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Service industries in the U.S., the largest share of the economy, probably stabilized in September after contracting for almost a year, economists said before a report this week.

The Institute for Supply Management’s index of non- manufacturing businesses, which reflects almost 90 percent of the economy, rose to 50, according to the median of 64 forecasts in a Bloomberg News survey ahead of figures tomorrow. Fifty is the dividing line between expansion and contraction.

The emerging recovery in manufacturing and housing spurred by government measures such as “cash-for-clunkers” and a tax credit for first-time homebuyers started spreading to the broader economy. Nonetheless, last week’s jobs report showing payroll cuts accelerated in September is a reminder that gains in sales may not be sustained as incentives expire.

“The economy is in a recovery but the recovery in the labor market has lost some steam,” said Zach Pandl, an economist at Nomura Securities International Inc. in New York. “The service sector, while on a sustainable path of growth, is only improving very gradually.”

The projected reading for the Tempe, Arizona-based ISM’s services gauge would be the first break-even point since September 2008, when Lehman Brothers Holdings Inc. filed for bankruptcy. The measure was 48.4 in August.

ISM’s factory index on Oct. 1 showed manufacturing, which accounts for about 12 percent of the economy, expanded less than economists anticipated. The measure fell to 52.6 in September, the first drop this year, from 52.9 in August.

More Job Losses

Job losses accelerated last month and the unemployment rate climbed to the highest level since 1983, Labor Department data showed on Oct. 2. Payrolls fell by 263,000 following a 201,000 decline the prior month, while the jobless rate rose to 9.8 percent from 9.7 percent. The U.S. has lost 7.2 million jobs since the recession began in December 2007.

U.S. stocks fell on Oct. 2, capping the market’s first back-to-back weekly declines since July, as the bigger-than- estimated loss of jobs spurred concern the economy is struggling to recover. The Standard & Poor’s 500 Index retreated 0.5 percent to close at 1,025 pay day loans.21 in New York.

Economic growth next year probably won’t be strong enough to “substantially” bring down the jobless rate, which may remain above 9 percent at the end of 2010, Fed Chairman Ben S. Bernanke told lawmakers on Oct. 1.

Growth Rebound

Recent data signal the economy began growing in the third quarter. Consumer spending, about 70 percent of the economy, jumped in August by the most since October 2001, as the government’s $3 billion cash-for-clunkers incentive to trade in older, less fuel-efficient cars helped auto sales.

Homebuilding, which is included in ISM’s services index, may no longer be a drag on growth as rising sales help trim the glut of properties on the market. The number of contracts to buy previously owned homes rose in August for the seventh straight month, lifted by tax credits for first-time buyers, a report from the National Association of Realtors showed last week.

Service companies seeing a pickup include Carnival Corp., the biggest cruise-line operator. The Miami-based company raised its full-year profit forecast because of better-than- expected ticket bookings.

“Throughout the summer, booking volumes have continued to be quite strong which has enabled us to achieve higher last- minute prices,” Howard Frank, chief operating officer of Carnival, said on a Sept. 22 conference call.

Bigger Trade Gap

A report from the Commerce Department on Oct. 9 may show the trade deficit widened in August to $33 billion from $32 billion in July, the Bloomberg survey shows. Both imports and exports are likely to rise as demand worldwide picks up. Imports may have seen a bigger boost in August as American companies replenished depleted inventories, economists said.

The world economy will expand 3.1 percent next year, the International Monetary Fund said last week, exceeding its July forecast of 2.5 percent. The lender raised the outlook for China, and said developing Asia will grow at more than twice the pace of advanced economies including the U.S., Germany and Japan.

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Japan’s jobless rate unexpectedly retreated in August from a record and household spending rose as the nation emerged from its worst postwar recession.

The unemployment rate fell to 5.5 percent from 5.7 percent in July, the statistics bureau said today in Tokyo. None of the 29 analysts surveyed by Bloomberg predicted a decrease. Spending by households unexpectedly rose 2.6 percent from a year earlier, the biggest jump in 19 months.

Today’s reports add to evidence this week showing the recovery may be sustained: business sentiment rose for a second quarter and industrial production gained for a sixth month. Economists say the revival is likely to be tepid as companies burdened with excess capacity cut spending and deepening deflation erodes profit.

“I wouldn’t be dancing in the street over that one, but I do think labor demand is turning,” said Richard Jerram, chief Japan economist at Macquarie Securities Ltd. in Tokyo. “You’re seeing it in the business confidence surveys, you’re seeing it in manufacturing overtime, and you’re starting to see it now in things like the new job offers.”

Investors shrugged off the reports. The Nikkei 225 Stock Average lost 2.1 percent at 9:59 a.m. in Tokyo, heading for its third weekly decline. The yield on the 10-year government bond fell three basis points to 1.26 percent. The yen traded at 89.53 per dollar from 89.58 before the reports, edging toward an eight-month high of 88.24 reached earlier this week.

Stronger Yen

The Japanese currency’s 7 percent gain in the past three months threatens to erode exporters’ repatriated earnings and make their products less competitive abroad.

Economists forecast the unemployment rate would climb to 5.8 percent and household spending would slip 0.2 percent.

Government incentives to buy electronics products as part of the previous government’s 25 trillion yen ($280 billion) stimulus package buoyed demand for televisions, personal computers and refrigerators, the bureau said.

“Consumers are realizing that things aren’t as bad as they thought,” said Naoki Iizuka, a senior economist at Mizuho Securities Co. in Tokyo. “Things will continue to improve, but for consumer spending to become sustainable we’re going to need a stronger job and wage market.”

More Employed

The number of employed rose by 290,000 from July, the first increase since January, the bureau said. A separate report showed the job-to-applicant ratio, a leading indicator of employment trends, stopped worsening for the first time since January 2008. The ratio stayed at a record low of 0.42, meaning there are only 42 positions for every 100 candidates.

The Bank of Japan’s quarterly Tankan business survey yesterday showed confidence among large manufacturers rose for a second straight quarter from a record low of minus 58 in March. The index gained to minus 33 from minus 48, still a level on a par with the previous recession in 2001.

That survey also showed big companies plan to cut spending at a faster pace than they anticipated three months ago and forecast profits will drop 22 percent in the year ending March. While labor demand improved from the previous Tankan, large manufacturers still reported having too many employees.

Some economists say the unemployment rate probably hasn’t peaked, as companies including Japan Airlines Corp. cut jobs even as the economy recovers. Fifteen months of wage declines are also likely to discourage consumers from spending.

Too Early

“It’s still too early” to say the worst is over for Japan’s workers, Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo, said before today’s reports. “Companies still have too many employees and too much capacity.”

Japan Airlines, Asia’s most indebted carrier, said last month that it will cut 6,800 jobs as it plans the biggest reduction of routes in its history.

“Even when things start to get better, employers will delay hiring for some time,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “Companies are still burdened with excess workers.”

The jobless rate will climb to 5.9 percent in the second quarter of 2010, according to economists surveyed by Bloomberg. Adachi said the current rate reflects Japanese businesses’ cultural reluctance to fire workers and the country’s strict labor laws.

That’s making it tough for graduates to get work.

“I used to be against using personal connections for job leads, but it’s been impossible to find anything through the normal channels,” said Yoko Kasai, 23, who finished four years of college in Japan and a year abroad in the U.K. “I didn’t think it was going to be this hard for my friends and I to land a job we want.”

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The Federal Reserve has started talks with bond dealers about withdrawing the unprecedented amount of cash injected into the financial system the last two years, according to people with knowledge of the discussions.

Central bank officials are discussing plans to use so- called reverse repurchase agreements to drain some of the $1 trillion they pumped into the economy, said the people, who declined to be identified because the talks are private. That’s where the Fed sells securities to its 18 primary dealers for a specific period, temporarily decreasing the amount of money available in the banking system.

There’s no sense that policy makers intend to withdraw funds anytime soon, said the people. The central bank’s challenge is to decrease the cash without stunting the economy’s recovery and before it sparks inflation. Fed Chairman Ben S. Bernanke said in a July Wall Street Journal opinion article that reverse repos are one tool to accomplish that goal without raising interest rates.

“One thing the Fed has to figure out is if they can launch pilot programs without spooking the market and creating the perception that they are about to tighten,” said Louis Crandall, chief economist at Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that specializes in government finance. “They are discussing things like accounting issues, and updating the governing documents to the volume of reverse repos the dealer community could absorb.”

Fed Balance Sheet

Deborah Kilroe, a spokeswoman for the Federal Reserve Bank of New York, declined to comment about meetings with dealers. Total assets on the Fed’s balance sheet stand at $2.14 trillion, up more than a $1 trillion since the collapse of the subprime mortgage market in August 2007 triggered the worst global financial crisis since the Great Depression.

The Federal Open Market Committee, at the conclusion tomorrow of a two-day policy meeting, will probably maintain its assessment that “tight” bank credit is impeding growth, said economists including former Fed Governor Lyle Gramley.

The Fed will keep its target rate for overnight loans at a range of zero to 0.25 percent at the conclusion of the FOMC meeting, all 91 economists surveyed by Bloomberg News said.

Minutes from FOMC’s Aug. 11-12 meeting showed that among the exit strategy options discussed were reverse repurchase agreements as well as setting up a term deposit facility to reduce the supply of banks’ excess reserves.

Repo Sizes

At maturity of a reverse repo, the securities the Fed sold to the dealers are returned to the central bank, and the cash goes back to the companies. The reverse repurchase agreements contemplated by the Fed would need to be for a longer period and larger size than has been typical in previous open market operations, according to strategists.

“To be effective, the Fed would have to drain several hundred billion dollars worth of funds through these reverse repos, between about $400 and $600 billion,” said Joseph Abate, a money market strategist in New York at Barclays Plc, a primary dealer. “You may have a dislocation in the repo markets due to the supply effect of the Fed injecting such a large amount of extra collateral into the marketplace.”

Steps taken by the Fed since March 2008 to combat the seizure in credit markets included expanding emergency lending to banks, supporting the commercial-paper market and bailing out New York-based insurer American International Group Inc.

“The timing is not now for the exit strategies to begin,” said Tony Crescenzi, a market strategist and portfolio manager at Newport Beach, California-based Pacific Investment Management Co., manager of the world’s biggest bond fund. Talk of exit strategies “will all seem very preliminary and conditional upon evidence that the economy is moving toward a self-sustaining and self-reinforcing condition. The proof of that will be some improvement in the labor market picture,” he said.

More Participants

The jobless rate reached 9.7 percent in August, the highest in a quarter-century. Employers have eliminated almost 7 million jobs since the recession started, the biggest drop in any post- World War II economic decline.

Bernanke said in the opinion piece that reverse repos could be done with counterparties beyond the Fed’s primary dealers, which serve as counterparties in open market operations and are required to bid on Treasury auctions.

More trading partners may be needed since primary dealers have been shrinking their balance sheets the past two years, and likely can’t absorb an additional $500 billion of securities, according to Abate at Barclays.

Banks worldwide have recorded more than $1.6 trillion of losses and writedowns since the start of 2007, according to data compiled by Bloomberg.

General Collateral Rate

Securities dealers use repos to finance holdings and increase leverage. Bonds that can be borrowed at interest rates close to the Fed’s target rate for overnight loans between banks are called general collateral. Those in highest demand have lower rates and are called “special.”

As the supply of Treasuries increases, which occurs when reverse repos take place, repurchase agreement rates are typically pushed higher. The rate on collateralized loans in the more than $5-trillion-a-day repurchase agreement market, where Treasuries are borrowed and lent, is already higher than the amount changed for unsecured borrowing of federal funds.

The overnight general collateral repurchase rate, which is typically a few basis points below the fed funds rate, opened at 0.20 percent today, compared with fed funds at 0.17 percent, according to GovPX Inc., a unit of ICAP Plc. A basis point is 0.01 percentage point. Wrightson is also part of ICAP.

When the Fed does begin, “it will use reverse repos in tandem with other draining operations,” said George Goncalves, chief fixed-income rates strategist in New York at Cantor Fitzgerald LP, a primary dealer. “The Fed won’t want to totally disrupt the repo markets and the short-term financing of Treasuries given how much debt is coming to market.”

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Federal Reserve Chairman Ben S. Bernanke said the worst U.S. recession since the 1930s has probably ended, while warning that growth may not be strong enough to quickly reduce the unemployment rate.

“Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” Bernanke said today at the Brookings Institution in Washington, responding to questions after a speech.

The remarks are Bernanke’s most explicit statement that the contraction that began in December 2007 is over. They echoed comments yesterday by San Francisco Fed President Janet Yellen and followed a report today showing retail sales rose last month by the most in three years, adding to evidence of a recovery.

“Unemployment will be slow to come down” if growth turns out to be “moderate” and not much more than the economy’s underlying potential, Bernanke said.

Stocks rallied after a report showing U.S. retail sales rose more than forecast reinforced evidence the recession is over. The Standard & Poor’s 500 Index rose 0.3 percent to 1,052.63. Asian shares also gained, with the MSCI Asia Pacific Index up 1.1 percent at 9:50 a.m. in Tokyo. Treasuries were little changed, with 10-year yields at 3.45 percent.

‘Exceptionally Low’

The central bank has kept the benchmark lending rate as low as zero since December and in August said “exceptionally low” rates are likely warranted for “an extended period.”

The policy-setting Federal Open Market Committee also said in its Aug. 12 statement that there were signs that “economic activity is leveling out.” The Fed’s Beige Book report last week said that 11 of its 12 regional banks reported signs of a stable or improving economy in July and August.

Yellen said in a speech yesterday that the U.S. summer “likely marked the end of the recession, and the economy should expand in the second half of this year. A wide array of data supports this view.”

The unemployment rate reached 9.7 percent in August, a quarter-century high, and employers have eliminated almost 7 million jobs since the recession started, the biggest drop in any post-World War II economic downturn. Banks worldwide have recorded more than $1.6 trillion of losses and writedowns since the start of 2007, data compiled by Bloomberg show.

Mortgage Purchases

The central bank in March authorized $1.45 trillion in purchases of mortgage-backed securities and other housing debt this year. Policy makers decided last month to taper off a $300 billion program buying U.S. Treasuries through October, while debating a similar move for MBS purchases. Bernanke convenes the next meeting of Fed policy makers Sept. 22-23 in Washington.

The economy will rebound at a 2.3 percent pace next year, according to the median estimate in a Bloomberg News survey of economists. The growth rate won’t be fast enough to lower the unemployment rate below 9 percent, the economists predict.

“The chairman got it about right,” Glenn Hutchins, co- founder and co-chief executive of Silver Lake, a private investment firm with $13 billion under management, said on a panel following Bernanke’s speech.

“We are experiencing stability both in financial markets and underlying corporate performance,” he said. “But the overwhelming sense of market participants right now is that we are at a very low level of activity.”

NBER Role

Before becoming a central banker, Bernanke, a former Princeton University economics professor, served on the National Bureau of Economic Research’s business-cycle dating committee, the group that determines the dates of U.S. recessions.

Stanford University Professor Robert Hall, the panel’s current chairman, said in August that declaring the recession over may take more than a year because of the risk that recent signs of stabilization will prove short-lived.

Sales at U.S. retailers rose 2.7 percent last month, led by a jump in auto purchases as consumers took advantage of the government’s “cash-for-clunkers” program. The increase exceeded the median forecast of economists surveyed by Bloomberg News and followed a 0.2 percent drop in July, Commerce Department figures showed today in Washington.

Responding to a separate question, Bernanke said he’s “pretty optimistic” on chances for an overhaul of financial regulations given a crisis that was “too big a calamity” to ignore. “I feel quite confident that a comprehensive reform will be forthcoming,” Bernanke said.

Congress is preparing the biggest overhaul of U.S. financial regulations since the 1930s, when the Fed was reorganized. The U.S. Treasury proposes to give the Fed greater authority over the capital, liquidity, and risk-management standards at the largest financial firms. Congressional leaders haven’t supported that proposal and are considering giving broader authority to a council of regulators.

“The problem we had in part was the lack of systemic oversight,” President Barack Obama said in an interview with Bloomberg News yesterday. “We want to have a systemic-risk regulator,” he said, adding that “the Fed is best equipped to do this.”

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European Central Bank President Jean-Claude Trichet said the euro region’s recovery from recession will be “bumpy” and signaled officials are in no rush to withdraw emergency stimulus measures.

While latest data suggest “the significant contraction in economic activity has come to an end,” the recovery “is expected to be rather uneven,” Trichet said at a press conference in Frankfurt today after the ECB kept its benchmark interest rate at a record low of 1 percent. “It isn’t time to exit” policies designed to boost growth, he said.

The ECB is wary of nipping the euro-region recovery in the bud by tightening policy too soon as rising unemployment and the expiry of government rescue packages may damp expansion next year. The bank today raised its forecast for economic growth. At the same time, Trichet said the ECB won’t increase the rate it charges banks on 12-month funds at its next tender, which should “promote the extension of credit to the euro-area economy and, therefore, further underpin its recovery.”

“The key message from today’s decision is that rates are on hold for an extended period, and that the ECB is in no hurry to remove the monetary stimulus that it has put in place,” said Colin Ellis, an economist at Daiwa Securities SMBC in London. “Trichet sought to play down any prospect of a swift economic recovery.”

The euro fell almost a cent after Trichet’s comments to $1.4245.

‘Bumpy Road’

In the U.S., the Federal Reserve signaled in minutes published yesterday that it’s already trying to prepare investors for an end to some of its asset purchases.

Trichet will discuss exit strategies and prospects for the global economy when he meets with officials from the Group of 20 nations in London from tomorrow.

“Uncertainty is very high,” Trichet said. “It’s a bumpy road we have ahead of us. Prudence and caution are still of the essence.”

The ECB today raised its economic forecasts for the 16- nation euro region to predict growth of about 0.2 in 2010 instead of a 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months ago.

The ECB expects inflation to average 0.4 percent this year and 1.2 percent in 2010, up from 0.3 percent and 1 percent forecast in June. That is still below the bank’s goal of keeping annual price gains just below 2 percent.

‘Subdued’ Inflation

Euro-region consumer prices have posted annual declines for three straight months. Trichet said while “inflation rates are projected to return to positive territory again within the coming months,” price developments will “remain subdued” amid “ongoing sluggish demand.”

With a global recovery bolstering demand for European exports, economists nevertheless predict the economy will expand this quarter. European economic confidence increased twice as much as economists forecast in August, and the region’s manufacturing and service industries almost ceased contracting.

L’Oreal SA, the world’s largest cosmetics maker, said on Aug. 27 that sales improved in July and will keep recuperating gradually in the second half of the year. Voestalpine AG, Austria’s biggest steel company, said on Aug. 28 it’s ending shortened working hours for staff at its Linz plant after demand for flat steel rebounded “significantly.”

“The green shoots have to be seen in a relative context,” ECB Executive Board member Juergen Stark told a conference in Frankfurt today. “Still, there are signs that we’re moving past the low point. The free-fall of economic activity seems to be stopped and for 2010 we can expect a gradual recovery.”

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The productivity of U.S. workers grew in the second quarter at the fastest pace in almost six years as employers squeezed more out of remaining staff to bolster profits.

Productivity, a measure of how much an employee produces for each hour worked, rose at an annual 6.4 percent pace, more than forecast, after a 0.3 percent gain the prior three months, Labor Department data showed today in Washington. Labor costs fell by the most in eight years.

Lower expenses mean companies may need to fire fewer workers as sales stabilize, the first step toward ending the worst employment slump in the post World War II era. Efficiency gains also help curb inflation, giving Federal Reserve policy makers, meeting today and tomorrow, extra time to remove stimulus.

“This is good for the cost structure of companies,” said Chris Rupkey, chief financial economist at Bank of Tokyo- Mitsubishi UFJ Ltd. In New York. ‘The Fed will be encouraged on the inflation story. They have taken a lot of heat on the exit strategy. Certainly there is no rush to exit.”

Stock index futures trimmed losses and Treasury securities gained after the report indicated labor costs will not contribute to inflation. The contract on the Standard & Poor’s 500 index was down 0.2 percent 1,005.2 at 8:43 a.m. in New York. The yield on the benchmark 10-year note fell to 3.77 percent from 3.78 percent late yesterday.

Lower Costs

Labor costs decreased at a 5.8 percent pace, the second consecutive drop and the biggest since 2001. Expenses were down 0.6 percent over the last four quarters, the biggest fall in five years.

Economists had forecast productivity would rise at a 5.5 percent annual pace, according to the median of 62 forecasts in a Bloomberg News survey. Estimates ranged from increases of 7 percent to 2.9 percent. Unit labor costs, which are adjusted for efficiency gains, were projected to drop 2.5 percent.

Compared with the second quarter of 2008, productivity was up 1.8 percent, the most in a year.

Hours worked fell at a 7.6 percent pace, after a 9 percent drop. Output fell at a 1.7 percent rate.

Compensation

Compensation for each hour worked climbed at 0.2 percent annual pace, compared with a decline of 2.4 percent in the prior quarter.

Among manufacturers, productivity jumped at a 5.3 percent pace, compared with a 2.6 percent decrease.

A Labor report last week showed payrolls fell by 247,000 in July after a 443,000 drop in June, in a sign job losses are already starting to slow payday loans. The economy has lost 6.7 million jobs since the recession began in December 2007.

Smaller workforces have helped stem the slump in profits. For the second quarter, 72.2 percent of S&P 500 companies beat consensus earnings estimates, just below the 72.3 percent ratio five years ago that was the highest since at least 1993, data compiled by Bloomberg showed as of yesterday.

Investors are getting encouraged by the improvement. The Standard & Poor’s 500 index rose in each of the last four weeks, leaving it trading at the highest level relative to earnings since 2004.

DuPont Co., the third-biggest U.S. chemical maker, was one of the companies that posted second-quarter profit that topped analysts’ estimates as it trimmed expenses faster than expected. Wilmington, Delaware-based DuPont is cutting fixed costs by $1 billion, in part by shedding 2,500 employees and more than 10,000 contractors, and has achieved 60 percent of its cost- reduction target.

Cutting Payrolls

“Our aggressive actions to improve productivity and reduce costs across the company are paying off,” Chief Executive Officer Ellen Kullman said in a statement last month.

Some companies are already bringing employees back as demand stabilizes. Union Pacific Corp., the second biggest U.S. railroad by sales, trimmed payroll by operating with about 45,000 workers in the second quarter, its lowest employment since its 1996 purchase of Southern Pacific Rail Corp.

Omaha, Nebraska-based Union Pacific, whose profit also beat analysts’ estimates, has recalled some furloughed workers since June as weekly carload rates gain. About 900 of the 5,300 conductors, engineers and other employees laid off as of mid- June have returned, a spokesman said in July.

Rising productivity may help Fed officials build a case for keeping the benchmark lending rate close to zero for a long period of time. In addition to cutting rates, Fed policy makers injected billions of dollars to unclog the financial system after lenders clamped down on credit.

In the 1990s, former Fed Chairman Alan Greenspan was one of the first to recognize productivity was accelerating because of the increased use of computers and the Internet, and that the improvement would contain inflation even as the economy gained strength and unemployment stayed low. The realization allowed the Fed to keep interest rates little changed from 1996 to 1999.

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Employers cut jobs in July at a slower pace and the factory slump eased, indicating the end of the worst U.S. recession since the Great Depression is getting closer, economists said before reports this week.

Payrolls fell by 325,000 workers after dropping by 467,000 in June, according to the median on 56 estimates in a Bloomberg News survey ahead of an Aug. 7 Labor Department report. The jobless rate probably rose to a 26-year high of 9.6 percent.

The figures will be a reminder that, even as Obama administration stimulus efforts gain traction, hiring will take longer to pick up as companies such as Deere & Co. and US Airways Group Inc. continue to cut costs. Estimates that the jobless rate will exceed 10 percent by early 2010 signal consumer spending will lag behind an economic recovery.

“The labor market will remain a headwind,” said Conrad DeQuadros, senior economist and a partner at RDQ Economics in New York. “The pace of layoffs has slowed, but that’s not enough. Given an environment where growth is likely to be extremely sluggish, unemployment will still go higher.”

The U.S. has lost 6.5 million jobs since the recession began in December 2007, the most of any economic slump in the post-World War II era. June’s unemployment rate of 9.5 percent was the highest since 1983.

Households see few signs the job market will improve. Tempe, Arizona-based US Airways said last month it will cut 600 jobs after the peak summer travel season ends in September. Moline, Illinois-based Deere, the world’s largest maker of agricultural equipment, said about 800 salaried employees will leave as part of a voluntary program.

Fewer Paychecks

Automatic Data Processing Inc., the world’s largest payroll processor, last week forecast full-year sales and profit that trailed analysts’ projections as the recession curbed customers’ spending. It gets about three-quarters of its sales from paycheck, tax and benefits processing.

“Our guidance reflects the uncertainty about the depth and length of the downturn,” Chief Financial Officer Chris Reidy said in an interview on July 30. “The pipeline of activity has picked up significantly, but CEOs and CFOs are still hesitant to make these investments.”

A report last week from the Commerce Department underscored estimates that the economy will pick up this quarter. Gross domestic product shrank at a 1 percent annual pace from April to June, less than forecast, after plunging 6 cash advance.4 percent the prior three months.

Obama on Jobs

“We are still continuing to lose far too many jobs,” President Barack Obama said in a news conference on July 31 following the GDP release. “As far as I’m concerned, we won’t have a recovery as long as we keep losing jobs,” he said, and added that a rebound in hiring “won’t happen overnight.”

A record reduction in inventories over the first half of the year sets the stage for production to rebound, economists said. Companies including General Motors Co. and Chrysler Group LLC, both out of bankruptcy, may benefit from higher sales and a boost to output from the government’s “cash for clunkers” effort.

The House of Representatives on July 31 approved an emergency measure to add $2 billion to the automobile purchase program after a burst of demand exhausted most of the initial $1 billion in less than a week.

Sales figures from the auto industry are due tomorrow. Increasing demand will contribute to the stabilization in manufacturing already taking place.

Manufacturing, Services

The Institute for Supply Management may report tomorrow that its manufacturing index climbed to 46.5 in July, the highest level in almost year, according to the Bloomberg survey median. Readings below 50 signal contraction.

The slump in service industries, which make up almost 90 percent of the economy, is also waning. The Tempe, Arizona-based ISM’s gauge of non-manufacturing businesses probably increased to 48 last month from 47 in June, according to the Bloomberg survey. The report is due on Aug. 5.

The GDP report last week showed consumer spending, which makes up about 70 percent of the economy, has dropped 2 percent since it peaked at the end of 2007 — the most since the 1980 recession. A Commerce report on June 4 will give the month-by- month breakdown on spending and incomes for the quarter.

Economists project the economy will grow at an average 1.5 percent pace from July to December, according to a Bloomberg survey taken in early July. The survey also showed they forecast the jobless rate will reach 10.1 percent in the first quarter of 2010.

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U.S. Treasury Secretary Timothy Geithner said that authorities will be careful not to blunt measures aimed at pulled the economy out of recession.

Withdrawing stimulus too soon “would weaken our long-term fiscal process and weaken the basic fabric of the economy,” Geithner said in an interview with Bloomberg Television in Paris today. “That’s not something we can afford to do.”

The U.S. unemployment rate rose in June to the highest in almost 26 years as officials battle the deepest recession in half a century. Geithner said July 11 it’s too soon to determine whether a second stimulus package is needed, saying that the $787 billion measure that President Barack Obama signed into law in February may not take full effect until the second half.

“We’re not going to repeat the classic mistake that the U health insurance.S. made in the 1930s and that governments around the world have made in financial crises, by at the first sign of hope putting the brakes on prematurely,” he said.

China became the first major economy to rebound from global recession after today reporting 7.9 percent growth in the second quarter. Geithner said that emerging Asian economies are providing ground for “cautious optimism” about the prospects for global growth.

“We’re seeing durable signs of greater confidence” in markets, Geithner said. He earlier called for “comprehensive” reform of compensation practices as part of the U.S.’s shakeup of how financial markets are regulated.

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India’s economy grew more than expected last quarter, easing pressure on Prime Minister Manmohan Singh to revive consumer demand as he starts his second term in office. Stocks and the rupee gained.

Asia’s third-largest economy expanded 5.8 percent in the three months to March 31, matching the revised gain of the previous quarter, the statistics office said in New Delhi today. Economists were expecting a 5 percent increase.

Growth is still almost half the pace at which India expanded in the past five years and Finance Minister Pranab Mukherjee this week pledged to boost spending in July’s budget. The economy is already showing “some signs” of revival from interest-rate cuts and fiscal stimulus worth 7 percent of gross domestic product, Mukherjee said.

“A 5 percent growth rate isn’t enough to absorb the rise in working population, risking unemployment,” said Robert Prior-Wandesforde, senior Asian economist at HSBC Holdings Plc in Singapore. “It’s important to see how the issue is tackled in the budget — too much in the way of giveaways may lead to further sell-off in the bond market.”

Stocks extended their gains after the better-than-expected growth figures, with the Bombay Stock Exchange’s Sensitive Index rising 1.6 percent to 14,519.75 at 11:05 a.m. in Mumbai. The rupee strengthened, advancing to 47.39 a dollar immediately after the report, from 47.46 earlier, according to data compiled by Bloomberg.

Asset Sales

The yield on benchmark bonds has climbed 28 basis points percent to 6.7 percent since Singh’s May 16 electoral triumph on concern the government will borrow more to fund its budget.

Still, India’s key Sensitive stock index has surged 18 percent during the period on optimism a coalition without communist parties will allow Singh to sell state assets and accept more foreign investments in insurance and banking.

The sale of stakes in state-run companies such as National Hydroelectric Power Corp. and Oil India Ltd. is vital for Mukherjee to find money to spend without widening a budget deficit that Moody’s Investors Service says has ‘deteriorated.”

India’s budget shortfall stood at 6 percent of GDP in the year ended March 31, more than double the target. Moody’s has kept India’s local-currency long-term rating at Ba2, two levels below investment grade while Standard & Poor’s has a BBB- rating on India, the lowest investment grade.

‘Key Reforms’

“The unexpected election outcome provides scope for rationalizing spending, pushing ahead with disinvestments and key reforms,” Moody’s said in its annual report yesterday.

For now, Mukherjee said this week he plans to spend more to stimulate the economy, betting it will help boost tax revenues. He said the election results vindicate the strategy to pursue growth as a tool to improve people’s livelihood.

Almost 10 million people join India’s workforce each year and the International Labour Organization says India needs at least 10 percent economic growth each year for a one percent increase in employment no fax payday loans.

Lower interest rates and increased government spending is starting to yield results in the economy.

Car sales and the production of cement, electricity and refined petroleum are showing signs of revival. India’s passenger car sales increased 4.2 percent in April from a year earlier, after a 1 percent gain in March. Cement production jumped 10.1 percent in March and electricity output rose 5.9 percent from a year ago, according to government data.

Forecasts Raised

UBS AG raised its growth forecast for India to 6.2 percent in the year ending March 2010, compared with an earlier prediction of 5.2 percent. Standard Chartered economist Anubhuti Sahay said risks to the bank’s 5 percent forecast for the same period were now “to the upside” and Morgan Stanley’s Chetan Ahya raised his estimate to 5.8 percent from 4.4 percent.

The 73-year-old Mukherjee returned to the finance ministry after a quarter of a century. As the finance minister in Indira Gandhi’s cabinet from 1982 to 1984, he ran an economy that was almost closed and insulated from the global economy.

Singh, as finance minister between 1991 and 1996, abandoned the Soviet-style state planning and introduced free-market policies that have helped the economy quadruple to $1.2 trillion. Mukherjee said this week he will draft the budget with Singh, renewing a relationship that started in the early 1980s when he appointed Singh as the central bank governor.

‘Game-Changing’

Singh’s election triumph has been a “game-changing” verdict, says Macquarie Group Ltd. economist Rajeev Malik, describing it as a “catalyst in enhancing the evolving global rise of the Indian economy.”

In Singh’s first term between 2004 and 2009, India’s economy grew close to 9 percent on average each year, the fastest pace since independence in 1947, helped by a six-fold surge in foreign direct investments to $38 billion.

General Electric Co. Chief Executive Officer Jeffrey Immelt said yesterday the Indian elections was the best development in the country that he’d seen in 20 years and he was “completely optimistic about India in the long term.”

At stake are economic changes blocked by Singh’s erstwhile communist partners such as a bill to raise the foreign investment ceiling for Prudential Plc and other insurers to 49 percent from 26 percent, and other proposed legislation aimed at removing a 10 percent cap on the voting rights of foreign investors in non-state banks. The government also wants to allow global retailers such as Wal-Mart Stores Inc. into India.

“The future looks promising in India,” said Fumio Ito, president of Kuraray Co. Ltd., the Tokyo-based chemicals maker, which this week announced the opening of its marketing unit in India. “When our operations expand, we will consider building a production plant in India.”

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Japan’s economy shrank by a record last quarter as exports collapsed and consumers and businesses slashed spending, a decline that probably marked the low point in the country’s worst recession since World War II.

Gross domestic product fell an annualized 15.2 percent in the three months ended March 31, following a revised fourth- quarter drop of 14.4 percent, the Cabinet Office said today in Tokyo. The economy contracted 3.5 percent in the year ended March 31, the most since records began in 1955.

Exports plunged an unprecedented 26 percent last quarter, forcing companies from Toyota Motor Corp. to Hitachi Ltd. to cut production, workers and wages. Stocks have gained 32 percent since reaching a 26-year low in March on speculation worldwide interest-rate reductions and spending by governments will halt the slide in the world’s second-largest economy.

“There was a collapse across the board,” said Yoshiki Shinke, a senior economist at Dai-Ichi Life Research Institute in Tokyo. Still, he added, there’s “light at the end of the tunnel” and the economy will resume growing this quarter as companies replenish inventories and stimulus plans at home and abroad take effect.

The yen traded at 95.59 per dollar at 12:56 p.m. in Tokyo from 96.16 before the report was published. The Nikkei 225 Stock Average rose 0.3 percent. Economists surveyed predicted the economy would shrink 16.1 percent.

Worse Than U.S.

GDP fell 4 percent on a non-annualized basis, more than double the U.S.’s 1.6 percent slide. It’s also worse than Europe’s record 2.5 percent contraction. Without adjusting for price changes, Japan shrank 2.9 percent last quarter.

Weaker domestic demand was the biggest contributor to the decline, shaving 2.6 percentage points off GDP, the most since 1974. Net exports — the difference between exports and imports — was responsible for 1.4 percentage points of the drop.

Consumer spending slid 1.1 percent and business investment plunged a record 10.4 percent. Economists say companies will keep cutting spending because the decline in demand has left factories and workers underused.

“There is a huge problem of over-capacity,” said Hiromichi Shirakawa, chief economist at Credit Suisse Group AG in Tokyo. “That means capital spending is not likely to pick up.”

Hitachi, a maker of nuclear reactors, home appliances and hard-disk drives, will trim costs by 500 billion yen ($5.2 billion) this fiscal year to minimize losses after a record 787.3 billion yen deficit last year. The Tokyo-based company said in January it plans to cut 7,000 jobs.

May Grow

Still, reports in the past month suggest the world’s second-largest economy may grow for the first time in a year this quarter, albeit from a low point, as exports stabilize and Prime Minister Taro Aso’s 15 paydayloans.4 trillion yen stimulus plan, announced in April, takes effect.

Consumer confidence climbed to a 10-month high in April. Exports increased in March from a month earlier, and factory output rose for the first time since September.

“Japan, first of all, will get a big boost from fiscal stimulus,” Thomas Byrne, senior vice president of Moody’s Investors Service, said in an interview in Tokyo. “Second, if the global economy picks up a little bit, that will help tremendously in Japan because of its dependence on exports.”

Byrne said Moody’s is unlikely to cut Japan’s debt rating over the next year because investors are willing to buy bonds that will fund the stimulus plans. Moody’s unified Japan’s ratings at Aa2 this week, raising the local-currency assessment from Aa3 and lowering the foreign-currency view from Aaa.

Replenishing Inventories

“While the economy will continue to be in a severe state, I expect less pressure from inventory adjustments and the stimulus package to provide support,” Economy and Fiscal Policy Minister Kaoru Yosano said after today’s report.

Falling inventories accounted for 0.3 percentage point, or about a tenth, of last quarter’s contraction. Companies including Honda Motor Corp. have cut stockpiles at a quicker rate than sales have declined, giving them room to boost output.

Honda plans to increase production in Japan this quarter as dealerships clear inventories, the Wall Street Journal reported last week. Auto sales in Japan and the U.S. may have “bottomed,” Fuji Heavy Industries Ltd. President Ikuo Mori said in Tokyo today. Fuji Heavy makes Subaru-brand cars.

Still, the failure of export demand to do better than simply stabilize will probably limit the scope of Japan’s recovery. Toyota, Hitachi, and Panasonic Corp. all forecast continued losses in the current business year. Panasonic said last week it plans to close about 20 factories this year and proceed with the 15,000 job cuts announced in February.

“We basically bottomed out,” said Jesper Koll, chief executive officer of hedge fund adviser TRJ Tantallon Research Japan. Even so, “on the consumer spending side you’ve got a very clear negative from the severe labor market adjustment.”

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