Finance and Economic

The U.S. economy has ground to a halt and probably already is in recession but faces higher inflation this year than thought just a month ago, a Reuters poll showed on Wednesday.

A dismal run of economic data including two months of job market contraction, a declining factory sector and shrinkage in the dominant service sector, has led analysts to downgrade the already grim economic assessment they gave a month ago.

Economists made their forecasts before the Federal Reserve and other central banks teamed up on Tuesday to get hundreds of billions of dollars in fresh funds to cash-starved credit markets, allowing financial firms to use securities backed by home mortgages as collateral for central bank loans.

The latest poll, taken March 7-12, also reaffirmed the disturbing trend set in motion last year of higher median inflation expectations for 2008 even as growth forecasts take another hit.

Economists dropped growth expectations to none at all for the first three months of this year from the anemic 0.2 percent they forecast last month.

The poll also showed a median 60 percent chance of an outright recession, which likely started in the current quarter if not late last year no teletrak payday loans. That was up sharply from 45 percent last month and in January.

“The evidence has built to the point that it is now beyond a reasonable doubt that the U.S. economy has entered recession,” said Scott Anderson, a senior economist at Wells Fargo & Co. in Minneapolis.

A report on Friday that showed the U.S. economy shed 63,000 jobs in February, the biggest drop in non-farm payrolls since July 2003 was a key bit of evidence to back that conviction. It was the second consecutive month that payrolls fell, which also hasn’t happened since mid-2003. 

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Democrats have long served as the traditional enemy of Big Pharma, but in this presidential campaign, the left is taking the lion’s share of drugmaker money.

Democratic senators Barack Obama and Hillary Clinton are the top recipients of donations from the pharmaceutical industry, according to The Center for Responsive Politics, a non-profit, non-partisan research group in Washington, D.C. Meanwhile, donations to Sen. John McCain, who was recently endorsed by President Bush as the official Republican candidate, pale in comparison.

Obama maintains a slight edge over his Democratic rival, with $181,000 in Big Pharma donations through Jan. 31, compared with Clinton’s $174,000, according to the center. McCain is far behind with $44,000.

This is in spite of the fact that all three candidates have consistently bashed the pharma industry and vowed to lower drug prices, which would take a bite out of corporate profits.

But it wasn’t always this way. Big Pharma, voting with its wallet, used to be more of an enthusiastic supporter for the Grand Old Party.

In the 2004 presidential election, drugmakers donated $516,000 to the Bush campaign, a huge increase over the $280,000 provided to Sen. John Kerry, the Democratic candidate from Massachusetts, according to the center.

There are two reasons for the recent shift in funding. The Bush administration may still control the White House, but Republicans no longer control Congress. Democrats hold the majority in the House, and the parties are evenly split in the Senate. Drugmakers could be trying to secure access to the ruling party by courting their traditional enemies.

"Since the Democrats took control of Congress in 2006, money has shifted away from Republicans, to the Democrats who hold the keys to the kingdom," said Massie Ritsch, a spokesman for The Center for Responsive Politics. "The pharmaceutical industry is one that would lean Republican if it didn’t have to make friends with the party that’s in power right now."

Merck spokesman Ron Rogers said his company has never announced support for a specific candidate and "has always sought to work with both Republicans and Democrats on the issues that affect pharmaceutical innovations whether one party or the other has controlled the Congress of White House."

Schering-Plough spokesman Steve Galpin said his company has not donated to any presidential candidates. Other drugmakers contacted on this issue - Pfizer and Eli Lilly & Co. - did not comment by press time.

Secondly, the distinctions have blurred between the two parties’ relationship with big business. Democrats have traditionally been seen as enemies to the pharmaceutical industry, while Republicans are supposed to be their allies.

"I think what you can say about the philosophical divide is that the Republicans as a party believe in free markets and the Democrats want to socialize our healthcare system," said Barbara Ryan, pharma analyst for Deutsche Bank North America.

But with McCain as the conservative contender for the White House, the issues are no longer black and white online payday advance. Ryan noted that the current campaign lacks hard and fast party differences in healthcare. In fact, the policies from of Clinton, Obama and McCain are uniformly unfriendly toward Big Pharma.

Much of their political ire is focused on drug prices. All the candidates co-sponsored a bill early last year to allow the re-importation of U.S.-made drugs back from Canada, where they’re cheaper. But the bill failed to pass the Senate.

McCain, who has described himself as "the biggest enemy of the pharmaceutical industry in Washington," has been particularly vocal on re-importation.

"Why shouldn’t we be able to re-import drugs from Canada?" he asked during the New Hampshire republican debates in January. "It’s because of the power of the pharmaceutical companies."

"Don’t turn the pharmaceutical companies into the big bad guys," countered Mitt Romney, the former presidential candidate who has since dropped out of the race.

"Well, they are," said McCain.

Campaign crosshairs are also focused on the Bush administration’s ban on drug-price negotiations between the government and drug companies. This ban was included in the 2003 Medicare Modernization Act. Removing it could result in lower drug prices, which would put the squeeze on pharma sales.

Obama and Clinton have clearly stated that they oppose the ban on price negotiations.

"[Clinton] has been very much against the non-negotiation ban, said Gene Sperling, her economic advisor, as well as former director of the National Economic Council for former President Bill Clinton. "She feels that that puts the government in a worse position than a big company."

Obama, on his campaign Web site, has vowed to repeal the ban that prevents the government from negotiating with drug companies, estimating it could result in savings of up to $30 billion for patients.

McCain’s stance on this issue isn’t clear. When Democrats failed to pass a bill last year that would have eliminated the ban, he wasn’t present for the vote. McCain’s office did not return calls and emails asking about his position on this issue.

But even with all the political rhetoric, Wall Street doesn’t seem to be paying attention.

Paul Alan Davis, manager of Charles Schwab’s $800 million healthcare portfolio, which includes holdings in Pfizer (PFE, Fortune 500), Merck (MRK, Fortune 500), Johnson & Johnson (JNJ, Fortune 500), Schering-Plough (SGP, Fortune 500) and other major pharma companies, said he wasn’t sure which of the candidates posed the biggest shake-up for the industry - if at all. He also said that the campaign is not a factor in his investment decisions.

"I think it’s probably easier to talk about change to get votes than it is to actually change the system," he said. 

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When production lines close in the United States, protectionism tends to rear its head. In China, the opposite is happening.

A volatile mix of inflation, a rising yuan and new labor legislation has corroded profits in the country’s manufacturing heartland. Hundreds, possibly thousands, of factories have been forced to close or leave the Pearl River Delta, which churns out more than a quarter of China’s exports.

Some are moving inland. Others are going to places like Vietnam, where labor is even cheaper.

But analysts say the movement dovetails with — and in no small way results from — state policies designed to propel China’s economy up the value ladder. Guangdong led reforms, and it is leading the reinvention of China’s manufacturing industry.

China, like other rapidly industrializing economies, is learning it cannot compete forever by churning out cheap, simple goods while gobbling up increasingly costly resources such as oil and iron ore cash till payday. Policymakers are keen to promote more efficient industries and higher-value products as a route to more predictable and sustainable economic growth.

“The factories that are closing are really victims of creative destruction,” said consultant Edith Terry, author of a report on the changes in the Delta published in February.

Industry estimates put the number of factories closing in the Pearl River Delta as high as 15,000, although the Guangdong trade bureau has said fewer than 300 were shutting. Most were labor-intensive, small- or medium-sized producers of metal or plastic products, toys, garments and shoes, the government said.

About 90 percent are based in Hong Kong or Taiwan, which explains why industry groups there have been so vocal in calling for relief from the pernicious effects of fast-rising costs. 

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WASHINGTON – The European refueling tanker that won a $35 billion Pentagon contract last week "was clearly a better performer" than its U.S. rival, Air Force Secretary Michael Wynne told lawmakers Wednesday.

Speaking at a Senate Armed Services Committee hearing, Wynne said the plane offered by European Aeronautic Defence and Space Co. and its U.S. partner, Northrop Grumman Corp., was determined to be less expensive and less risky than the plane offered by Chicago-based Boeing Co.

The planes were judged on nine key criteria, he said, and "across the spectrum, all evaluated, the Northrop Grumman airplane was clearly a better performer."
Committee Chairman Carl Levin of Michigan and the panel’s top Republican, John Warner of Virginia, said they would want more information on how the contract was won after the companies are briefed Friday.

Jim Albaugh, top executive of Boeing’s Integrated Defense Systems, said the company was surprised to lose the contract, and believes its proposal would have been a better choice.

"We offered an airplane that was more cost-effective. We offered an airplane that met the requirements better than the competition, and of lower risk," Albaugh told a Citigroup conference of defense analysts in New York.

But Warner, who oversaw the tanker deal as head of the committee before Levin, commended the Air Force’s process and said he supports the decision.

Reacting to heavy criticism that the Pentagon is outsourcing military purchasing, Warner said lawmakers should back off.

"I feel very strongly that Congress should not get into the business of trying to rewrite a contract, particularly one of this magnitude and complexity," he said.

The contract calls for the Air Force to buy 179 in-flight tanker aircraft over the next 15 years as it replaces its Boeing-built KC-135 tankers, which are on average 47 years old.

Boeing had been heavily favored to win the new contract, and the Air Force’s decision helps EADS _ maker of Airbus _ break into the world’s largest military market and opens the door to possible follow-up contracts.

The EADS/Northrop Grumman team plans to perform its final assembly work in Mobile, Ala., although the underlying plane would mostly be built in Europe paydayloans.com. And it would use General Electric engines built in North Carolina and Ohio.

The contract award could still be challenged by Boeing or members of Congress. Boeing will protest the decision only "in the event that we think there is an irregularity in the proposal phase," Albaugh said.

Boeing shares, which have shed more than a quarter of their value since reaching an all-time high of $107.83 last July, rose 94 cents, or 1.2 percent, to $80.56 in afternoon trading.

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Facebook said on Tuesday it had named Google Inc’s global sales head, Sheryl Sandberg, as the social networking site’s new chief operations officer, accelerating a decline in Google shares to year lows.

Google shares slid as much as 4.6 percent, trading below a 52-week low for the first time since its IPO and removing a technical crutch that had supported the stock.

The departure of Sandberg, who in six years at Google was instrumental in developing its fast-growing online advertising business, marks one of the first senior executives at the Web search leader to leave since its sensational initial public offering in August 2004.

“Sandberg’s departure is a significant loss for Google,” RBC Capital analyst Jordan Rohan said. “It signals that the company has reached a level of scale and bureaucracy with which some early Google employees are uncomfortable.”

“It is a significant move,” Oppenheimer analyst Sandeep Aggarwal agreed cash advance. “This could be the start of others leaving.”

Chief Financial Officer George Reyes said he would retire last August, the three-year anniversary of Google’s IPO, when pre-IPO stock options had fully vested for executives. Reyes remains at Google as it seeks to hire a replacement.

Symbolically, Sandberg’s hiring represents a passing of the crown as Silicon Valley’s hottest start-up from Google to Facebook, which has gained momentum over the past year.

“While there is no comparison between Google and Facebook in revenue terms, Facebook, in terms of popularity and impact, has a very similar profile to the pre-IPO Google,” Aggarwal said. 

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Two Federal Reserve officials said Friday that the housing market could damage the economy even more severely than it has already if measures are not taken to correct it.

In speeches at the U.S. Monetary Policy Forum in New York, Eric Rosengren, president of the Federal Reserve Bank of Boston, and Frederic Mishkin, a member of the Federal Reserve board of governors, spoke about the critical nature of the housing market crisis.

"Further declines in housing prices could depress residential investment, reduce consumer spending, generate elevated foreclosures, and contribute to financial instability," said Rosengren.

"Taking appropriate monetary, regulatory, and fiscal actions to mitigate this risk seems prudent."

Mishkin worried that the housing market could pose an even greater threat to the economy if the United States enters a recession and does not demonstrate the modest growth that economists expect.

"It is important to understand … how significant the downside would be if the rise in the unemployment rate and the decline in housing prices were significantly greater than currently expected," he said.

Both officials said they believe this slump will be more pronounced than other historical downturns. They said financial institutions have been unwilling to expose themselves to the mortgage market, and lenders are hesitant to lend to risky borrowers in a declining house price market after the subprime meltdown.

"The housing malaise could be more protracted and the recovery more anemic than we have experienced in previous housing downturns," said Mishkin.

"Unfortunately, we have little historical precedent for sustained declines in national housing prices, which makes it difficult to forecast future home prices," Rosengren added in his speech.

But Rosengren said a solution may not solely be related to monetary policy.

As mortgage rates continue to decline, he said that foreclosures and unemployment should come down with them no fax payday loan. He also said that as borrowers shy away from risky subprime loans, they should instead look into FHA loans - home mortgages that allows for a purchase or refinance with a low down payment.

"Examining how FHA programs could continue to be modernized and streamlined and become a more viable choice for borrowers may be an important mitigant for housing problems," said Rosengren. 

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"U.S. recession is unlikely but not impossible," says the January "Straight Talk," the monthly economic outlook of Gail Fosler, president and chief economist of the Conference Board.

Fosler says the business sector, outside of the financial sector, remains "strong," benefiting as it is from an "export boom." The retreat in housing is "nearly over." "Non-financial corporate profitability looks solid."

In short, "The business sector is fundamentally stronger than at any time since the 1960s," Fosler writes in her latest forecast.

Why is this woman smiling? The Conference Board, a nonprofit business-research group in New York, is entrusted with maintaining the index of leading economic indicators, a gauge designed to predict turning points in the economy. And right now, the leading indicators are flashing signs of a recession.
The Conference Board’s business-cycle gurus use the six-month annualized change in the LEI and the six-month diffusion index to assess the depth, duration and diffusion of the decline in economic activity.

The "Three Ds" rule "helps to refine the signal and better interpret the LEI," said Victor Zarnowitz, senior fellow and economic counselor at the Conference Board.

Zarnowitz’s research has found that recessions generally are characterized by a six-month annualized decline in the LEI of at least 4.5 percent and a sub-50 reading in the six-month diffusion index, indicating that more than half of the 10 components have fallen in the last six months.

In January, the six-month annualized decline in the LEI was 4 percent, the biggest drop since the recession of 2001. The six-month diffusion index stood at 20, the lowest since June 2004. Periods of recession coincide with multiple low readings in the diffusion index.

Fosler was traveling and couldn’t be reached. However, her colleague, economist Ken Goldstein spoke with me instead. He says the U.S guaranteed payday loans. is "on the cusp of recession." The warning so far is "a strong yellow, not a full red."

So why the expectation that the economy will pull back from the edge? "Gail’s view is that if business profits remain OK, businesses have the money to invest and hire," Goldstein said.

But profits aren’t OK. They’re "falling on a year-over-year basis," said Paul Kasriel, chief economist at the Northern Trust Co. in Chicago. "S&P operating profits were down 11 percent in the third quarter from a year earlier. The last time profits contracted on a year-over-year basis was 2001," in a recession.

Fourth-quarter S&P profits fell as well.

Another problem with Fosler’s profits-into-jobs forecast is where U.S. companies are earning money. Domestic profits fell 4.6 percent in the third quarter, according to the Bureau of Economic Analysis’ National Income and Product Accounts. "Domestic profits have to do with hiring here," Kasriel said.

The labor market isn’t OK. Initial jobless claims, the number of people receiving unemployment benefits and the unemployment rate all are trending higher. Consumer confidence, another indicator published each month by the Conference Board, is sagging.

Kasriel is flummoxed by the seeming disconnect between the Conference Board’s forecast and the group’s indicators.

"Almost every economic indicator published by the Conference Board is pointing toward recession, yet Fosler’s 2008 real GDP growth forecast in the February Blue Chip survey was 2.3 percent, among the highest estimates," he said. "Why is Ms. Fosler so optimistic when the indicators her organization publishes imply much weaker economic performance?"

CAROLINE BAUM IS A BLOOMBERG NEWS COLUMNIST.

cabaum@bloomberg.net

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Venezuelan state oil firm PDVSA told a UK court on Friday that a $12 billion freeze on its assets should not have been granted to Exxon Mobil (XOM.N: Quote, Profile, Research) as the oil major’s arguments were “sheer fantasy land”.

PDVSA lawyer Gordon Pollock said the amount frozen was excessive. He said a claim that PDVSA would try to hide its assets was not credible and the English court which awarded the freeze had exceeded its jurisdiction.

Pollock said the $12 billion figure Exxon asked to be frozen was based on adding up all the projected cash flows of the Venezuelan heavy oil project seized by President Hugo Chavez as part of his nationalization drive, without any discount made for the fact they run to 2035.

He said this argument was “simply economically and financially illiterate.”

“There’s only one way to describe that argument and that’s ‘weird’.”

He said any amount Exxon could claim legitimately was “an absolute tadpole” compared to the $12 billion which the U.S online cash advance. major oil company managed to have frozen so that compensation could be secured if it won arbitration over its lost oil fields.

He said the U.S. company justified the need for the freeze by alleging bad faith on the part of the Venezuelan government and by claiming state oil company PDVSA could rapidly sell its refineries and pipelines around the world and stash the cash away from Exxon’s grasp.

“This is sheer fantasy land,” he said. “Refineries don’t get up in the middle of the night and sneak away across the border.” 

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