserve parking spaces at privately run lots at 65 airports in the United States and Canada. Surveys have shown that price is a major factor for people who use the reservation site, followed by the lot’s location and security.
Lombardi said it "just blows my mind" that Lambert and other U.S. airports would raise parking fees in the face of a sluggish economy. Some private parking companies say the move could backfire on the airport and send more customers their way.
The airport prices going up "will cause some of the people to look a little bit more," said Henry Bullough, general manager at FastTrack Airport Parking no teletrack payday loan lenders. "A dollar doesn’t seem like much, but if you are going to be going for 10 days, it’s 10 bucks."
Demand for airport parking is driven largely by airline boardings, industry officials say. The Air Transport Association of America, an airline industry trade group, reported that June passenger boardings on U.S. airlines fell 6.5 percent this year, compared with the same month in 2008.
Bullough, like other parking managers, has seen a drop in customers during this recession. In the first quarter of 2009, he said, revenue was down about 15 percent from the same period last year. Meantime, people tend to be taking shorter trips, which has eaten into revenue per parked car.
FastTrack has been "a lot more prudent" with its costs, but there have been no layoffs in St. Louis, he said.
Mark Wildman, vice president of marketing at The Parking Spot, said the push now was to hang onto — and potentially increase — market share.
The Parking Spot and the Parking Spot 2 have not increased rates in the past year and a half, and it is "doubtful" that the company will raise rates next year, Wildman said. Customers still get a complimentary bottle of water and can participate in the "frequent parker" program.
But the company has done promotions to capture new customers, including a summer sale that offered up to 25 percent off parking rates for stays that included Saturday night.
"Everybody in every category is looking for a deal to make their dollar go farther," he said.
The Parking Spot has two locations and also operates EZ Park on a leased property. In all, that encompasses about 4,200 parking spaces.
Meantime, the company is doing what it can to hold down costs. It will soon run more fuel-efficient shuttles and has instituted a shuttle idling policy. Under that policy, if a shuttle is idling more than a minute it must be turned off. There has been a wage freeze, but no layoffs, Wildman said.
In the wake of travel slumps following the Sept. 11 terrorist attacks and the latest recession, Skypark and other lots have provided monthly parking to airline employees and other Lambert workers. Skypark’s monthly rates range from $45 to $60.
"We basically look at it as if we had to wholesale half of our spaces just to at least keep them occupied," Adalberti said.
Japan’s government and central bank agree that the worst of the deepest postwar recession is over.
Demand is picking up even though “the economy is in a difficult situation,” the Cabinet Office said in Tokyo yesterday. The Bank of Japan said the world’s second-largest economy has “begun to stop worsening.”
Evidence the economy has turned a corner has mounted as companies bolstered industrial output at the fastest pace in 56 years in April and exports recovered from unprecedented declines. Central bank Governor Masaaki Shirakawa said this week he is “cautious” about the rebound because renewed demand may only be temporary.
“Policy makers are raising their economic assessments to reflect recent improvements, but they remain pretty cautious about the outlook,” said Junko Nishioka, chief Japan economist at RBS Securities Japan Ltd. in Tokyo. “Exports are starting to turn around, but that doesn’t guarantee production will keep rebounding and support employment.”
The Nikkei 225 Stock Average rose above 10,000 for the first time in eight months last week and consumer sentiment climbed to a 14-month high in May. The Nikkei fell 1.4 percent to 9,703.72 today, and has retreated 4.3 percent this week on concern a recovery in the U.S., Japan’s largest export market, isn’t a sure thing.
‘Bottomed Out’
“It seems clear the economy bottomed out between January and March,” Japan’s Finance Minister Kaoru Yosano told reporters at a press briefing yesterday. “There are signs the decline in personal spending on some items is ending.”
It may take some time before Americans start spending again. President Barack Obama said in an interview that unemployment may climb to 10 percent from the current 25-year high of 9.4 percent.
“You’re starting to see the engines of the economy turn,” Obama said. Still, he added that “it’s going to take a long time” for a full-fledged recovery as households work off the debt accumulated during the real-estate boom.
Japan’s export dependence has caused it to suffer the most from the global recession. Gross domestic product fell at an annual 14.2 percent pace in the three months ended March 31, the steepest contraction since records began half a century ago freecreditreport. Analysts surveyed by Bloomberg expect the economy to grow this quarter, which would be the first expansion in a year.
Postponed Recovery
“The upgrades by the BOJ and the government just mean the worst is over,” said Takahide Kiuchi, chief economist at Nomura Securities Co. in Tokyo. “The U.S. recovery will be postponed until the middle of next year so it’ll be impossible for Japan to have a solid recovery.”
Economists say the economy may stutter after recovering from its worst contraction on record as Prime Minister Taro Aso’s 25 trillion-yen ($260 billion) stimulus plans wear off. The government said in yesterday’s report that rising unemployment may also discourage consumer spending and damp growth in the coming months.
“The Japanese economy is still at a delicate stage,” said David Cohen, head of Asian forecasting at Action Economics in Singapore. “At the end of the day, much will remain dependent upon the outlook for global export demand.”
Optimism that the worst is over doesn’t mean the Bank of Japan is preparing to raise the key overnight lending rate, which has stayed at 0.1 percent since being cut in December.
Deflation Risk
“Given that employment and wages are deteriorating and deflation risk is rising, it’s difficult to expect a rate hike anytime soon,” said Hiroaki Muto, a senior economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “The central bank won’t likely raise rates until fiscal 2011 at the earliest,” he said, referring to the year ending March 2012.
Deteriorating prospects for consumers are also a risk, the Cabinet Office said in yesterday’s report. The unemployment rate rose to a five-year high of 5 percent in April and economists surveyed by Bloomberg expect it to climb to a record 5.8 percent next year. About two work seekers are competing for a single spot, the most severe job shortage on record.
“We aren’t in a recovery phase,” said Fumihira Nishizaki, director of macroeconomic analysis at the Cabinet Office. “There is a risk that Japan’s economy will deteriorate again.”
It was supposed to be a dream home for the Swidlers of Clermont, Fla., but it turned out to be a nightmare.
Jill Swidler recalls the string of mishaps that eventually became the clue that something was wrong. "The AC went out, the appliances went out, we had jewelry tarnishing and the plumbing fixtures tarnishing, but none of that seemed to be related," she recalls.
The Swidlers had built their home themselves. Michael Swidler, a construction foreman by trade had overseen the building of more than 500 homes in Florida. For his own home, he bought 289 sheets of Toughrock brand drywall, made by Georgia Pacific, at a nearby lumberyard.
In the months after they moved in, however, the couple’s air conditioning broke down, and other appliances also faltered. Metal faucets corroded. The fire alarm would go off randomly, copper wires turned black and soot blanketed fixtures. The house smelled of sulfur.
The Swidlers knew about complaints regarding tainted Chinese drywall, which had posed similar problems for homeowners in many states. But their walls were lined with a product made by an American company.
Brian Warwick, who represents the Swidlers in their lawsuit against Georgia Pacific, says the problem with the drywall used in their home, a Georgia Pacific brand called Toughrock, is that its key ingredient is synthetic gypsum — which contains chemical material scrubbed from the exhaust of coal-fired power plants payday advance.
The Consumer Product Safety Commission has an investigation into drywall, with a focus on electrical and fire safety issues in homes and consumer reports of health symptoms. CPSC staff has collected samples of both imported and domestically manufactured drywall and is testing that drywall. The commissioner said in a statement that no conclusions have been reached. A report is expected in the coming weeks.
The Florida Department of Health and the Department of Environmental Protection says the Swidler’s home "appears to have the same symptoms as homes containing Chinese drywall" in which state and federal studies have found sulfur.
Georgia Pacific declined to comment on the Swidler’s suit. However, the company released this statement: "We are disappointed that they elected to pursue a lawsuit without first informing us of their concerns, ..We stand behind the quality of our products and take customer complaints seriously."
For now, the Swidlers have moved out of their home and into a rental home nearby. They are afraid for the health of their family.
Service industries in the U.S. shrank at a slower pace in May, while job losses mounted, indicating that any economic recovery will be slow to develop.
The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, climbed less than forecast to 44 from 43.7 in April, the Tempe, Arizona-based group reported today. ADP Employer Services estimated companies cut 532,000 workers from payrolls.
“These reports throw cold water on the notion that this aircraft carrier that is the economy will turn on a dime,” said Tim Quinlan, an economist at Wachovia Corp. in Charlotte, North Carolina. “We are heading into a long, gradual recovery that will finally culminate in positive economic growth at the end of this year.”
Federal Reserve Chairman Ben S. Bernanke today projected the economy will suffer “sizable” job losses in coming months that will restrain consumer spending. Stocks retreated for the first time in five days because of concern that increases in unemployment will hobble the early stages of any expansion later this year.
The ISM index was projected to increase to 45, according to the median forecast in a Bloomberg News survey of 70 economists. Estimates ranged from 40.5 to 47. Readings less than 50 signal contraction.
Stocks Fall
The Standard & Poor’s 500 index fell 1.4 percent to close at 931.76. Treasury securities climbed, pushing the yield on the 10-year note down to 3.54 percent at 4:23 p.m. in New York from 3.62 percent late yesterday.
Another report today showed orders placed with factories in April rose for the second time in three months, as demand for automobiles, electrical equipment and construction machinery increased. Bookings gained 0.7 percent, after a revised 1.9 percent drop in March that was more than twice the previous estimate, the Commerce Department said.
Bernanke, in testimony to lawmakers, said large U.S. budget deficits threaten financial stability and the government can’t continue to borrow indefinitely at the current rate to finance the shortfall. He projected economic growth will return “later this year,” and said unemployment will probably continue to rise into 2010. Fed officials expect growth will not be “robust” this year, he said.
Job Losses
Economists project a Labor Department report in two days will show the unemployment rate in May topped 9 percent for the first time in more than 25 years and payrolls probably fell by more than 500,000 workers, according to a Bloomberg survey.
An inability by consumers to sustain gains in spending on concern over rising unemployment is among reasons the next expansion will probably be subdued Faxless payday loans. The economy has lost 5.7 million jobs since the recession began in December 2007, the worst performance of any post-World War II downturn.
The ISM non-manufacturing industries index of employment rose to 39 from 37 the prior month, and its gauge of new orders fell to 44.4 from 47.
Measures of order backlogs and exports also fell, while inventories contracted at a slower pace.
Two of the worst-performing parts of the economy show signs of steadying. Manufacturing fell the least in eight months in May as new orders climbed for the first time since the recession began, ISM reported two days ago. At the same time, auto industry bankruptcies, including those at General Motors Corp. and Chrysler LLC, may limit any rebound in factory activity.
Housing Steadies
Homebuilding, which is included in the services index, may be past its worst declines. Construction of single-family homes advanced in April after holding near a record low the previous two months, according to figures from the Commerce Department.
The stabilization reflects steadier sales. Total home purchases have hovered around an average annual pace of 4.98 million since November.
Recent increases in borrowing costs have restrained a refinancing boom without hindering sales, a report today from the Mortgage Bankers Association showed. The group’s loan applications index fell 16 percent last week, led by a 24 percent drop in refinancing as the rate on a 30-year fixed loan climbed to the highest level since January.
Starwood Hotels & Resorts Worldwide Inc., the third-largest U.S. lodging company, is among companies still cutting costs even as demand is likely to pick up. Starwood owns brands including St. Regis, Westin and Sheraton.
“There is some healthy growth coming ahead for the industry,” Chief Financial Officer Vasant Prabhu said in a June 1 conference presentation. “People are not as spooked as they were three to six months ago, where they were unwilling to act.” Still, “I think it’s too early to call a turn,” he said.
Tiffany & Co., the world’s second-largest luxury-jewelry retailer, is among merchants sensing the slump is easing. The New York-based company last week reiterated its annual profit forecast and said year-over-year sales declines are lessening.
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