Friday, August 21, 2009

Mortgage defaults soar to record 13%

In the second quarter, the number of homeowners behind on payments or in foreclosure rose along with the jobless rate, with California among states leading the way.

By E. Scott Reckard and Ronald D. White

August 21, 2009

Widespread joblessness is causing more Americans to fall behind on their house payments, triggering a new round of foreclosures that some analysts fear could delay the nation's economic recovery.

A mortgage trade group reported Thursday that more than 13% of the nation's mortgage holders were delinquent on their mortgages or in the process of having their homes repossessed during the second quarter of this year. That's the highest figure since tracking began in 1972. California's rate, 15.2%, was among the highest of all states.

The numbers underscore a worrisome trend. A spate of foreclosures -- which began with speculators who walked away from their souring investments, then spread to high-risk borrowers who couldn't make their payments when their low-interest mortgages reset -- is now hitting unemployed homeowners with good credit scores, clean financial histories and conventional home loans.

The U.S. has shed 6.7 million jobs since the recession began, employment losses that have left even high-quality borrowers struggling. One in three new foreclosures from April to June was from a prime, fixed-rate loan, up from 1 in 5 a year earlier.

The rising tide of foreclosures could swamp positive economic trends such as improving home sales and a surprise increase in U.S. regional manufacturing, also reported Thursday.

"The broadening of the foreclosure crisis to include prime loans due to high and rising unemployment will delay a bottom in the housing market and threatens the economic recovery," said Mark Zandi, co-founder and chief economist of Moody's

It's also a huge challenge to the Obama administration, which is pressuring banks to restructure troubled mortgages to keep borrowers in their homes. Such modifications are difficult to achieve when a family's income is slashed. The Washington-based Mortgage Bankers Assn. predicts that U.S. job losses will continue at least until the middle of 2010, meaning that mortgage delinquencies and repossessed homes will almost certainly continue rising.

"We would expect delinquencies and foreclosures to peak sometime after that, probably at the end of next year," said Jay Brinkmann, the trade group's chief economist.

The U.S. jobless rate in July was 9.4%, down slightly from 9.5% in June, a 26-year high. California's June unemployment rate was 11.6%. July figures will be released today.

The employment troubles are compounding a messy situation for banks. Faced with a burgeoning backlog of problem loans, loan-servicing giants such as Bank of America Corp. and Wells Fargo & Co. have gotten off to a slow start on the Obama administration's Home Affordable Modification program, recently released government statistics show.

Anxious borrowers who have contacted The Times complain that lenders lose their documents, pass them from employee to employee and make them endure unexplained delays.

They include Janet and Stan Hurwitz, who said they enjoyed pristine credit and good salaries before this recession turned their financial world upside down. Both now unemployed, they're worried about exhausting their savings and losing their spacious Porter Ranch home.

Stan, 58, lost his job as an apparel sales representative in May and has pursued dozens of leads without success. Janet, a 53-year-old commercial pilot, has been unable to find work in the battered airline industry since returning from disability last summer.

The couple have pared expenses drastically and are trying to refinance their 6.25% mortgage to reduce their $2,789-a-month payment. But the Hurwitzes say that the mounds of paperwork they have sent out -- to Bank of America, two government-sponsored home retention plans, credit and debt consolidation agencies and several elected officials -- seem to have disappeared into a black hole.

"No matter what you send in, or where, it just disappears," Stan Hurwitz said.

After The Times contacted Bank of America on Thursday about the case, the bank issued a statement saying it "has reached out to the Hurwitzes to apologize for their experience and to ensure they have a single point of contact to help them through these challenging times."

"Despite our best efforts, there are limits to how far modification programs can go," the Bank of America statement said. With unemployment rates so high, "even the most ambitious modification plan will not help when the homeowner has no income or prospects."

The bank said unemployment benefits count as income under the Obama plan as long as they continue for nine months, adding that it is working with the government "to find solutions for at-risk homeowners who fall outside the eligibility requirements of the current program as well as the growing number of customers now unemployed."

The mortgage bankers group said efforts to aid distressed borrowers, such as the Obama administration's housing affordability program, are providing some relief but are not addressing all the problems.

"While the various loan modification programs continue to have an impact on holding foreclosure rates below where they otherwise would be, the issue is that many of the foreclosures involve homes that are vacant, borrowers who no longer have jobs, or loans where there was fraud involved," Brinkmann said.

Another problem plaguing California and other hard-hit areas is the unprecedented decline in home prices. Falling values have left homeowners who purchased at the peak of the housing boom "underwater," owing far more than their homes are worth. Even drastically reducing interest rates and paying borrowers bonuses to stay in their homes can have little lasting effect if it will be years before homeowner equity is restored,'s Zandi noted.

"The idea [of the Obama plan] is to give homeowners a break so they can get through the recession and the falling housing market and, hopefully somewhere down the road, make full payments again," Zandi said. "That's going to be helpful, but as long as foreclosures keep rising and home prices keep falling, a lot of houses will be so far underwater that it makes no sense to bother modifying them -- from the lender's perspective and from the borrower's."

He said the Obama administration might reach its goal of having lenders offer 3.5 million to 4 million loan modifications -- restructurings that lower rates, extend the time for borrowers to repay what they owe and, in some cases, suspend interest payments on part of the loan balance. But Economy .com is projecting that only half of those offers will result in actual modifications, "and they'll be lucky if they get 1 million successful modifications out of that," Zandi said.

If the problem worsens, the government and lenders may have to revisit some ideas that so far have proved untenable, such as finding a way to reduce the principal owed on large numbers of loans, he added.

The problems are especially thorny in California, Zandi noted, because unemployment is higher and home prices have fallen more than in most states.

Still, he said, the Golden State should recover sooner than other hard-hit states including Nevada, Florida and Michigan because its economy is more diversified. Already, he noted, there are signs of stabilizing prices in areas such as San Francisco and Orange County, as buyers step in on the belief that California's notoriously up-and-down housing market will eventually stage one of its famous recoveries.,0,4202530.story

Rise of the Super-Rich Hits a Sobering Wall

August 21, 2009


The rich have been getting richer for so long that the trend has come to seem almost permanent.

They began to pull away from everyone else in the 1970s. By 2006, income was more concentrated at the top than it had been since the late 1920s. The recent news about resurgent Wall Street pay has seemed to suggest that not even the Great Recession could reverse the rise in income inequality.

But economists say — and data is beginning to show — that a significant change may in fact be under way. The rich, as a group, are no longer getting richer. Over the last two years, they have become poorer. And many may not return to their old levels of wealth and income anytime soon.

For every investment banker whose pay has recovered to its prerecession levels, there are several who have lost their jobs — as well as many wealthy investors who have lost millions. As a result, economists and other analysts say, a 30-year period in which the super-rich became both wealthier and more numerous may now be ending.

The relative struggles of the rich may elicit little sympathy from less well-off families who are dealing with the effects of the worst recession in a generation. But the change does raise several broader economic questions. Among them is whether harder times for the rich will ultimately benefit the middle class and the poor, given that the huge recent increase in top incomes coincided with slow income growth for almost every other group. In blunter terms, the question is whether the better metaphor for the economy is a rising tide that can lift all boats — or a zero-sum game.

Just how much poorer the rich will become remains unclear. It will be determined by, among other things, whether the stock market continues its recent rally and what new laws Congress passes in the wake of the financial crisis. At the very least, though, the rich seem unlikely to return to the trajectory they were on.

Last year, the number of Americans with a net worth of at least $30 million dropped 24 percent, according to CapGemini and Merrill Lynch Wealth Management. Monthly income from stock dividends, which is concentrated among the affluent, has fallen more than 20 percent since last summer, the biggest such decline since the government began keeping records in 1959.

Bill Gates, Warren E. Buffett, the heirs to the Wal-Mart Stores fortune and the founders of Google each lost billions last year, according to Forbes magazine. In one stark example, John McAfee, an entrepreneur who founded the antivirus software company that bears his name, is now worth about $4 million, from a peak of more than $100 million. Mr. McAfee will soon auction off his last big property because he needs cash to pay his bills after having been caught off guard by the simultaneous crash in real estate and stocks.

“I had no clue,” he said, “that there would be this tandem collapse.”

Some of the clearest signs of the reversal of fortunes can be found in data on spending by the wealthy. An index that tracks the price of art, the Mei Moses index, has dropped 32 percent in the last six months. The New York Yankees failed to sell many of the most expensive tickets in their new stadium and had to drop the price. In one ZIP code in Vail, Colo., only five homes sold for more than $2 million in the first half of this year, down from 34 in the first half of 2007, according to MDA Dataquick. In Bronxville, an affluent New York suburb, the decline was to two, from 17, according to Coldwell Banker Residential Brokerage.

“We had a period of roughly 50 years, from 1929 to 1979, when the income distribution tended to flatten,” said Neal Soss, the chief economist at Credit Suisse. “Since the early ’80s, incomes have tended to get less equal. And I think we’ve entered a phase now where society will move to a more equal distribution.”

No More ’50s and ’60s

Few economists expect the country to return to the relatively flat income distribution of the 1950s and 1960s. Indeed, they say that inequality is likely to remain significantly greater than it was for most of the 20th century. The Obama administration has not proposed completely rewriting the rules for Wall Street or raising the top income-tax rate to anywhere near 70 percent, its level as recently as 1980. Market forces that have increased inequality, like globalization, are also not going away.

But economists say that the rich will probably not recover their losses immediately, as they did in the wake of the dot-com crash earlier this decade. That quick recovery came courtesy of a new bubble in stocks, which in 2007 were more expensive by some measures than they had been at any other point save the bull markets of the 1920s or 1990s. This time, analysts say, Wall Street seems unlikely to return soon to the extreme levels of borrowing that made such a bubble possible.

Any major shift in the financial status of the rich could have big implications. A drop in their income and wealth would complicate life for elite universities, museums and other institutions that received lavish donations in recent decades. Governments — federal and state — could struggle, too, because they rely heavily on the taxes paid by the affluent.

Perhaps the broadest question is what a hit to the wealthy would mean for the middle class and the poor. The best-known data on the rich comes from an analysis of Internal Revenue Service returns by Thomas Piketty and Emmanuel Saez, two economists. Their work shows that in the late 1970s, the cutoff to qualify for the highest-earning one ten-thousandth of households was roughly $2 million, in inflation-adjusted, pretax terms. By 2007, it had jumped to $11.5 million.

The gains for the merely affluent were also big, if not quite huge. The cutoff to be in the top 1 percent doubled since the late 1970s, to roughly $400,000.

By contrast, pay at the median — which was about $50,000 in 2007 — rose less than 20 percent, Census data shows. Near the bottom of the income distribution, the increase was about 12 percent.

Some economists say they believe that the contrasting trends are unrelated. If anything, these economists say, any problems the wealthy have will trickle down, in the form of less charitable giving and less consumer spending. Over the last century, the worst years for the rich were the early 1930s, the heart of the Great Depression.

Other economists say the recent explosion of incomes at the top did hurt everyone else, by concentrating economic and political power among a relatively small group.

“I think incredibly high incomes can have a pernicious effect on the polity and the economy,” said Lawrence Katz, a Harvard economist. Much of the growth of high-end incomes stemmed from market forces, like technological innovation, Mr. Katz said. But a significant amount also stemmed from the wealthy’s newfound ability to win favorable government contracts, low tax rates and weak financial regulation, he added.

The I.R.S. has not yet released its data for 2008 or 2009. But Mr. Saez, a professor at the University of California, Berkeley, said he believed that the rich had become poorer. Asked to speculate where the cutoff for the top one ten-thousandth of households was now, he said from $6 million to $8 million.

For the number to return to $11 million quickly, he said, would probably require a large financial bubble.

Making More Money

The United States economy experienced two such bubbles in recent years — one in stocks, the other in real estate — and both helped the rich become richer. Mr. McAfee, whose tattoos and tinted hair suggest an independent streak, is an extreme but telling example. For two decades, at almost every step of his career, he figured out a way to make more money.

In the late 1980s, he founded McAfee Associates, the antivirus software company. It gave away its software, unlike its rivals, but charged fees to those who wanted any kind of technical support. That decision helped make it a huge success. The company went public in 1992, in the early years of one of biggest stock market booms in history.

But Mr. McAfee is, by his own description, an atypical businessman — easily bored and given to serial obsessions. As a young man, he traveled through Mexico, India and Nepal and, more recently, he wrote a book called, “Into the Heart of Truth: The Spirit of Relational Yoga.” Two years after McAfee Associates went public, he was bored again.

So he sold his remaining stake, bringing his gains to about $100 million. In the coming years, he started new projects and made more investments. Almost inevitably, they paid off.

“History told me that you just keep working, and it is easy to make more money,” he said, sitting in the kitchen of his adobe-style house in the southwest corner of New Mexico. With low tax rates, he added, the rich could keep much of what they made.

One of the starkest patterns in the data on inequality is the extent to which the incomes of the very rich are tied to the stock market. They have risen most rapidly during the biggest bull markets: in the 1920s and the 20 years starting in 1987.

“We are coming from an abnormal period where a tremendous amount of wealth was created largely by selling assets back and forth,” said Mohamed A. El-Erian, chief executive of Pimco, one of the country’s largest bond traders, and the former manager of Harvard’s endowment.

Some of this wealth was based on real economic gains, like those from the computer revolution. But much of it was not, Mr. El-Erian said. “You had wealth creation that could not be tied to the underlying economy,” he added, “and the benefits were very skewed: they went to the assets of the rich. It was financial engineering.”

But if the rich have done well in bubbles, they have taken enormous hits to their wealth during busts. A recent study by two Northwestern University economists found that the incomes of the affluent tend to fall more, in percentage terms, in recessions than the incomes of the middle class. The incomes of the very affluent — the top one ten-thousandth — fall the most.

Over the last several years, Mr. McAfee began to put a large chunk of his fortune into real estate, often in remote locations. He bought the house in New Mexico as a playground for himself and fellow aerotrekkers, people who fly unlicensed, open-cockpit planes. On a 157-acre spread, he built a general store, a 35-seat movie theater and a cafe, and he bought vintage cars for his visitors to use.

He continued to invest in financial markets, sometimes borrowing money to increase the potential returns. He typically chose his investments based on suggestions from his financial advisers. One of their recommendations was to put millions of dollars into bonds tied to Lehman Brothers.

For a while, Mr. McAfee’s good run, like that of many of the American wealthy, seemed to continue. In the wake of the dot-com crash, stocks started rising again, while house prices just continued to rise. Outside’s Go magazine and National Geographic Adventure ran articles on his New Mexico property, leading to him to believe that “this was the hottest property on the planet,” he said.

But then things began to change.

In 2007, Mr. McAfee sold a 10,000-square-foot home in Colorado with a view of Pike’s Peak. He had spent $25 million to buy the property and build the house. He received $5.7 million for it. When Lehman collapsed last fall, its bonds became virtually worthless. Mr. McAfee’s stock investments cost him millions more.

One day, he realized, as he said, “Whoa, my cash is gone.”

His remaining net worth of about $4 million makes him vastly wealthier than most Americans, of course. But he has nonetheless found himself needing cash and desperately trying to reduce his monthly expenses.

He has sold a 10-passenger Cessna jet and now flies coach. This week his oceanfront estate in Hawaii sold for $1.5 million, with only a handful of bidders at the auction. He plans to spend much of his time in Belize, in part because of more favorable taxes there.

Next week, his New Mexico property will be the subject of a no-floor auction, meaning that Mr. McAfee has promised to accept the top bid, no matter how low it is.

“I am trying to face up to the reality here that the auction may bring next to nothing,” he said.

In the past, when his stock investments did poorly, he sold real estate and replenished his cash. This time, that has not been an option.

Stock Market Mystery

The possibility that the stock market will quickly recover from its collapse, as it did earlier this decade, is perhaps the biggest uncertainty about the financial condition of the wealthy. Since March, the Standard & Poor’s 500-stock index has risen 49 percent.

Yet Wall Street still has a long way to go before reaching its previous peaks. The S.& P. 500 remains 35 percent below its 2007 high. Aggregate compensation for the financial sector fell 14 percent from 2007 to 2008, according to the Securities Industry and Financial Markets Association — far less than profits or revenue fell, but a decline nonetheless.

“The difference this time,” predicted Byron R. Wein, a former chief investment strategist at Morgan Stanley, who started working on Wall Street in 1965, “is that the high-water mark that people reached in 2007 is not going to be exceeded for a very long time.”

Without a financial bubble, there will simply be less money available for Wall Street to pay itself or for corporate chief executives to pay themselves. Some companies — like Goldman Sachs and JPMorgan Chase, which face less competition now and have been helped by the government’s attempts to prop up credit markets — will still hand out enormous paychecks. Over all, though, there will be fewer such checks, analysts say. Roger Freeman, an analyst at Barclays Capital, said he thought that overall Wall Street compensation would, at most, increase moderately over the next couple of years.

Beyond the stock market, government policy may have the biggest effect on top incomes. Mr. Katz, the Harvard economist, argues that without policy changes, top incomes may indeed approach their old highs in the coming years. Historically, government policy, like the New Deal, has had more lasting effects on the rich than financial busts, he said.

One looming policy issue today is what steps Congress and the administration will take to re-regulate financial markets. A second issue is taxes.

In the three decades after World War II, when the incomes of the rich grew more slowly than those of the middle class, the top marginal rate ranged from 70 to 91 percent. Mr. Piketty, one of the economists who analyzed the I.R.S. data, argues that these high rates did not affect merely post-tax income. They also helped hold down the pretax incomes of the wealthy, he says, by giving them less incentive to make many millions of dollars.

Since 1980, tax rates on the affluent have fallen more than rates on any other group; this year, the top marginal rate is 35 percent. President Obama has proposed raising it to 39 percent and has said he would consider a surtax on families making more than $1 million a year, which could push the top rate above 40 percent.

What any policy changes will mean for the nonwealthy remains unclear. There have certainly been periods when the rich, the middle class and the poor all have done well (like the late 1990s), as well as periods when all have done poorly (like the last year). For much of the 1950s, ’60s and ’70s, both the middle class and the wealthy received raises that outpaced inflation.

Yet there is also a reason to think that the incomes of the wealthy could potentially have a bigger impact on others than in the past: as a share of the economy, they are vastly larger than they once were.

In 2007, the top one ten-thousandth of households took home 6 percent of the nation’s income, up from 0.9 percent in 1977. It was the highest such level since at least 1913, the first year for which the I.R.S. has data.

The top 1 percent of earners took home 23.5 percent of income, up from 9 percent three decades earlier.

Foreclosures Plunge People Into Depression

New U.S. study finds many also skip food and needed drugs in an effort to cut costs

Posted August 19, 2009

WEDNESDAY, Aug. 19 (HealthDay News) -- The epidemic of home foreclosures is having a serious impact on Americans' health, suggests a study that looked at 250 Philadelphia homeowners facing foreclosure.

More than half of them reported being depressed, and 37 percent of them had major depression. In addition, almost 60 percent reported skipping meals because they couldn't afford food and 48 percent said they couldn't afford prescription drugs.

The study also found that for 9 percent of participants, a medical condition in their family was the primary reason for the home foreclosure, and more than 25 percent said they had significant unpaid medical bills.

"The foreclosure crisis is also a health crisis. We need to do more to ensure that if people lose their homes, they don't also lose their health," the study's lead author, Dr. Craig E. Pollack, who conducted the research while at the University of Pennsylvania School of Medicine, said in a news release.

The financial strain of foreclosure may cause people to reduce what they consider discretionary health care spending, for such things as preventive care visits, healthy foods and drugs for chronic conditions. This can have a serious effect on long-term health, Pollack said.

He and his colleagues also found that the stress of foreclosure may lead to an increase in unhealthy behaviors. For example, 65 percent of smokers in the study said they smoked more since receiving notice of foreclosure.

The findings from Philadelphia may represent only the tip of the iceberg when compared to some other cities, Pollack said. While foreclosure filings in Philadelphia almost doubled between 2007 and 2008, other large cities have higher unemployment and foreclosure rates.

In order to reduce foreclosure-related health effects, mortgage counseling agencies and health care workers need to coordinate their efforts to help people at risk of foreclosure access both housing and medical help, the researchers said.

The study appears online this week in the American Journal of Public Health.

Thursday, August 20, 2009

New jobless claims rise unexpectedly to 576K

New jobless claims rise unexpectedly to 576,000; total benefit rolls show little change

By Christopher S. Rugaber, AP Economics Writer
On Thursday August 20, 2009, 11:08 am EDT
WASHINGTON (AP) -- The number of first-time claims for unemployment benefits rose unexpectedly for the second straight week, a sign that jobs remain scarce even as other data show the economy is stabilizing.

Many economists expect the economy to grow at a modest pace in the second half of this year, bringing an end to the longest recession since World War II. But jobs are likely to remain scarce and many analysts worry that persistently high unemployment could cause consumers to hold back on spending, threatening a recovery.

The Labor Department said Thursday the number of new jobless claims rose to a seasonally adjusted 576,000 last week, from a revised figure of 561,000. Wall Street economists expected a drop to 550,000, according to a survey by Thomson Reuters.

Economists closely watch initial claims, which are considered a gauge of layoffs and an indication of companies' willingness to hire new workers.

"Consumer spending is going to have a very difficult time recovering with the labor market as weak as it is," said Joshua Shapiro, chief U.S. economist at MFR Inc.

The Conference Board's index of leading economic indicators rose for a fourth straight month in July, gaining 0.6 percent. That was slightly less than economists expected and a slower rate than in the prior three months.

Still, the Conference Board said its index, which is meant to project economic activity in the next three to six months, suggests the recession has bottomed out and growth in economic activity will begin soon. Six of the 10 indicators that comprise the index increased in July, including employment data and stock prices. Consumer expectations were the biggest negative factor.

Meanwhile, the Mortgage Bankers Association said more than 13 percent of American homeowners with a mortgage are either behind on their payments or in foreclosure, a record tally as the recession leaves more people unemployed. About a third of new foreclosures between April and June were prime, fixed-rate loans, up from one in five a year earlier.

The jobless claims figures are volatile, and had been trending down, after remaining above 600,000 for most of this year. The new report indicates that the labor market is still weak. In a healthy economy, initial claims are usually around 325,000 or below.

The four-week average of initial claims, which smooths out fluctuations, rose for the second straight week to 570,000.

The number of people remaining on the benefit rolls dropped by 2,000 to 6.24 million. Analysts had expected a slight decline. The continuing claims figures lag initial claims by a week.

The stock market rose slightly in morning trading. The Dow Jones industrial average added about 35 points, while broader indices also edged up.

When federal emergency programs are included, the total number of jobless benefit recipients was 9.18 million in the week that ended Aug. 1, the most recent data available. That was down from 9.25 million in the previous week. Congress has added up to 53 extra weeks of benefits on top of the 26 typically provided by the states.

The large number of people remaining on the rolls is an indication that unemployed workers are having a hard time finding new jobs.

Still, layoffs have slowed recently. The department said earlier this month that companies cut 247,000 jobs in July, a large amount but still the smallest number in almost a year.

The unemployment rate dipped to 9.4 percent in July from 9.5 percent, its first drop in 15 months. But many private economists and the Federal Reserve think the rates could top 10 percent by next year.

The recession, which began in December 2007 and is the longest since World War II, has eliminated a net total of 6.7 million jobs.

More job cuts were announced this week. Bethesda, Md.-based defense contractor Lockheed Martin Corp. said it will eliminate about 800 jobs in its space systems division, and San Francisco-based video and audio conferencing company Polycom Inc. said it will cut 3 percent of its 2,600 person work force.

Among the states, Tennessee had the largest increase in claims with 2,525 for the week ended Aug. 8, which it attributed to more layoffs in the transportation equipment, industrial machinery, and rubber and plastics industries. The next largest increases were in North Carolina, Wisconsin, Georgia and Washington.

California reported the largest drop in claims of 5,635, which it attributed to fewer layoffs in the construction, trade and service industries. Michigan, Ohio, Kentucky and Delaware had the next largest decreases.

AP Business Writers Alan Zibel in Washington and Tali Arbel in New York contributed to this report.

U.S. productivity soars as employers slash payrolls

WASHINGTON — Associated Press
Last updated on Friday, Aug. 14, 2009

U.S. productivity surged in the spring by the largest amount in almost six years while labour costs plunged at the fastest pace in nine years. The results point to a recession losing steam, but they do not bode well for the unemployed or those forced to work shorter weeks who were hoping for more hours.

The U.S. Labour Department said yesterday that productivity, the amount of output per hour of work, rose at an annual rate of 6.4 per cent in the April-June quarter, while unit labour costs dropped 5.8 per cent. Both results were greater than economists expected.

Productivity can help boost living standards because it means companies can pay their workers more, with those wage increases financed by rising output. However, in this recession, companies have been using their productivity gains from layoffs and other cost cuts not to hire again but to bolster their profits.

The result: Many companies have been reporting better-than-expected second-quarter earnings despite falling sales.

Businesses producing more with fewer employees means millions of unemployed Americans likely will continue to face a dismal job market. Some analysts also worry that companies' aggressive cost-cutting could make it hard to mount a sustainable recovery. That's because a lack of wage growth and a shortage of jobs will likely depress consumer spending, which accounts for about 70 per cent of U.S. economic output.

Ideally, businesses would use the current productivity gains to stabilize their own financial situations and as the economy rebounds, resume hiring to meet the rising demand, analysts said.

"Hopefully, businesses will stop the layoffs and start hiring again so that consumers will have the ability to spend, but that is a tricky transition," said Mark Zandi, chief economist at Moody's

In a second report, the Commerce Department said wholesale inventories declined for a record 10th consecutive month, falling 1.7 per cent in June. That was nearly double the 0.9 per cent decrease economists had expected.

But in an encouraging sign, sales rose 0.4 per cent for a second straight month. The first back-to-back increases in a year boosted hopes that businesses will begin to ramp up production to meet rising demand.

The second-quarter productivity increase reflected that the number of hours worked fell much faster than output dropped. Total hours worked dropped at an annual rate of 7.6 per cent, while the output of non-farm businesses fell at a 1.7 per cent rate.

The U.S.'s total output of goods and services, as measured by the gross domestic product, fell at an annual rate of 1 per cent in the second quarter. That was a much slower rate of decline than the previous two quarters when the economy shrank at the fastest pace in more than a half-century.

Many economists believe the recession is on the verge of ending. Should the economy start to grow in the second half of this year, some companies might boost employment - if demand for their products showed a sustained increase.

Still, the leaner work force should help keep productivity rising in coming quarters although the gains are not expected to be as large as the jump in the spring.

Ahead of the Bell: Productivity

(AP) – Aug 10, 2009
WASHINGTON — Productivity likely surged by a sizable amount in the spring as businesses worked to hold down costs in the face of the worst recession to hit the country in the post World War II period.
Economists surveyed by Thomson Reuters expect productivity grew at an annual rate of 5.3 percent in the April-June quarter. The Labor Department will release the report at 8:30 a.m. EDT Tuesday.
A productivity increase of 5.3 percent would be more than three times higher than the 1.6 percent advance recorded in the first three months of the year.
Economists are expecting the surge in productivity because they believe that businesses continued to lay off workers and trim the number of hours being worked by their remaining employees aggressively in an effort to trim their labor costs.
This effort is expected to show that unit labor costs fell at an annual rate of 2.4 percent in the second quarter, compared to a 3 percent rise in the first three months of the year.
The improvement in productivity is occurring because businesses have been successful in cutting the number of hours worked at an even faster pace than their output has been falling.
The nation's total output of goods and services, as measured by the gross domestic product, fell at an annual rate of 1 percent in the second quarter, a much slower rate of decline than the previous two quarters, when the economy shrank at the fastest pace in more than a half-century.
Productivity, the amount of output per hour of work, is a key ingredient for rising living standards because it means that companies can pay their workers more with the wage increases financed by rising output.
However, in the current hard times, companies are expected to use the productivity gains to bolster their bottom lines, meaning that the increases will go to shoring up company profits rather than boosting workers' wages and benefits.
But many economists believe that the current recession, already the longest in the post World War II period, is on the verge of ending. If the economy starts to post better growth in the second half of this year, companies are expected to switch from layoffs and trimming workers' hours to boosting employment as demand for their products increases.
The leaner work force, however, should help keep productivity rising in coming quarters although the gains are not expected to be as large as the jump in the spring.
Copyright © 2009 The Associated Press. All rights reserved.

Labor costs fall as productivity increases slightly

Humboldt Beacon
Posted: 08/20/2009

According to the latest the Bureau of Labor Statistics, worker productivity increased at an annual rate of 6.4 percent in the second quarter of 2009. This is the biggest quarterly gain since a 9.7 percent increase in the third quarter of 2003.
As worker productivity increased, unit labor costs fell by 5.8 percent, indicating employees are doing more work with less pay. Economists are concerned that instead of hiring more people, businesses are holding on to profits earned from increased productivity and lower labor costs.

In additon, the recession eased up in the second quarter. The gross domestic product (GDP) fell at a lower pace than economists expected, according to a recent government report. The GDP fell by 1 percent in the second quarter of 2009 after falling at an annual rate of 6.4 percent in the first quarter, the Commerce Department reported. Key factors in bettering GDP performance included fewer spending cuts by businesses, increased spending by federal and local governments, and improved trade, the report showed. However, consumers are still held back on spending due to rising unemployment, decreased retirement savings, and falling home values.