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U.S. and Chinese economic leaders pledged to keep up stimulus efforts and to rein in trade and investment imbalances that contributed to the global crisis.

“It is vitally important for China and the United States to see through their commitments to repair the financial system and lay the foundation for recovery,” Treasury Secretary Timothy Geithner said at the end of the first Strategic and Economic Dialogue talks under the Obama administration in Washington. China’s Vice Premier Wang Qishan said the two will press for an “expansion” of the recovery.

The U.S. pledged to curb the budget deficit and boost household savings, and China committed to rely less on overseas demand for its goods. There were few signs of the disputes over the yuan and market access that characterized talks in the Bush administration. Analysts expressed skepticism whether the two governments can secure “balanced” growth.

“These statements are made in good faith, but the issue is that you can’t just wave a magic wand and get there overnight,” said Huw McKay, senior international economist at Westpac Banking Corp. in Sydney. “These things take long periods of time.”

The two sides indicated that while economic data improved in recent months, a self-sustaining rebound has yet to emerge. In the U.S., President Barack Obama is implementing a $787 billion fiscal stimulus and Federal Reserve Chairman Ben S. Bernanke doubled the central bank’s balance sheet to about $2 trillion. China has a 4 trillion yuan ($585 billion) stimulus.

‘Strong’ Responses

“Both countries pledged to maintain their strong policy responses until recovery is secured,” the U.S. Treasury said in a statement.

Zhou Xiaochuan, the Chinese central bank governor, said China will wait for the U.S. to begin to pull back on its stimulus measures before deciding whether it will do the same.

“If we see that the U.S. starts to exit its expansionary fiscal and monetary policies, then China will see what it will do at that time,” Zhou said at a press briefing today.

The People’s Bank of China governor also said that “I believe that the Federal Reserve of the U.S. will make appropriate arrangements to prevent high inflation.”

The U.S. Treasury highlighted China’s commitments to liberalize business and investment rules, including letting international banks underwrite Chinese bonds, raising the threshold for foreign direct investments that need government approval, and loosening limits on interest rates.

‘Sustainable’ Deficit

China’s officials reiterated their concern at the record American budget deficit, and were told by Obama’s aides that there’s a plan to achieve a “sustainable” deficit by 2013. Their comments today indicated they accepted the U.S. presentation.

“Credible steps will be taken by the U.S. to control the deficit,” China’s Finance Minister Xie Xuren said at a press briefing today. “The Treasury secretary stated clearly that they are placing a lot of importance on this issue.”

At stake is sustaining demand for U advance payday loans.S. debt from China, the largest foreign holder of Treasuries. The federal deficit is on course to reach $1.8 trillion this year; China’s investments in Treasuries reached $801.5 billion in May, about 100 percent more than at the start of 2007.

“We are joined at the hip with China and that means both countries need to be sensitive to each other’s needs, each other’s problems,” Mickey Kantor, a former U.S. Trade Representative, said in an interview from Los Angeles.

Yuan Policy

China’s Treasuries holdings also are the result of holding down the value of the yuan, a policy that U.S. lawmakers have charged is designed to provide a subsidy for its exports. The yuan has hovered around 6.83 per dollar since July last year after gaining about 21 percent since China lifted a strict peg to the dollar in July 2005.

Zhang Xiaoqiang, vice chairman of the National Development and Reform Commission, told reporters yesterday that “compared with previous meetings” between Chinese and U.S. officials, “the U.S. side doesn’t lay as much emphasis on renminbi exchange-rate reform and opening of capital markets.” The yuan is a denomination of the renminbi.

The effort to produce more “balanced” growth comes after Bernanke and other officials blamed imbalances in trade, spending and investment for helping spark the crisis.

Trade, Investment

U.S. consumers relied on borrowing to finance their purchases, contributing to an export boom from Asia. As China and other Asian nations accumulated dollars from trade surpluses, they bought bonds and depressed global yields. Lower borrowing costs helped stoke the housing and credit booms that turned to bust in 2007.

China and the U.S. will aim to “bring about more balanced and sustainable global economic growth after a global recovery is firmly established,” the two sides said in a fact sheet on the economic side of the talks.

“Building a consumption-based economy is overdone and overhyped” with regard to China, Donald Straszheim, who heads Straszheim Global Advisors Inc. in Los Angeles. “It will take a generation, not just a few years, for China’s consumer sector to really develop.”

In the U.S., officials will take steps to reduce its current-account deficit, boost private savings and cut its budget deficit once a recovery is “firmly established,” Geithner said.

The U.S. savings rate reached 6.9 percent in May, the highest level since 1993, as Americans consumers curtailed spending. Geithner said he expects those gains to be part of a more permanent shift.

“We’re more likely to decide that these changes we’ve seen in private savings already are durable,” Geithner said. “We’ve learned some tough lessons as a country. I think the basic lesson, the importance of living within our means, is best for the country, and at the household level, is an important, necessary lesson.”

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U.K. home sellers lowered asking prices in June for the first time in five months as banks scaled back lending and required buyers to stump up bigger deposits, Rightmove Plc said.

The average cost of a home slipped 0.4 percent to 226,436 pounds ($372,000) from May, when it rose by 2.4 percent, the operator of the biggest U.K. residential property Web site said today. Separately, business service companies will lose more than 300,000 jobs within five years, the Centre for Economics and Business Research said in a report.

While the Bank of England says the housing market has shown signs of stabilizing, Governor Mervyn King cautioned last week that the squeeze on lending may slow the economy’s recovery from the worst recession in a generation. Unemployment, which rose to the highest since 1996 in the quarter through April, may also hamper a rebound in home values.

“We’re very much bumping along the bottom,” said Miles Shipside, commercial director at Rightmove, in an interview with Bloomberg Television. “Sellers are having to reduce prices to where they’re getting interest. With the pickup in sales activity, there’s a narrowing of the gap between asking prices and what’s actually being achieved.”

House prices fell 5.5 percent on the year, Rightmove said. Values dropped the most on the month in East Anglia, the North and the Southeast. Prices slipped 0.1 percent in London. They rose in the East Midlands, Wales and the Northwest.

Mortgage Costs

Mortgage lenders are raising the cost of fixed-rate loans and asking for bigger down payments. Nationwide Building Society and Lloyds Banking Group Plc this month both increased the cost of their fixed-rate home loans after a jump in U free business card template.K. swap rates, used by banks as a benchmark for mortgage costs.

The drop in housing prices follows reports last week showing retail sales unexpectedly fell and manufacturers’ export orders declined to the lowest level in a decade. King said that the economy’s recovery will probably be “protracted.”

Business services in Britain such as consulting, legal firms and accountants will lose 311,000 jobs between 2008 and 2013, the CEBR said today. Output in the industry will drop 5 percent this year, the report said.

Still, more than half of U.K. companies said the country has reached the bottom of the economic cycle and business confidence is at the highest since 2008, a survey by KPMG showed in a separate report today. A majority still said they face higher financing costs and tighter borrowing.

There are other signs of a pickup. Inflation slowed less than economists forecast in May, while surveys of manufacturing and services industries improved. Both Halifax and Nationwide Building Society reported that home values jumped last month.

U.K. homebuyers are clinching smaller discounts on property prices as the housing market stabilizes, the Royal Institution of Chartered Surveyors said June 15. Rightmove said today that asking prices are still 6 percent higher than in January.

“We’re through the worst, but it will take a long time to recover,” Shipside said.

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Australia’s central bank didn’t see a pressing case to cut interest rates from a 49-year low two weeks ago, saying the effects of previous reductions and government spending will take time to emerge.

“Maintaining the current stance of monetary policy for the time being would be consistent with fostering sustainable growth and low inflation,” policy makers said in minutes of the bank’s June 2 meeting released in Sydney today.

Reserve Bank Governor Glenn Stevens left the overnight cash rate target at 3 percent for a second month ahead of a report showing Australia joined China and India as one of the few economies to expand last quarter. The central bank has scope for “some further easing of monetary policy if that were needed” to spur growth, according to the minutes.

The minutes confirm “an easing bias, but the details hint at a Reserve Bank that has shifted to the sidelines for the foreseeable future,” said Su-Lin Ong, senior economist at RBC Capital Markets Ltd. in Sydney. “We think the cash rate has troughed.”

The Australian dollar rose to 79.19 U.S. cents at 12:21 p.m. in Sydney from 78.92 cents before the minutes were released. The yield on the two-year government bond gained 1 basis point to 3.78 percent. A basis point is 0.01 percentage point.

Reports published since the meeting showed employers fired fewer workers than estimated in May, consumer confidence jumped the most in 22 years, business sentiment had the biggest gain since 2001 and home-loan approvals rose for a seventh month.

Economy Grows

Gross domestic product unexpectedly grew 0.4 percent in the three months through March 31 after contracting 0.6 percent in the fourth quarter, the government reported on June 3. Economists forecast a 0.2 percent decline.

While Australia’s economy is experiencing a “downturn,” there are signs it is “less severe than in most other countries,” the minutes said. “The outlook was for a fairly gradual expansion getting underway later in the year, with spare capacity tending to increase and inflation tending to decline.

“Recent information had not led to any downward revision to the outlook; if anything, some indicators had been on the stronger side,” the bank said.

To cushion the economy against the worst global slump since the Great Depression, Stevens cut the overnight cash rate target by a record 4 cash til payday loans.25 percentage points between September and April.

Scope to Cut

The government in February also began distributing more than A$12 billion ($9.5 billion) in cash handouts to consumers. Treasurer Wayne Swan said last month he will spend another A$22 billion on roads, railways, schools and ports.

“Indications were that these policies were having some impact, though the full effects would take time yet to be seen,” the minutes said. The bank’s current policy setting also leaves “adequate flexibility to respond to developments as needed over the period ahead.”

Speculation that Stevens will raise interest rates over the coming 12 months climbed last week on signs the economy is strengthening, according to a Credit Suisse Group AG index.

Investors expect Stevens and his board to raise the benchmark interest rate by 58 basis points in the next 12 months, the index showed at 12:18 p.m. in Sydney. At the start of June, traders tipped 3 basis points of cuts. The index was unchanged after today’s minutes were published.

Rising Currency

“People are jumping to pretty aggressive rate hikes by the first half of 2010, and I don’t think that’s what the Reserve Bank are thinking of at the moment,” said Brian Redican, a senior economist at Macquarie Group Ltd. in Sydney.

Today’s minutes suggest “rates won’t rise anytime soon,” Redican said. And “they are still reiterating that they can cut rates further if the economy needs it.”

The Australian currency’s recent appreciation, particularly against the U.S. dollar, has “reduced the stimulus to the economy coming from the earlier depreciation,” today’s minutes said.

Australia’s dollar climbed about 7 percent against a trade- weighted basket of currencies in the month prior to the June 2 meeting, the Reserve Bank said.

Much of the increase came during offshore trading sessions, suggesting that currency movements reflected “changes in sentiment toward the U.S. dollar and risk appetite more generally, rather than any specific reassessment about Australia’s economic prospects,” the minutes said.

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The European Central Bank’s Governing Council discussed a package of asset purchases worth about 125 billion euros ($170 billion) this month, more than twice the amount finally agreed upon, people briefed on the talks said.

The package proposed at the May 7 council meeting included buying commercial paper and corporate bonds, said the people, who declined to be identified because the discussions were private. After the meeting, President Jean-Claude Trichet announced plans to acquire 60 billion euros of covered bonds, low-risk securities backed by mortgages and public-sector loans. An ECB spokeswoman declined to comment.

Germany’s Axel Weber opposed buying assets and argues the ECB should maintain its focus on getting banks to lend to each other again. Smaller countries in the 16-nation euro area pushed for the ECB to follow the Federal Reserve and the Bank of England in buying a broader range of assets to pump money into the economy and counter the possible risk of deflation.

“For an economy the size of the euro zone, 60 billion is chicken feed,” said Peter Dixon, an economist at Commerzbank AG in London. A sum of 125 billion euros is “more realistic, though it’s still half of what you’d like to see.”

The ECB’s plan is worth 0.6 percent of euro-region gross domestic product. Asset-purchase programs by the Federal Reserve and the Bank of England amount to about 12 percent of U.S. GDP and 10 percent of U.K. GDP.

Diversity

The diversity of views on the ECB’s 22-member council may make it harder for Trichet to restore consensus at the central bank and help an economy struggling to escape its worst recession since World War II. Before the May meeting, Trichet asked council members not to publicly debate the next policy steps, Austrian governor Ewald Nowotny said on April 30.

Slovenian central bank chief Marko Kranjec said in a May 13 interview that “we don’t exclude the purchase of first-class corporate bonds” and “short-term securities such as commercial paper.” He also said that an increase beyond 60 billion euros was “very likely.”

Six days later, he said that the comments were taken “out of context.”

Slovakia’s Ivan Sramko said May 14 he “can exclude nothing” on non-standard measures. Nowotny, in a speech on central banks in general, said they can buy government bonds when interest rates near zero. He later moved to “avoid some misunderstandings,” saying policy makers had a “clear common view.”

‘Powerful Comeback’

Bundesbank President Weber on May 13 insisted that 60 billion euros was the “maximum” the ECB will spend on assets and said inflation may make a “rapid and powerful comeback” if the economy recovers faster than expected business cards.

Athanasios Orphanides from Cyprus, the former Fed economist who has argued for an aggressive response to the financial crisis, warned the same day that deflationary expectations must not be allowed to develop.

“You have completely conflicting signals from different members, creating confusion,” said Jacques Cailloux, chief euro-region economist at Royal Bank of Scotland Group Plc in London. “There may come a time when this cacophony becomes unbearable.”

“Intervention by Trichet to restore a certain order would help,” said Aurelio Maccario, chief euro-area economist at UniCredit Group in Milan.

‘Full Blown’

Asked on May 7 whether the ECB had considered buying other assets, Trichet said: “We have decided to engage in the purchase of covered bonds” and “have not taken any other decision on any other purchase.”

He said the ECB will give details of its covered bond purchases after its next council meeting on June 4. The securities have suffered a slump in demand during the crisis.

Weber “will block any further attempts to buy assets,” said Nick Kounis, chief euro-region economist at Fortis in Amsterdam. “As long as the Bundesbank is against it, we won’t get a full-blown” asset-purchase program.

The ECB this month cut its benchmark interest rate to a record-low 1 percent and Trichet said that’s not necessarily its lowest level. While Weber wants to make 1 percent the floor for the key rate, others say deeper cuts may yet be necessary.

Council members have also disagreed about the outlook for Europe’s recovery. Vice President Lucas Papademos said last week that “the recovery may start sooner than previously envisaged,” while Dutch official Nout Wellink warned against becoming “too optimistic when you see a few swallows flying around.”

Confidence Improves

German investor confidence rose more than economists forecast to a three-year high in May. At the same time, Europe’s largest economy shrank the most since 1970 in the first quarter and industrial output across the euro region plunged the most since at least 1986 in March.

The euro-area economy will contract 4.2 percent this year, according to the International Monetary Fund, more than the projected 2.8 percent contraction in the U.S. and 4.1 percent slump in the U.K.

The Fed, Bank of England and Bank of Japan have already lowered their key rates to close to zero and are buying government and corporate debt, effectively pumping new money into their economies to revive growth.

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Treasury Secretary Timothy Geithner said the U.S. government shouldn’t set a ceiling on executive pay and instead should seek to ensure compensation packages don’t encourage excessive risk taking.

“I don’t think our government should set caps on compensation,” he said in answering questions at an event at the National Press Club today in Washington. “What I think we need to do is make sure we put in place some broad constraints on the incentives compensation systems create.”

Geithner’s remarks indicate the administration’s proposals may focus more on principles than on specific prescriptions for how financial companies compensate their executives. Federal Deposit Insurance Corp. Chairman Sheila Bair made similar comments last week, while calling for broad application of guidelines to include traders as well as corporate chiefs.

The Obama administration is implementing pay restrictions on banks receiving government aid, which were set by Congress as part of this year’s $787 billion economic stimulus legislation.

The administration also is reviewing ways to toughen supervision of financial markets and companies to avoid a repeat of a crisis that has cost $1.5 trillion in credit losses since 2007. Geithner said incentives in pay packages contributed to the turmoil.

‘Broad Caps’

“We had a crisis magnified by the fact that people were paid to take a huge amount of short-term risk, and that’s something that’s preventable,” he said. “We shouldn’t be setting broad caps, I think we should be trying to get the incentives better.”

Geithner said the administration is in touch with California and other state and local governments that are having trouble balancing their budgets. While there would be efforts to help those governments, he disputed the prospects of a “federal bailout” for municipal bond markets.

“I wouldn’t use the word bailout or federal,” Geithner said. “I would say we’re in close consultation with the people who are looking at ways to make sure these markets are working so that states and munis can meet their needs bad credit pay day loans.”

The House Financial Services Committee has scheduled a May 21 hearing to consider four bills related to the municipal bond markets.

Budget Woes

Recently, such markets have seen “significant improvement” after a “traumatic adjustment” caused by the financial crisis, Geithner said. He said states now need to address their long-term budget problems, some of which predated the credit market woes.

The Treasury secretary also said that the U.S. economy has stabilized, even while many people may not feel a turnaround immediately.

“Unemployment is going to keep increasing for a while,” he said. “It’s not going to feel better for a long time for millions of Americans.”

The U.S. economy lost 539,000 jobs in April, the smallest drop in six months, as the worst recession in half a century started to ease and the federal government stepped up hiring for the country’s next census. Still, the unemployment rate jumped to 8.9 percent, the highest level since 1983.

The economy has lost 5.7 million jobs since payrolls started dropping in January of last year.

Geithner said his coming trip to Beijing is part of the Obama administration’s efforts to build ties with China, the second biggest U.S. trading partner and the largest foreign holder of U.S. government debt.

“We’ll talk about how they’re doing in strengthening their economy, shifting to a more balanced domestic demand-led growth, and they’re going to want to hear from us in terms of how we’re in getting our economy out of the crisis,” Geithner said.

The U.S. also will continue to encourage China to take a more active role in international organizations, he said. “We want them to have a seat at the table,” Geithner said. “We want them to feel invested in making the system work.”

– With reporting by Shobhana Chandra in Washington. Editors: Brendan Murray, James Tyson

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Solutia Inc. has agreed to sell its nylon business to a New York-based private equity firm, the Town and Country company said today.

At the closing of the sales, which is expected by the end of June, Solutia will receive $50 million in cash and a two percent equity stake in a new company formed by the private-equity firm SK Capital Partners II LP.

Solutia said it also will receive $4 million in deferred cash payments, paid annually in $1 million increments starting in 2011.

With the money from the sale, the company said, it plans to pay down some debt.

Solutia makes a range of products, including chemicals and window films business cards. On June 30, it announced it would review the nylon business and possibly sell it.

"We do not believe the operations, product profitability and long-term strategy of Integrated Nylon are aligned with our specialty businesses," Solutia said in a regulatory filing on Feb. 19.

The sale includes all five of the nylon business’ manufacturing plants in: Alvin, Texas; Decatur, Ala.; Foley, Ala.; Greenwood, S.C.; and Pensacola, Fla.

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KV Pharmaceutical Co. has reached a deal with federal prosecutors that bars the embattled drug maker from resuming production until it can comply with Food and Drug Administration regulations.

Still, it remains far from clear when Brentwood-based KV might be able to meet those standards and what products it will be allowed to make.

KV agreed to an injunction contained in a court order called a consent decree. Prosecutors filed the decree Monday at the same time they filed the complaint against KV and its top officers. The defendants are accused of using manufacturing methods that failed to comply with FDA regulations and making new drugs that had not yet been approved for distribution.

KV, which produces drugs through its ETHEX and Ther-Rx subsidiaries, has a history of manufacturing problems despite continuous warnings by the FDA, prosecutors allege.

"The deficiencies observed by FDA at the most recent inspection in February 2009 are the same as, or similar to, prior violations observed by FDA at several other inspections conducted during the last eight years," the suit states.

During the FDA’s most recent inspections between Dec. 15 and Feb. 2, FDA investigators found 35 separate deviations from manufacturing regulations, according to the complaint filed in U.S. District Court in St. Louis.

KV already halted production and shipping of products it makes, and the company has been voluntarily recalling most of its drugs. When it announced the decision in January, KV only said the products might not have met FDA manufacturing regulations.

The move came after the company had initiated a series of recalls, some of which involved oversize drugs that might contain too much morphine and other active ingredients. As recently as Feb. 3, KV began a recall of prescription prenatal vitamin and iron supplement products.

In the consent decree, KV agreed not to make products until the FDA gives its approval.

Before KV can resume production, it will have an independent third-party manufacturing consultant review the company’s facilities and certify they comply with FDA regulations auto loans.

The decree also sets out inspection requirements for the five years after KV resumes production.

If KV fails to comply with any provisions of the decree, it could be ordered to pay damages of $15,000 per day. It could also be subjected to an additional $15,000 for each violation, up to $5 million per year. The decree requires KV to destroy all drugs recalled between May 2008 and Feb. 3.

"Predicting the timing for the return and the ultimate product assortment that we will market are presently very difficult due to the range of variables that must be managed," David Van Vliet, KV’s interim chief executive said in a statement. "As we gain certainty, we will notify customers and all other stakeholders."

Van Vliet, who assumed that position in December, is one of the defendants named in the case. Others include Marc Hermelin, the former chief executive who was fired by KV in December and still sits on the company’s board of directors; Rita Bleser, president/pharmaceutical division; and Jay Sawardeker, vice president, corporate quality assurance/quality control.

The defendants consented to the decree without admitting or denying guilt.

In addition to the FDA probe, KV is being investigated by the Securities and Exchange Commission. It also faces mounting private lawsuits filed by shareholders, employees and consumers alleging they have been injured by KV drugs.

Last week, KV said it plans to reduce its work force to 690 jobs by March 15 as part of a cost-cutting move as it tries to resume production. The company said it had 1,700 employees on Dec. 31.

gappleson@post-dispatch.com | 314-340-8331

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Sen. Judd Gregg withdrew his nomination as President Barack Obama’s commerce secretary Thursday, citing "irresolvable conflicts" over the administration’s stimulus bill and the upcoming 2010 census.

"I realize that to withdraw at this point is really unfair in many ways," the three-term New Hampshire Republican told reporters. "But to go forward and take this position and then find myself sitting there and not being able to do the job the way it should be done on behalf of the president, 100 percent, that would have been an even bigger mistake."

Gregg is the third of Obama’s Cabinet nominees to pull out of consideration - and the second pick for the Commerce Department to withdraw. Speaking during a visit to his home state of Illinois to plug the stimulus bill, Obama said Gregg’s announcement "comes as something of a surprise."

"Mr. Gregg approached us with interest and seemed enthusiastic," he told State Journal-Register in Springfield. "But ultimately, I think, we’re going to just keep on making efforts to build the kind of bipartisan consensus around important issues that I think the American people are looking for."

Gregg said Obama had been "incredibly gracious" during the process, and that it was "my mistake, obviously, to say yes." He added that he would "probably not" seek re-election in 2010.

All but three Republicans in the Senate have opposed the now-$789 billion stimulus bill, which Obama argues is necessary to prevent a more severe economic skid. After being nominated, Gregg said he would not vote on the package, which Obama hopes to sign by Monday.

Asked whether the White House was unhappy with his refusal to support the stimulus bill, Gregg said, "I’m sure that’s true." But he said, "I gave my word to people."

Republicans in Congress also accuse Democrats and the Obama administration of trying to skew the 2010 census, the results of which will be used to apportion legislative seats and distribute federal money.

African-American and Latino leaders raised concerns that the Census Bureau, which is part of the Commerce Department, might lack sufficient resources under Gregg’s leadership to accurately count ethnic minorities. The White House responded by saying it would work closely with the bureau’s next director to ensure "a timely and accurate count" in 2010.

That led Republicans leaders in the House of Representatives to accuse the White House of putting the census under the control of "political operatives."

Gregg told reporters the issue was "only a slight catalyzing issue" in his decision to withdraw.

"It was not a major issue," he said.

But a Republican source close to Gregg says the census "tipped things," adding to increasing concerns that he might be marginalized within the administration instant payday loan.

"Basically if on any issue important to Democratic constituencies they are on one side and Judd is on the other, he is muted," the source said.

And a Democratic source close to the White House said the administration "almost humiliated him" by trying to restrict his influence over the count.

A Republican aide familiar with Gregg’s decision said he had been consulting with GOP leaders privately about this move for the "past couple of days."

White House spokesman Robert Gibbs said in a written statement that the administration regretted Gregg’s "change of heart."

"He was very clear throughout the interviewing process that despite past disagreements about policies, he would support, embrace, and move forward with the president’s agenda," Gibbs said. "Once it became clear after his nomination that Senator Gregg was not going to be supporting some of President Obama’s key economic priorities, it became necessary for Senator Gregg and the Obama administration to part ways."

But Senate Minority Leader Mitch McConnell welcomed Gregg’s withdrawal.

"He is among the smartest, most effective legislators to serve in the Senate - Democrat or Republican - and a key adviser to me and to the Republican Conference. It’s great to have him back," announced McConnell, R-Kentucky.

Gregg would have been the third Republican to join the Democratic administration, following Defense Secretary Robert Gates and Transportation Secretary Ray LaHood.

He is Obama’s third Cabinet nominee to withdraw, following last week’s decision by Health and Human Services Secretary-designate Tom Daschle to quit over tax issues and the withdrawal of Obama’s previous Commerce Department pick, New Mexico Gov. Bill Richardson. Richardson withdrew in early January, citing the distraction of a federal investigation into whether he was played an improper role in directing state business to a company that had donated to his political action committees.

Gregg, a leading fiscal conservative, once voted to abolish the Commerce Department. But a GOP source said Gregg "didn’t want to be a powerless GOP token, and that’s where this was headed."

With Republicans holding only 41 seats in the Senate, Gregg had said he would take the Cabinet post only if his replacement was a fellow Republican. New Hampshire Gov. John Lynch agreed, announcing plans to replace Gregg with the senator’s former chief of staff, Bonnie Newman.

CNN’s Dana Bash, Candy Crowley, Gloria Borger and Jessica Yellin contributed to this report. 

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New york — Stocks climbed for a second day Monday as Home Depot Inc. cut jobs, joining companies that are taking steps to weather the economic slowdown, and Freeport-McMoRan Copper & Gold Inc. beat analysts’ profit estimates.

Home Depot advanced 4.7 percent, leading the Dow Jones industrial average’s gain, after the biggest home improvement retailer eliminated 7,000 jobs. Freeport-McMoRan surged 9.3 percent. Lennar Corp. jumped 14 percent as Citigroup Inc. recommended the house builder, saying its shares sank too far.

The Standard & Poor’s 500 index added 0.6 percent to 836.57, trimming its yearly loss to less than 7.4 percent. The Dow rose 38.47 points, or 0.5 percent, to 8,116.03. The Nasdaq composite index gained 12.17, or 0.82 percent, to 1,489.46.

"The job cuts have scared the pants off of people, but they are a part of repairing balance sheets and fixing a company to become stronger," said Robert Lutts, president of Cabot Money Management in Boston, which manages $400 million.

Home Depot rose $1.01 to $22.73.

Freeport-McMoRan Copper & Gold jumped $2.13 to $24.94. The world’s largest publicly traded copper producer reported profit excluding some one-time items of 6 cents a share, beating the $1.01 a share loss estimated by analysts.

Lennar climbed 14 percent, the most in the S&P 500, to $7.82. The builder was raised to buy from hold by analysts at Citigroup.

General Electric Co. jumped 3.2 percent to $12.42 after S&P said the company’s and General Electric Capital Corp.’s AAA debt ratings are not immediately affected by fourth-quarter earnings results payday loans.

Rohm & Haas Co. dropped 13 percent to $57.10 after saying Dow Chemical Co. doesn’t intend to close its $15.4 billion acquisition by today as required by their merger agreement.

Caterpillar slumped $2.99 to $32.67 after reporting profit that trailed analysts estimates.

Wyeth fell 35 cents to $43.39 even after Pfizer Inc. said it will pay $50.19 a share in cash and stock for the drug maker. Pfizer retreated 10.3 percent to $15.65.

"The market is signaling that its probably not going to go through, not at that price anyway," said Peter Sorrentino, who co-manages $16 billion at Huntington Asset Advisors Inc. in Cincinnati. "It looks tenuous at best."

Profits decreased 47 percent for the 84 companies in the S&P 500 that have released fourth-quarter results since Jan. 12. Analysts now forecast a 32 percent drop in earnings for the fourth quarter after saying in March 2008 that net income would rise as much as 55 percent, according to Bloomberg data.

"Earnings have been an absolute disaster so far, but the market feels that earnings numbers couldn’t possibly get any worse than they are," said David Kelly, chief market strategist at JPMorgan Funds, which oversaw $304 billion as of Oct. 8.

"The market is getting used to the shocking news flow even though the hits keep on coming."

The S&P 500, which has dropped for three straight weeks, is still 11 percent above an 11-year low reached on Nov. 20.

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Japan's economy, the world's second largest, entered its first recession since 2001 last quarter and the government and economists say conditions may get even worse.

Gross domestic product shrank an annualized 0.4 percent in the three months ended Sept. 30, the Cabinet Office said today in Tokyo. Economists predicted the economy would grow 0.1 percent after contracting a revised 3.7 percent in the previous period.

The slowdown may deepen as the global financial crisis hurts exports, prompting companies from Toyota Motor Corp. to Canon Inc. to slash profit forecasts and cut investments. Japan has the lowest interest rates among the 20 biggest economies and public debt that exceeds 180 percent of GDP, limiting the government's ability to stimulate growth.

“It's only going to get worse,'' said Masamichi Adachi, senior economist at JPMorgan Chase & Co. in Tokyo. “Japan may be entering its deepest recession in a decade as the global financial crisis cools demand overseas.''

The Nikkei 225 Stock Average closed 0.7 percent higher, reversing declines of as much as 2.9 percent, as investors bought shares of drug and utilities companies, which are less vulnerable to a slowdown. The gauge has lost 43 percent this year. The yield on Japan's 10-year bond fell two basis points to 1.48 percent.

The yen fell to 97.21 per dollar as of 4:16 p.m. in Tokyo from 96.09 before the report as a stock-market rally across Asia prompted investors to fund purchases of higher-yielding overseas assets in the Japanese currency. The yen has gained 9.2 percent since the end of September, compounding exporters' woes.

Europe, U.S.

The economy last contracted over two consecutive quarters — the technical definition of a recession — in 2001. Germany also fell into a recession last quarter, as did the entire euro zone, reports showed last week, and the U.S. is probably in one also.

“There is more bad news to come in the next few quarters as the global downturn hits hard,'' said Julian Jessop, chief international economist at Capital Economics Ltd. in London.

Leaders from the Group of 20 nations this weekend agreed to take a “broader policy response'' by using interest-rate cuts and fiscal stimulus to shore up the weakening global economy. The Bank of Japan has little scope to contribute further after lowering the benchmark rate to 0.3 percent last month, and a 5 trillion yen ($52 billion) stimulus plan announced by Prime Minister Taro Aso last month risks worsening the public debt.

Economic and Fiscal Policy Minister Kaoru Yosano confirmed that the economy had entered a recession that may deepen.

“Given that the global economy is decelerating, Japan's downturn will continue,'' Yosano said. He said there's a risk that that the slump will become “more severe'' because the global financial crisis is spreading to emerging economies.

Businesses Cut Back

Growth in China, which became Japan's biggest customer in July, slowed to 9 percent last quarter, the weakest since 2003 freecreditscore.

Quarter-on-quarter, Japan's economy shrank 0.1 percent, today's report showed. Capital spending fell 1.7 percent from the previous three months, compared with economists' expectations of a 2 percent drop.

Toyota, which makes more than three-quarters of its sales abroad, forecast profit will fall this fiscal year by almost 70 percent. The carmaker will fire 3,000 workers by March, and the Nikkei newspaper reported this month that it will delay adding capacity at a domestic plant that makes Lexus sedans.

Canon, the world's largest camera maker, last month forecast profit growth would fall for the first time in nine years and said it will cut capital spending 4.7 percent in 2008 to 410 billion yen.

“The economy is still so sensitive to the global business cycle,'' said Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG in Tokyo. “A long as the global economy keeps sinking, Japan will probably experience a deep recession.''

Exports Weaken

Net exports subtracted 0.2 percentage point from growth after imports outweighed an increase in shipments abroad. Exports rose 0.7 percent, less than the 1.2 percent expected. Imports climbed 1.9 percent as oil surged to a record in the quarter. Economists predicted a 1.5 percent gain.

Still, Japan will probably suffer less than its biggest counterparts after companies shed debt and streamlined labor forces following the bursting of the property and asset bubble in the early 1990s. Asia's biggest economy will shrink 0.1 percent next year, according to the Organization for Economic Cooperation and Development, less than the 0.9 percent and 0.5 percent contractions in the U.S. and Europe.

Consumers are getting some relief as inflation abates and the government prepares to provide households with at least 12,000 yen ($125) each as part of the stimulus plan. Consumer spending increased 0.3 percent last quarter, more than the 0.1 percent economists expected, today's report showed.

Not a Good Sign

“It's difficult to take it as a good sign because the figure was boosted by seasonal factors such as the hot summer and the Olympics,'' said Junko Nishioka, an economist at RBS Securities Japan Ltd. in Tokyo. “Consumption will probably turn negative in the fourth quarter'' and the economy won't recover until 2010, she said.

The ratio of jobs to applicants has fallen for eight months and the deteriorating profit outlook for companies is also putting pressure on wages. Winter bonuses, which typically account for about 10 percent of a fulltime worker's annual pay, will fall 2.9 percent this year, the Nikkei reported last week.

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