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EU nations to hammer out financial oversight
European Central Bank president Jean-Claude Trichet warned EU governments Wednesday that the public will be unforgiving if authorities don't provide a stronger financial system.
Trichet's comments came a day before the 27-nation bloc hammers out major new reforms.
Finance ministers from each country will hold talks Thursday and Friday about a new financial oversight framework for Europe, moving forward from a pledge that the world's G-20 rich and developing nations made last week to not allow a return to banking as usual.
"Our own people will not forgive us if we don't deliver a much more resilient financial system," Trichet said.
The EU ministers will also discuss how they should withdraw economy stimulus programs that are stoking feeble economic growth and adding to huge public debt they built up by rescuing banks and spending far more on welfare during the downturn.
Trichet said "the next few years are crucial for building a strong, competitive and less leveraged financial system which will be subjected to proper regulation and supervision."
The EU's top economy official, Joaquin Almunia, also warned that regulators could not allow some financial sectors to set their own rules because they "have demonstrated that they are not able to."
Putting that into practice means adding a new EU layer to a patchwork of financial supervision across the bloc, with the EU executive suggesting that new EU authorities should oversee — and possible overrule — national supervisors for banking, insurance and financial markets.
Governments are likely to want to limit the circumstances under which the EU authorities could overrule them. The European Commission describes it only as a last resort to resolve a dispute between different national supervisors or to order a nation to bring technical financial standards in line with others.
EU governments were also being asked to approve the creation of a new economy watchdog, the European Systemic Risk Board, which would be tasked with monitoring emerging risks to the economy such as highly leveraged banks, swelling asset bubbles and worrying trends on markets.
The board would issue recommendations and warnings to national governments and could ask them to comply or justify why they weren't doing something. It would not be able to force them to act.
The ECB, which sets borrowing costs for the 16 nations that use the euro, will help run the new board and its president will likely lead it. This has triggered concern among EU countries outside the euro zone that this will give the ECB a say over countries that don't use the euro.
EU nations will also try to lay out a coordinated plan for how they all should end stimulus spending that aims at speeding up economic growth this year and next year to end the worst recession since the 1930s.
"It's absolutely necessary that we start to design and communicate exit strategies," said Swedish Finance Minister Anders Borg, who will lead the talks because Sweden holds the EU presidency.
This could lead to empty words as some governments prepare to borrow more and spend heavily.
France said its debt would soar in coming years to 91 percent of economic output in 2013. Its yearly budget gap is set to swell to a record 8.2 percent of gross domestic product this year and 8.5 percent in 2010, it said, up from 3.4 percent last year.
It also plans to borrow heavily to finance infrastructure work, which will likely increase the debt even further.
This will see the second-largest euro nation flaunt EU budget rules designed to keep the euro currency stable that require the 16 countries to keep deficits below 3 percent of GDP and debt under 65 percent of GDP.
It could also set it on a collision course with Germany, which has repeatedly called on European nations and others to start repaying debt as soon as possible.
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Homeowners in financial trouble often redefault
Lenders are ramping up efforts to avoid home foreclosures, but a report by bank regulators says more than half of borrowers who get help fall behind again.
More than 50 percent of homeowners with loans modified in the first half of last year had missed at least two months of payments a year later, the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision said Wednesday.
But the results were better among those who saw their payments drop substantially.
About one in three borrowers whose monthly payments were reduced by 20 percent or more had fallen behind again within a year. That compares with more than 60 percent for borrowers whose loan payments were left unchanged or increased.
The report by highlights a significant challenge for the Obama administration's plan to tackle the foreclosure crisis, backed by $50 billion in money from the financial industry bailout fund.
The administration's effort got off to a slow start, but has picked up speed in recent months. As of last month, about 360,000 borrowers, or 12 percent of those eligible, have signed up for three-month trial modifications. They are supposed to be extended for five years if the homeowners make their payments on time. There is currently no data on redefaults within the plan.
Traditionally, most lenders have offered payment plans that allowed borrowers to catch up on missed payments. But those modifications often do not involve an interest rate reduction and result in a higher monthly payment.
All that does is set the borrower up for failure, said Kristi Cahoon, an attorney and housing counselor with Legal Services of Northern Virginia. "A lot of them aren't true modifications," she said.
By contrast, under the Obama plan, she believes the loans will be sustainable for the homeowners she counsels. Borrowers' interest rates, for example, can go as low as 2 percent for five years under the Obama plan.
Bank regulators say they have pressed lenders to shift their focus to modifications that reduced borrowers' payments. They made up nearly 80 percent of new modifications in the April-June quarter, up from about half in the first three months of the year.
The report covers 34 million loans, representing more than 60 percent of primary home mortgages. Consistent with other reports, it showed borrowers are continuing to fall behind as job losses mount. More than 11 percent of borrowers covered by the report had missed at least one payment as of June 30, up from 10 percent in April.
It also highlighted mounting problems with an especially troubling category of loans — "pick-a-payment" or option ARM loans, which allowed borrowers to defer some of their interest payments and add them to the principal. At the end of June, 10 percent of these loans were in foreclosure, more than triple the rate for all mortgages in the survey.
The lenders included in the report offered help to about 440,000 borrowers in the April-June period, they started foreclosure on about 370,000 homes, unchanged from the January-March period.
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German unemployment fell in September, official data showed on Wednesday, but without signalling a general improvement for the biggest European economy, experts said.
The raw unemployment rate, the headline figure in Germany, fell to 8.0 percent, the Federal Labour Agency reported, and the seasonally-adjusted rate dipped for the the third month running to 8.2 percent.
Labour agency president Frank Weise said in a statement that the latest results "were not a change in the trend," which has been upwards.
The figures come just three days after Angela Merkel was re-elected chancellor to head a centre-right coalition government which faces a range of tough policy issues, including job protection, arising from the economic crisis.
However, the crucial German machine-tool sector reported some light ahead, with the VDMA federation's chief economist Ralph Weichers saying that "the drop in orders might have finally touched bottom."
That was the case in particular for domestic orders he added, which would be good since Germany typically depends on exports for economic growth.
Government subsidies which allow firms to cut working hours has prevented a surge of jobless claims so far but the first wave of short-work accords are approaching their "sell-by dates," ING senior economist Carsten Brzeski noted.
Germany has managed to keep unemployment from spiralling higher despite its worst recession for six decades. It is now emerging from the downturn, with 0.3-percent growth in the second quarter of 2009 from output in the previous three-month period.
In August the unemployment rate stood at 8.3 percent, but the figures have been subject since May to a change in the method of calculation, with jobless workers undergoing training by private agencies purged from the data.
On an unadjusted basis, the latest number of people out of work fell by 125,000 people to 3.346 million, the labour agency said on Wednesday, the lowest level since December 2008.
Analysts polled by Dow Jones Newswires had forecast an increase in the jobless rate to 8.4 percent.
Also important for German unemployment is the new coalition government because it will include liberal Free Democrats (FDP) who call for rules controlling job cutting to be eased to make the labour market more flexible.
Goldman Sachs economist Dirk Schumacher estimated that an interesting test of upcoming talks between the coalition partners on future policy "will be dismissal protection."
He said: "The FDP election platform demands meaningful changes to the current regime while chancellor Merkel apparently made a promise to unions not to touch the current framework."
Such a pledge could undermine already weak hiring prospects, and UniCredit economist Alexander Koch warned that even a solid rebound in manufacturing "should not be enough to prevent further sizeable job cuts in coming months."
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IMF says estimated crisis losses down by $600 billion
Likely losses from the financial crisis in the three years to 2010 have been reduced by $600 billion to $3.4 trillion as the world economy grows faster than previously expected, the International Monetary Fund said Wednesday.
The organization warned however that the impetus for far-reaching financial reforms risked being lost if the improving situation leads to complacency.
In its half-yearly Global Financial Stability Report presented in Istanbul, Turkey, the fund said concerted efforts by governments and central banks to deal with the crisis and fledgling signs of a global economic recovery have helped limit the losses.
"Systemic risks have been substantially reduced following unprecedented policy actions and nascent signs of improvement in the real economy," the IMF report said.
"There is growing confidence that the global economy has turned the corner, underpinning the improvements in financial markets," it added.
The IMF said its analysis suggests that U.S. banks are more than halfway through the loss cycle to 2010, whereas in Europe loss recognition is less advanced, reflecting differences in the regions' economic cycles.
A top IMF official noted that the conference in Istanbul was taking place just over a year since the Lehman Brothers bankruptcy triggered the sharpest phase of the global financial and economic crisis.
"Fortunately, the situation is very different today," said Jose Vinals, IMF Financial Counsellor and Director of the Monetary and Capital Markets Department. "We are on the road to recovery, but it doesn't mean that risks have disappeared."
"Bank balance sheets have been stabilized," Vinals said. But "there is still a substantial need for capital" to safeguard the financial system.
Over the last year, governments around the world have bailed out banks and stimulated their economies by increasing spending, while major central banks have slashed interest rates and pumped cheap money into the financial system in an attempt to get liquidity flowing again.
The growing confidence has been most evident in stock markets around the world — most of the world's major indexes are now in positive territory for 2009 as investors have grown more optimistic about the outlook for the world economy.
Stock markets usually rally between six to nine months before actually recovery emerges and most economists reckon that most of the world's leading economic regions will be growing by the end of the year at the very least. Already, the recessions in France, Germany and Japan have officially ended, though it will take many years for the lost output to be recouped.
The IMF's reassessment of the potential losses stemming from the financial crisis comes ahead of Thursday's World Economic Outlook, when the fund will publish its latest estimates for the global economy.
In Wednesday's report, the IMF indicated the outlook would raise its baseline forecast for global growth, with advanced economies expected to register positive growth in 2010, and emerging economies projected to rebound significantly.
Most analysts expect Thursday's report to show that 2010 global growth will be revised up to 3 percent from 2.5 percent.
Despite its more optimistic assessment of the financial fallout from the crisis, the IMF warned that risks to global stability remained high and that banks still need to rebuild their capital, strengthen earnings and wean themselves off government support.
Commercial property markets in the U.S. and Europe also continue to weaken, the IMF said.
In particular, the IMF said governments and central banks have to be careful to make sure they time the withdrawal of their assistance carefully. Otherwise they could spark a secondary crisis or endanger monetary and fiscal stability.
It also said that complacency was a worry. "Banking system problems could go unresolved and much-needed regulatory reforms may be delayed or diluted," it said.
"Policymakers should promptly provide a plan for the future regulatory framework that mitigates the buildup of systemic risks, grounds expectations, and underpins confidence, thereby contributing to sustained economic growth," it added.
The IMF's warnings are likely to carry more clout than they used to. The fund has seen its role enhanced as a result of the financial crisis.
Last week, leaders of the Group of 20 rich and developing countries agreed to give it the fund more responsibility for monitoring the health of the global financial system and to create an early warning system about potential risks.
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Stocks waver on housing, consumer confidence data
The latest batch of mixed economic data is making it difficult for stocks to take direction.
Stocks wavered early Tuesday after the Conference Board said its consumer confidence index fell to 53.1 in September, down from 54.5 in August, and much lower than the reading of 57 that economists had been expecting.
The private research group attributed the decline to concerns about the labor market, saying consumers are still worried about losing their jobs.
That disappointing report was tempered by data showing home prices rose for a third month in a row in July. The Standard & Poor's/Case-Shiller home price index of 20 major cities showed home prices rising 1.2 percent from June. Though home prices are still 13.3 percent below the same month a year ago, the annual declines have slowed in all 20 cities for the sixth straight month.
In morning trading, the Dow Jones industrials fell 2.34, or 0.02 percent, to 9,787.02. The Standard & Poor's 500 index rose 1.13, or 0.1 percent, to 1,064.11, and the Nasdaq composite index fell 1.14, or 0.1 percent, to 2,129.60.
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Index shows home prices rose for 3rd month in July
Home prices rose for the third month in a row in July, new data Tuesday showed, more proof a fragile housing recover is underway.
The Standard & Poor's/Case-Shiller home price index of 20 major cities rose 1.2 percent from June to a reading of 143.05. Though home prices are still 13.3 percent below July a year ago, the annual declines have slowed in all 20 cities for the sixth straight month.
The index is down about 33 percent from the peak in mid-2006. Home prices are now at levels not seen since the third quarter of 2003. And prices in Las Vegas, Detroit and Seattle are still falling.
Prices in Las Vegas are down more almost 55 percent from their peak. In August, almost 80 percent of home resales were either a foreclosure or a sale below the value of the mortgage, the National Association of Realtors said last week.
The Detroit housing market is being reeling from layoffs in the automotive industry. Seattle, by contrast, was one of the last areas to enter the downturn so prices there have yet to hit bottom.
"We do need to be cautious in coming months to assess whether the housing market will weather the expiration of the federal first-time buyer's tax credit in November, anticipated higher unemployment rates and a possible increase in foreclosures," said David M. Blitzer, committee chairman for the Case-Shiller index.
First-time homeowners can qualify for a tax credit worth 10 percent of the purchase price, up to $8,000, but it expires at the end of November. More than a dozen bills to extend the credit have been introduced in Congress, but it's unclear if lawmakers want to continue subsidizing the real estate market.
Still, there are clear positive trends: 13 metro area posted at least three straight months of price gains.
The Case-Shiller indexes measure home price increases and decreases relative to prices in January 2000. The base reading is 100; so a reading of 150 would mean that home prices increased 50 percent since the beginning of the index.
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KB Home posted a smaller third-quarter loss on Friday as it reduced costs and said new home orders increased, offering fresh evidence that the housing market is hobbling toward recovery.
Still, the results missed analysts' expectations.
The company said it lost $66 million, or 87 cents a share, in the three months ended in August. That compares with a loss of $144.7 million, or $1.87 a share, the same period last year.
KB Home said it improved its results by focusing on cost reduction, managing inventory levels and building smaller homes to compete with heavily discounted foreclosures.
Revenue dropped 33 percent to $458.5 million from $681.6 million the year before due to fewer home sales and a decrease in the average sales price.
The company sold 2,240 homes in the current quarter, a 20 percent decline from the year-ago period, while the average selling price fell 15 percent to $202,800.
Analysts polled by Thomson Reuters were expecting a loss of 58 cents a share on revenue of about $457.9 million.
But the results provided new signs that the housing market, while fragile, is on the mend. KB Home said its new home orders jumped 62 percent in the third quarter from the year before to 2,158, with every region posting year-over-year growth.
Its cancellation rate dropped to 27 percent during the quarter, compared to 51 percent in the previous year.
Low mortgage rates and a federal tax credit of up to $8,000 for first-time homebuyers have helped to fuel recent dealmaking. Nationally, new home sales have risen for four straight months, and August's new home sales are projected to be higher when official figures are released later Friday.
KB Home remains cautious, however. Company President and CEO Jeff Mezger noted that increased foreclosures, higher unemployment, tighter credit requirements and weak consumer confidence could hamper a turnaround.
"The housing market overall remains in a transition," Mezger said in a statement, "where it will likely be some time before we see meaningful improvement in the economic conditions that are essential to our industry's future growth."
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Home resales dipped unexpectedly last month after a four-month streak of gains, providing evidence that the housing market recovery remains fragile.
Sales dropped 2.7 percent to a seasonally adjusted annual rate of 5.1 million in August, from a pace of 5.24 million in July, the National Association of Realtors said Thursday. Compared with a year ago, however, home sales are up 3.4 percent.
The results surprised analysts, who had expected sales to rise to an annual pace of 5.35 million, according to Thomson Reuters.
"We suspect it is just a temporary blip in the improving trend rather than a sign of renewed weakness," wrote Paul Dales, U.S. economist at Capital Economics.
In a positive sign, the inventory of unsold homes on the market fell to 3.6 million, from 4 million in July. That's an 8.5 month supply at the current sales pace, the lowest level in more than two years.
Nevertheless, there is a key unknown on the horizon. A tax credit of up to $8,000 for new homeowners expires on Nov. 30. Congress is facing intense pressure from real estate agents and homebuilders to extend it, but it's unclear whether lawmakers want to spend more money to prop up the housing market.
First-time buyers have purchased almost one in three homes in August. Together with investors snapping up foreclosures, they have provided most of the momentum in the market this year.
Nationwide sales are up nearly 14 percent from their bottom in January, but are still down nearly 30 percent from their peak nearly four years ago. For the housing market to truly return to normal, said Lawrence Yun, the Realtors' chief economist, sales would need to rise to a pace of around 5.5 million to 6 million per year.
If buyers see clear evidence of stable prices, the housing market recovery can be self-sustaining, Yun said, adding, "We are not there yet."
Nationally, the median sales price was $177,700, down 12.5 percent from the same month last year. Prices were also down 2.1 percent from a month earlier.
The drop in sales last month may reflect delays in completing sales due to tough lending standards and new rules for appraisals. Real estate agents say new rules, effective May 1, that were designed to limit conflicts of interest in the appraisal process are delaying or undermining sales because appraisals are coming in too low.
That's what happened to Maria Jose Garcia, who just bought a three-bedroom house with a garden in a quiet neighborhood in West Park, a suburb of Fort Lauderdale, Fla.
Garcia signed a contract to buy her first home in early July but closing was pushed back twice because two appraisals came in below the contract price. After negotiating with the seller, the price came down from $125,000 to $105,000.
"The whole time, I was worried, but those issues did not depend on me," said Garcia, 43, an office assistant at a rehabilitation center. "I was sure I was going to buy a house. It was just a matter of negotiating and keeping a good disposition."
Low mortgage rates are also helping more people like Garcia afford a home. Freddie Mac said Thursday that the average rate on a 30-year fixed-rate loan was 5.04 percent this week, unchanged from a weak earlier.
Foreclosures and other financially distressed sellers accounted for about 30 percent of the market last month. In the West, sales of homes under $100,000 were up 150 percent from a year ago. Sales of homes priced at over $250,000 were down nationally, with the biggest drop of nearly 40 percent coming among homes priced over $2 million.
With unemployment and foreclosures rising in the upper end of the housing market, "there will be plenty of more pain for higher-priced properties," wrote Joshua Shapiro, chief U.S. economist with MFR Inc.
Compared with a month earlier, the West posted the strongest results. Sales there were up nearly 3 percent. They fell by nearly 7 percent in the Midwest, more than 2 percent in the Northeast and 3 percent in the South.
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New jobless claims drop unexpectedly to 530K
The number of newly laid-off workers seeking unemployment benefits fell for the third straight week, evidence that layoffs are continuing to ease in the earliest stages of an economic recovery.
The Labor Department said Thursday that initial claims for unemployment insurance dropped to a seasonally adjusted 530,000 from an upwardly revised 551,000 the previous week. Wall Street economists expected claims to rise by 5,000, according to a survey by Thomson Reuters.
Fewer layoffs "would be an important sign of improvement ... lessening the critical threat to consumer spending — and to the overall economy — represented by falling employment," Pierre Ellis, an economist at Decision Economics, wrote in a note to clients.
The Federal Reserve said Wednesday that spending "remains constrained by ongoing job losses," tight credit and falling home values. But consumer spending, which makes up 70 percent of the U.S. economy, could improve as workers feel more secure about their jobs.
Meanwhile, home resales dipped unexpectedly last month after four straight gains, a sign the housing market recovery remains fragile.
The National Association of Realtors said sales dropped 2.7 percent to a seasonally adjusted annual rate of 5.1 million in August. Sales had been expected to rise to an annual pace of 5.35 million, according to economists surveyed by Thomson Reuters. The median sales price fell to $177,700, down 12.5 percent from the same month last year.
The four-week average of jobless claims, which smooths out fluctuations, dropped to 553,500. That's the lowest since late January, though still far above the 325,000 weekly claims typical in a healthy economy.
Economists closely watch initial claims, which are considered a gauge of layoffs and an indication of companies' willingness to hire new workers.
The four-week average has fallen by about 100,000 since reaching a peak for the current recession in early April. Economists say initial claims below 400,000 would be a signal that employers are adding to the net total of jobs.
The number of people continuing to claim benefits for more than a week dropped 123,000 to a seasonally adjusted 6.14 million.
But when federal emergency programs are included, the total number of jobless benefit recipients was about 9 million in the week that ended Sept. 5, down slightly from the previous week. Congress has added up to 53 extra weeks of benefits on top of the 26 typically provided by the states. The House this week approved legislation that would add another 13 weeks in high-unemployment states.
The large number of people remaining on the rolls shows unemployed workers are having a hard time finding new jobs.
Most analysts expect the economy, bolstered government stimulus efforts, will grow at a healthy clip in the current July-September quarter, technically ending the recession. But many economists also agree with Fed Chairman Ben Bernanke, who said earlier this month that growth isn't expected to be strong enough to reduce the jobless rate for some time.
The Fed said Wednesday that economic activity "has picked up," and the central bank kept the interest rate it controls at its record low of nearly zero.
The recession, which began in December 2007 and is the worst since the 1930s, has eliminated a net total of 6.9 million jobs.
More job cuts were announced this month. Health insurer WellPoint Inc. said this week it may eliminate more positions in an effort to become more efficient, though the company didn't provide details.
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Fed slows housing market plan; rates to stay low
Signaling confidence in a recovery, the Federal Reserve decided Wednesday to stretch out the pace of a program intended to lower mortgage rates and prop up the housing market.
Even so, rates on home loans are expected to remain low.
With the economy on the mend, the Fed said it now plans to reach its goal of buying $1.45 trillion in mortgage-backed securities and debt by the end of March, rather than by the end of this year as originally scheduled. It's the second time since August that the Fed has opted to slow emergency programs designed to encourage spending and boost the economy.
Those decisions show that Fed Chairman Ben Bernanke and his colleagues are shifting from managing the financial and economic crises to nurturing a budding recovery.
In a far brighter assessment, Fed policymakers said: "Economic activity has picked up following its severe downturn." In August, policymakers had observed that economic activity was "leveling out."
To foster the recovery, the Fed also decided to hold the target range for its key bank lending rate at a record low of between zero and 0.25 percent. It again pledged to keep rates there "for an extended period." Economists predict that means through the rest of this year, and perhaps into part of next year.
Holding that rate steady means commercial banks' prime lending rate — used to peg rates on home equity loans, certain credit cards and other consumer loans — will stay at about 3.25 percent, the lowest in decades. The goal is to entice people and businesses to step up spending to aid economic growth.
Yet even so, Fed policymakers predict inflation will remain "subdued for some time."
On Wall Street, stocks initially enjoyed a bounce but quickly gave up those gains, once traders digested the news and saw nothing new in it to boost stocks.
The "market got exactly what it was expecting," said Thomas Wilson, a managing director at Brinker Capital in Berwyn, Pa.
The Dow Jones industrial average, which had risen 27 points before the announcement, ended up losing more than 81 points to close at 9,748.55. Major market indicators are up more than 50 percent from their lows in early March, and many analysts fear stocks have become overvalued.
Analysts say mortgage rates should remain low for now but could eventually head higher. That's why homeowners who want to refinance mortgages shouldn't delay, said Greg McBride, senior financial analyst at Bankrate.com.
McBride said rates will eventually be pushed up by the Fed's gradual withdrawal from the market, the strengthening housing market and the likely increase in inflation as the economy stabilizes.
Refinancing is especially urgent for people eligible for a separate government-backed refinance program, which expires in June, McBride said. But he said homeowners in adjustable-rate loans whose payments fell this year also need to move quickly.
"They could be tempted to put their heads in the sand on refinancing for another 12 months," he said. "It could be a different story 12 months from now," with much higher rates for 30-year fixed rate mortgages.
In their more optimistic outlook, policymakers noted that financial conditions and the housing market have improved. Those observations build on Bernanke's declaration last week that the recession is "very likely over."
They also cautioned, though, that other factors could weigh down the recovery. Consumer spending — the lifeblood of economic activity — remains constrained by job losses, sluggish income growth, lower housing wealth and still hard-to-get-credit.
Even though the Fed will slow its purchases of mortgage securities, rates for home loans should remain low "in the 5 percent range" as long as the purchases continue, said Guy Cecala, publisher of Inside Mortgage Finance.
The program has helped the housing market, which led the country into recession. Home sales have firmed, and mortgage rates have dropped. Rates on 30-year home loans fell to 5.04 percent last week, compared with 5.78 percent a year earlier, Freddie Mac says.
But the housing market's health remains precarious as foreclosures continue to mount.
"This phaseout is significant because housing, though stabilizing, is very dependent on the government help and so much of the economy depends on housing," said Sung Won Sohn, economist at California State University's Smith School of Business.
The central bank announced the mortgage-buying program in November, after financial turmoil reached a crisis point.
The Fed has bought roughly $775 billion worth of both mortgage-backed securities and debt from Fannie Mae, Freddie Mac and Ginnie Mae, which finance most new mortgages. The central bank is buying roughly 85 percent of the mortgages issued by those companies, according to one estimate. It's basically bankrolling mortgage lending.
By doing so, the Fed is helping provide demand for these securities — which had dried up when the crisis deepened — and forcing down mortgage rates. The Fed's purchases of mortgage securities and debt have averaged roughly $25 billion a week over the past six weeks.
The Fed did say additional mortgage purchases could occur if economic conditions warrant.
A $8,000 federal tax credit for first-time home buyers also is helping to shore up the housing market. There's a bipartisan push on Capitol Hill to extend the credit, which expires on Nov. 30.
As the recovery gains traction, the Fed will face more pressure to wind down some emergency programs. It's a fine line. Policymakers need to leave programs intact long enough to support the recovery — but not so long as to unleash inflation later on.
Inflation will remain in check, according to the Fed policymakers, who got rid of language in their August statement that noted rising prices for energy and other commodities.
Factories are still operating well below capacity. Other factors keeping prices in check include the weak job market — enabling employers to avoid wage increases — and cautious shoppers making companies wary of raising costs.
After suffering a free-fall, the economy is growing at a pace of 3 to 4 percent in the current quarter, many analysts predict. But Bernanke warned that growth in the months ahead probably won't be strong enough to generate many new jobs and prevent the unemployment rate from rising. The rate hit a 26-year high of 9.7 percent in August and is expected to top 10 percent this year.
"The U.S. economy has moved from its deathbed to intensive care, so some of the Fed's more extreme policy programs can be rolled back," said Richard Yamarone, economist at Argus Research. "However, the patient is still in intensive care, and the central bank should be careful not to pull the plug too quickly."
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China, ahead of G20, backs policy coordination
China responded on Wednesday to a United States proposal for closer cooperation among Group of 20 countries to tackle global imbalances by saying it supported international economic policy coordination.
In a statement to Reuters, the Chinese Foreign Ministry also said international financial institutions had a role to play in providing policy recommendations, though only for reference purposes.
"All countries should determine appropriate macro-economic policies according to their own national conditions," it said.
U.S. President Barack Obama will urge world leaders at a summit in Pittsburgh this week to launch a framework of "mutual assessment" whereby the International Monetary Fund (IMF) would make policy recommendations on rebalancing to the G20 every six months, according to a U.S. document obtained by Reuters.
The Chinese Foreign Ministry did not refer to any of the specific details of Obama's proposal, but made clear its belief that the IMF had more important work at hand.
"At present, the principal task of the IMF is to speed up the reform of its governance structure and to really increase the speaking rights and representation of emerging markets and developing countries," it said.
China, Brazil, Russia and India this month called for a 7 percent shift in IMF voting rights in favor of developing countries, more than the 5 percent the United States is proposing.
China will get the biggest increase in voting power when the global lender completes a long-awaited restructuring in 2011, the head of the IMF said on Tuesday.
The foreign ministry's statement indicated that Beijing could find common ground with at least the thrust of Obama's ideas about rebalancing.
"We approve of countries strengthening their macro-economic policy coordination and together pushing forward the sustainable and balanced development of the world economy," it said. "Relevant international financial organizations can provide recommendations as reference."
Chinese government researchers on Tuesday gave a cautious welcome to the U.S. initiative, but recent history shows that China will not let the IMF have real bite at a supervisory role.
When the IMF changed its exchange-rate monitoring rules in 2007, Beijing feared it was a ploy by the United States to enlist the organization's support in its campaign for a stronger yuan.
China blocked the IMF's annual assessment of the Chinese economy until the fund reversed the rule change this year.
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Stocks dip ahead of Fed decision as oil tumbles
Stocks edged lower early Wednesday as investors awaited word from the Federal Reserve.
A sharp drop in oil weighed on energy and material stocks. Gains in some technology companies helped temper the market's losses. The Dow Jones industrial average is about 200 points away from 10,000, a mark it hasn't been above since October.
The U.S. central bank is expected to keep its benchmark interest rate at a record low of near zero, but investors are hoping for a clearer indication of when the Fed may raise rates in the future. Investors will also be looking for more clues about the strength of the economy's recovery in the statement to be released at the conclusion of the Fed's two-day policy meeting Wednesday afternoon.
"The whole market in general is just waiting and seeing," said John Canally, an economist at LPL Financial. "The market is going to look through every word of this statement for the 'when.'"
Low interest rates have helped spur the nearly seven-month rally in stocks, weakening the dollar and providing investors with access to cheap financing. The obstacle the Fed faces is determining the appropriate time to raise rates and exit some of its stimulus programs. If the Fed raises rates too soon it risks upsetting the recovery, but if rates are left low for too long it could lead to inflation.
With major market indicators up more than 50 percent since early March, investors are worried that stocks have become overvalued, especially with the strength of the economy's recovery still in question.
"Because we're up so much there is a tendency to hesitate here," said Steven Goldman, chief market strategist, Weeden & Co. in Greenwich, Conn.
In late morning trading, the Dow fell 24.71, or 0.3 percent, to 9,805.16. The Standard & Poor's 500 index fell 3.85, or 0.4 percent, to 1,067.81, while the Nasdaq composite index fell 2.45, or 0.1 percent, to 2,143.85.
Declining stocks outnumbered advancers by about 3-to-2 on the New York Stock Exchange, where volume came to 302.4 million shares, compared with 340.7 million shares traded at the same time a day earlier.
Oil prices dropped $2.74 to $69.02 a barrel on the New York Mercantile Exchange, bringing energy stocks down with it, after the government reported that crude inventories unexpectedly rose by 2.8 million barrels last week. Crude in storage is now 10.6 percent above year-ago levels, the Energy Department's Energy Information Administration said in its weekly report.
Analysts had expected a drop of 2.25 million barrels for the week ended Sept. 18, according to a survey by Platts, an energy information service owned by McGraw-Hill Cos.
In other trading, the Russell 2000 index of smaller companies fell 1.95, or 0.1 percent, to 619.94.
On Tuesday, the Dow rose 51 points, recovering all of the previous day's losses, as the dollar sank and commodities rebounded. The market's movements have been moderate in recent weeks as investors try to determine whether the massive jump in stocks since early March accurately reflects the state of the economy.
Britain's FTSE 100 fell 0.2 percent in afternoon trading, Germany's DAX index fell 0.5 percent and France's CAC-40 fell 0.3 percent.
Hong Kong's Hang Seng index fell 0.5 percent. Japan's markets were closed for a public holiday.
Bond prices turned higher as stocks edged lower. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.44 percent from 3.45 percent late Tuesday.
The dollar was mixed against other major currencies, while gold prices slipped.
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FDIC could seek bailout from banks
Regulators have approached big banks about borrowing billions to shore up the dwindling fund that insures regular deposit accounts.
The loans would go to the fund maintained by the Federal Deposit Insurance Corp. that insure depositors when banks fail, said two industry officials familiar with the conversations, who requested anonymity because the plans are still evolving.
Regulators also are considering levying a special emergency fee on all banks, charging regular fees early or tapping a $100 billion credit line with the U.S. Treasury, the people said.
FDIC spokesman Andrew Gray said that while borrowing from the banks "is an option, it's not being given serious consideration." The board meeting where the plans will be discussed is scheduled for next week.
But a government official familiar with the FDIC board's thinking said earlier Tuesday that the plan was being considered. He requested anonymity because he was not authorized to discuss the matter.
The fund, which insures deposit accounts up to $250,000, is at its lowest point since 1992, at the height of the savings-and-loan crisis. Ongoing losses on commercial real estate and other loans continue to cause multiple bank failures each week.
FDIC Chairman Sheila Bair wants to avoid tapping the Treasury credit line, and Treasury officials insist that the strongest big banks have enough extra capital to operate, the officials said. Comptroller of the Currency John Dugan, who is a voting member of the FDIC board, has said he doesn't want to levy another fee on banks while the industry is still recovering.
Bair's priorities for the banking industry are different from the Treasury's, analysts said. They said she is focused on stabilizing the many banks still at risk of failure. Those failures could further deplete the insurance fund. Treasury Secretary Tim Geithner has taken a more hands-off approach to the industry, and wants to wind down government assistance quickly.
Bair and Geithner have sparred on key decisions throughout the financial crisis, including the question of whether to bail out Citigroup Inc. with billions of taxpayer dollars last fall.
In an interview with The Associated Press last December, Bair said she and Geithner "have different perspectives frequently, and I think that's a healthy thing."
"You don't want to get everybody in the room nodding," she said.
Lending money to the insurance fund would give big, healthy banks a safe harbor for their money and would limit their risk-taking, said Daniel Alpert, managing director of the investment bank Westwood Capital LLC in New York.
It also would allow the industry's strongest players — which still rely on FDIC loan guarantees and other emergency subsidies — to help weaker banks avoid paying another fee, he said.
"Lots of banks are going to require more capital, and (Bair is) trying to rob from the rich and give to the poor," said Alpert, who supports the plan as a creative way to avoid another bailout.
Bankers and lobbyists strongly support the plan to have some big banks lend money to the fund, since it would help still-struggling institutions avoid another fee.
In a letter to Bair Monday, American Bankers Association CEO Ed Yingling endorsed borrowing from the industry or collecting regular premiums early as alternatives to charging another fee.
An earlier special fee already is having a negative economic impact, and another fee "may do more harm than good," he said.
The FDIC may settle on a plan that combines two or more of the options being considered.
A spokesman for the agency did not respond to requests for comment Tuesday morning. The New York Times reported details of the possible bank lending plan earlier Tuesday.
The FDIC estimates bank failures will cost the fund around $70 billion through 2013. Ninety-four banks have failed so far this year. Hundreds more are expected to fall in coming years largely because of souring loans for commercial real estate.
The FDIC's fund has slipped to 0.22 percent of insured deposits, below a congressionally mandated minimum of 1.15 percent. The $10.4 billion in the fund at the end of June is down from $13 billion at the end of March, and $45.2 billion in the second quarter of 2008.
Bair last week said the FDIC board would meet at the end of the month to consider options including taking Treasury funds, assessing fees on banks in advance and again increasing the fees they must pay.
"We don't want to stress the industry too much at this time, when they're still in the process of recovery," she said.
Congress in May more than tripled the amount the FDIC could borrow from the Treasury if needed to restore the insurance fund, to $100 billion from $30 billion.
The FDIC then adopted a new system of special fees paid by U.S. financial institutions that shifted more of the burden to bigger banks to help replenish the insurance fund. The move cut by about two-thirds the amount of special fees to be levied on banks and thrifts compared with an earlier plan, which had prompted a wave of protests by small and community banks.
Bair had earlier promised a reduction in fees charged to banks if the Treasury credit line could be expanded.
The FDIC emergency premium, to be collected from all federally-insured institutions, is 5 cents for every $100 of a bank's assets minus its so-called Tier 1, or regulatory capital, as of June 30. Banks and thrifts paid an average premium of 6.3 cents last year. A measure of a bank's health, Tier 1 capital includes common and preferred stock as well as intangible assets such as tax losses that can be used to reduce future earnings.
In addition, the FDIC raised the regular insurance premiums for banks to between 12 and 16 cents for every $100 in deposits starting in April, from a range of 12 to 14 cents.
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Rebound in commodities carries stocks higher
Stocks rose slightly in morning trading Tuesday as commodities rebounded ahead of the Federal Reserve's meeting on interest rates.
Benefiting from a weaker dollar, commodities including oil and gold bounced back from the previous day's sell-off, sending energy and material stocks higher.
The gains in stocks and commodities came as the Federal Reserve prepared for a two-day rate-setting meeting. Investors are hoping the Fed will provide a clearer picture of the economic recovery and some indication of when it may raise interest rates. The Fed is widely expected to keep rates at their record low of near zero for the time being.
The market appears to be following a well established pattern, where brief selloffs are met with more buying as investors fear missing out on a continued rally. With stocks up more than 50 percent since bottoming in March, analysts have been forecasting a pullback, warning that uninterrupted gains are unsustainable. However any dips in recent weeks have been moderate and short-lived.
"We haven't had a negative catalyst," said Art Hogan, chief market analyst at Jefferies & Co. "Reluctantly, investors are continually being dragged into a market that is finding a path of least resistance to the upside."
The consensus on Wall Street is that the economy is healing despite ongoing challenges like unemployment. But investors still have doubts over how strong the recovery will be, and whether the stock market's massive, nearly seven-month advance accurately reflects such a strong recovery.
The Dow Jones industrial average rose 32.12, or 0.3 percent, to 9,810.98. The Standard & Poor's 500 index gained 5.73, or 0.5 percent, to 1,070.39, while the Nasdaq composite index rose 7.44, or 0.4 percent, to 2,145.48.
About two stocks rose for every one that fell on the New York Stock Exchange, where volume came to 144.2 million shares, compared with 168.9 million shares traded at the same time the day before.
In other trading, the Russell 2000 index of smaller companies rose 3.53, or 0.6 percent, to 619.50.
Gold and silver prices rose after three days of declines, while oil prices gained $1.34 to $71.05 a barrel on the New York Mercantile Exchange.
Commodities rose as the U.S. dollar index, which measures the greenback against a basket of foreign currencies, fell 1 percent to a fresh low for the year. The dollar has fallen sharply since early March amid record-low interest rates and unprecedented government spending designed to stimulate the economy.
Energy and material stocks were lifted by the gains in commodities. U.S. Steel Corp. rose $1.63, or 3.4 percent, to $49.65, while Chesapeake Energy Corp. rose 90 cents, or 3.2 percent, to $29.01.
Financial stocks were mostly higher after Rochdale Securities analyst Richard Bove raised his target price on Bank of America Corp. to $25 a share. Shares of the Charlotte, N.C.-based bank jumped 35 cents, or 2 percent, to $17.60.
Citigroup Inc. shares added 17 cents, or 3.8 percent, to $4.60 after a Singapore sovereign wealth fund cut its stake in the New York bank to below 5 percent from 9 percent following a recent exchange of preferred stock.
Among technology stocks, Google Inc. shares hit a 13-month high after a Canaccord Adams analyst raised the target price on the stock to $560. Shares rose as high as $501.19 in early trading, and recently added $2.75 to $499.75.
Stocks sold off on Monday as the dollar rose ahead of the Fed meeting, sending shares of commodity companies lower. The Dow Jones industrials lost a modest 41 points after being down as much as 94 points earlier in the day.
After soaring 49 percent since hitting a 12-year low in early March, the Dow stands about 200 points away from the 10,000 mark — a level the average first crossed in March 1999 and hasn't been above since October of last year.
Bond prices rose slightly ahead of the latest round of government auctions. The yield on the benchmark 10-year Treasury note, which moves opposite its price, slipped to 3.47 percent from 3.49 percent late Monday.
In afternoon trading in Europe, Britain's FTSE 100 was up 0.8 percent, Germany's DAX index jumped 1.0 percent, and France's CAC-40 rose 0.6 percent.
Earlier Tuesday, Hong Kong's Hang Seng index added 1.1 percent. Japan's markets were closed for a public holiday.
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Britain's EU input falls amid exchange-rate slide
Britain's direct contribution to the European Union fell by more than 2.71 billion pounds over 2008 compared to the previous year, according to the bloc's latest financial report issued on Tuesday.
London directly pumped 6.92 billion pounds into the 27-nation EU, down from 9.76 billion pounds for 2007 owing to a sharp decline in the value of sterling against the euro.
The size of what Brussels now calls the British correction, money returned to London to offset what it says is skewed Mediterranean agricultural spending, also increased in 2008 from 4.70 billion pounds to 5.66 billion.
Likewise, receipts from items such as border taxes and duties raised in Britain but then allocated to Europe also fell given the greater effect in Britain of exchange-rate changes during the financial and economic crisis. These amounted to another 2.26 billion.
Regardless of the impact of exchange rates, a European Commission spokesperson said the effects of the so-called 'Thatcher rebate,' the mechanism that sees all 26 other EU member states return money to Britain under a deal initially negotiated in 1984, would become diminished by 2010.
Britain nevertheless remains among 10 countries that paid in more than they got back: Austria, Cyprus, Denmark, Finland, France, Germany, Italy, the Netherlands and Sweden being the others.
The governing Labour party agreed in 2005 to sign away much of the rebate on the proviso that France and other countries would cut back on their farm subsidies.
The annual drop in the British share of contributions was set against sharp rises for France, Germany and Italy.
"It's important to stop thinking in terms of net balances," said Commissioner for Financial Programming and Budget Algirdas Semeta as he presented the figures.
"That doesn't create a good atmosphere within Europe," he said.
He said the overall British contribution to the EU's budget, between 2007 and 2013, would remain "stable at around 10 percent of the total."
He added: "The United Kingdom was and will remain the fourth-largest contributor to the EU's budget."
France was once again the EU's biggest recipient, taking in 12.41 billion pounds, but remains one of its biggest contributors with an input of 16.31 billion pounds.
The four biggest recipients were France, Spain, Germany and Italy with 47.3 percent of the EU's total budget of 106 billion pounds. The next biggest recipients were Greece, Poland and Britain.
France again topped the tables for agricultural spending, at 9.06 billion, with spending on the newer eastern European member states "set to deepen" over the next four years, said Semeta.
Poland was a major recipient of funds handed out by Brussels across the various policy categories.
The European Commission's financial report showed that a record 40 percent went on measures to boost jobs, growth and competitiveness.
However, 242 million euros of funds already committed to national projects went unclaimed by 15 member states and will now be lost.
Said Semeta: "In difficult economic times, every euro counts... that is lost money."
The commissioner said planned changes to EU budgeting mechanisms in part designed to strip away the focus on net national balances were being help up amid uncertainty as to whether the current commission's mandate will have to be extended awaiting Irish and Czech hurdles to ratifying the bloc's reforming Lisbon Treaty.
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Energy, material stocks lead market decline
More dealmaking and a favorable economic forecast weren't enough to carry stocks higher Monday as markets around the globe cooled from a recent surge.
The Dow Jones industrials and the Standard & Poor's 500 index lost about 0.8 percent in early trading. The dollar rose, igniting a sharp sell-off in commodities like oil and gold, which weighed on energy and material stocks.
The declines came even as a private sector group's forecast of economic activity rose for the fifth straight month. The Conference Board's index of leading economic indicators increased 0.6 percent in August, just short of the 0.7 percent increase economists expected. The index, which is meant to project economic activity in the next three to six months, climbed 0.9 percent in July, revised up from 0.6 percent.
News of Dell Inc.'s plans to buy information technology company Perot Systems Corp. for about $3.9 billion also did little to invigorate investors who have taken stocks up more than 50 percent since early March.
Analysts say breaks in the rally are perfectly healthy.
"This is what should happen, needs to happen, is going to happen along the way but it doesn't mean we're headed down significantly from here," said Jordan Smyth, managing director at Edgemoor Investment Advisors in Bethesda, Md.
The benchmark Standard & Poor's 500 index tacked on a 2.5 percent gain last week, bringing its total rise since March to 58 percent, after Federal Reserve Chairman Ben Bernanke declared the U.S. recession was "likely over" from a technical standpoint.
Investors are now waiting to see what the rest of the Fed has to say this week during its two-day rate-setting meeting, which begins Tuesday.
In early trading, the Dow Jones industrial average fell 79.73, or 0.8 percent, to 9,740.47. The Standard & Poor's 500 index lost 9.23, or 0.9 percent, to 1,059.07, while the Nasdaq composite index fell 8.84, or 0.4 percent, to 2,124.02.
In other trading, the Russell 2000 index of smaller companies fell 5.86, or 1.0 percent, to 612.02.
More than four stocks fell for every one that rose on the New York Stock Exchange, where volume came to 280.2 million shares, down from 669.4 million at the same time on Friday.
The dollar rose against other major currencies, sending prices for gold, oil and other commodities tumbling. Commodities are priced in dollars, so a stronger greenback makes them less appealing for foreign investors.
Oil prices dropped $2.82 to $69.22 a barrel on the New York Mercantile Exchange, driving energy stocks lower. Chesapeake Energy Corp. lost 92 cents, or 3.3 percent, to $26.93, while Halliburton Co. fell 89 cents, or 3.2 percent, to $27.26.
Bond prices rose, benefiting from the sell-off in stocks. The yield on the benchmark 10-year Treasury note, which moves opposite its price, fell to 3.43 percent from 3.46 percent late Friday.
Shares of Perot Systems shot up nearly 66 percent, or $11.70, to $29.61 after Dell offered to buy the company for $30 a share in cash — a 68 percent premium over the stock's Friday closing price. Dell shares slid 73 cents, or 4.4 percent, to $15.96.
With major stock indexes up more than 50 percent over the past six months, including the Dow Jones industrial average, which is less than 300 points shy of the 10,000 mark, it's widely believed that the market is ripe for a pullback.
Though economic data is expected to continue to improve, there are other worries plaguing the market, such as the potential threat of inflation.
The Federal Reserve is expected this week to keep its key interest rate at a record low of near zero, but the market will be looking for any indication of when the Fed plans to actually raise rates, a tactic it would use to ward off inflation.
The Fed has kept interest rates low to help stimulate the economy, but if the central bank signals inflation is becoming a concern, that could spook investors. Up until now, the Fed has insisted that inflation, which would further erode the value of the dollar and eat into Treasury yields, is largely in check.
Investors will also get reports this week on new and existing home sales, as well as durable goods orders.
Overseas, Hong Kong's Hang Seng index lost 0.7 percent. A number of other Asian markets, including Japan's, were closed for holidays. In afternoon trading, Britain's FTSE 100 was down 0.9 percent, Germany's DAX index dropped 1.2 percent, and France's CAC-40 fell 0.9 percent.
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Leading economic indicators rise in August
A private forecast of economic activity rose in August for the fifth straight month, the latest sign the recession has ended.
The Conference Board said Monday its index of leading indicators rose 0.6 percent in August. That follows a 0.9 percent gain in July revised up from 0.6 percent. Economists surveyed by Thomson Reuters had expected an 0.7 percent gain last month.
The indicators are designed to project economic activity in the next three to six months. The August results support many analysts' projections that the economy started growing again in the current July-September quarter and will continue to gain in the fourth quarter.
Federal Reserve Chairman Ben Bernanke last week said the recession was "very likely over."
The recession's end "is no longer a source of heated discussion ... but whether or not the economy can keep grinding forward (and at what speed) is still a big question mark," Jennifer Lee, an economist at BMO Capital Markets, wrote in a note to clients Monday.
A measure of supplier deliveries, rising stock prices, an increase in consumer expectations, a jump in building permits and the "interest rate spread" boosted the index in August.
That spread is the difference between yields on 10-year Treasurys and the federal funds rate, which the Fed is keeping at a record low near zero. The funds rate is the interest banks charge each other for loans. A big difference between it and the 10-year Treasury is viewed as positive because investors are willing to lend for longer periods.
On Wall Street, stocks moved lower despite the Conference Board's mostly positive report and news of Dell Inc.'s plans to buy information technology company Perot Systems Corp. for about $3.9 billion. The Dow Jones industrial average lost about 65 points in morning trading, and broader indices also fell.
The leading indicators index jumped 4.4 percent — an 8.9 percent annual rate — in the six months through August. That's the fastest six-month growth rate since March 2004. The increase in the six months through July was 3.3 percent.
An accompanying index meant to measure the current state of the business cycle was flat in August. The July reading was revised up to a 0.1 percent gain from zero, making it the first increase in nine months.
The two indices suggest "that the recession is bottoming out," said Conference Board economist Ken Goldstein.
"These numbers are consistent with the view that after a very severe downturn, a recovery is very near," he said. "But the intensity and pattern of that recovery is more uncertain."
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Gov't home loan agency faces cash squeeze
The Federal Housing Administration said Friday its cash cushion will dip below mandated levels for the first time, but officials insist it won't need a taxpayer rescue.
The agency, a growing source of funds for first-time homebuyers, faces mounting concerns that it will soon need a taxpayer bailout. As of this summer, about 17 percent of FHA borrowers were at least one payment behind or in foreclosure, compared with 13 percent for all loans, according to the Mortgage Bankers Association.
Rising defaults mean the FHA's reserves may sink below the 2 percent mark required by federal law. The FHA says a study being sent to Congress in November is expected to show that ratio dipping below required levels for the first time.
David Stevens, the agency's commissioner, however, said in an e-mailed statement that FHA "will not require taxpayer assistance."
The agency itself does not make loans, but rather offers insurance against default. Many borrowers are willing to pay for the insurance because FHA loans only require down payments of 3.5 percent of the purchase price.
The FHA now insures about 5.3 million mortgages, up from about 4 million three years ago.
In an effort to weed out shady operators, it wants to require that participating have a net worth of $1 million, up from the current requirement of $250,000, and undergo annual audits.
Last month, FHA banned mortgage company Taylor, Bean & Whitaker from making any more federally insured loans after it failed to submit a required financial report, raising fraud concerns.
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42 states lose jobs in August, up from 29 in July
Forty-two states lost jobs last month, up from 29 in July, with the biggest payroll cuts coming in Texas, Michigan, Georgia and Ohio.
The Labor Department says 27 states saw their unemployment rates increase in August, and 14 states and Washington D.C. reported unemployment rates of 10 percent or above.
Michigan has the highest jobless rate of 15.2 percent, followed by Nevada at 13.2 percent, Rhode Island at 12.8 percent, and California and Oregon at 12.2 percent each.
The jobless rates in California, Nevada and Rhode Island were the highest on records dating to 1976.
Nationwide, the unemployment rate rose to 9.7 percent in August from 9.4 percent in July.
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Student loan market overhaul approved by House
The biggest change in U.S. higher education finance in 35 years was approved on Thursday by the House of Representatives, handing a defeat to major banks and student loan giant Sallie Mae.
Lawmakers voted 253-171 in favor of legislation that would cut the banks and Sallie Mae out of a large slice of the $92 billion college student loan business, shifting most lending into a program run by the U.S. Education Department.
The bill, supported by the White House, will go next to the Senate for further consideration.
The Senate education committee is drafting a bill similar to the House measure and hopes to take action on it within weeks, said a Senate Democratic aide.
In mid-2008 the secondary market for student loans froze up, leaving many students to wonder if they could pay for school and forcing the government to intervene with a taxpayer-funded rescue.
That stabilized the market and produced a political opening for Democrats who had long wanted to kill the 1970s-era Federal Family Education Loan Program (FFELP), the core of a business model used by Sallie Mae and banks such as Citigroup.
Under the House the bill, FFELP would be discontinued, saving taxpayers an estimated $80 billion over 10 years, said backers of the legislation.
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Discover Financial's 3Q profit more than triples
Discover Financial Services said Thursday it more than tripled its profit in the fiscal third quarter, helped by a payment from a lawsuit settlement.
Even without the gain from the lawsuit settlement, the credit card lender would have been profitable, despite rising defaults and delinquencies and falling card sales volume.
Nearly all lenders are seeing more customers stop making their monthly payments as the economy falters and unemployment rises.
Discover said its earnings available to common shareholders surged to $559.4 million, or $1.07 per share, during the three months ended Aug. 31. That's up from $180.1 million, or 37 cents per share, a year earlier.
The company's results were bolstered by a $472 million payment received as part of a $2.75 billion settlement of an antitrust lawsuit with Visa Inc. and MasterCard Inc., raising Discover's profit by $287 million after taxes. The lawsuit claimed MasterCard and Visa harmed Discover's business by preventing their member banks from issuing credit cards for Discover's network.
Analysts surveyed by Thomson Reuters, on average, forecast a loss of 11 cents per share for the quarter. Analyst estimates often do not include one-time items. Discover expected a profit of 52 cents per share, excluding items.
Discover shares rose 34 cents, or 2.2 percent, to $15.66 in afternoon trading.
"Clearly, the antitrust litigation settlement made for a great third quarter," said Red Gillen, an analyst with Celent, a Boston-based financial research and consulting firm. "Discover's main concern still has to be the ever-rising charge-off and delinquency rates."
During the quarter, Discover's provision for loan losses increased 4.4 percent to $380.1 million from $364.8 million a year ago. The company's charge-off rate, the percentage of debt it does not expect to be repaid, climbed to 8.39 percent from 7.79 percent in the second quarter.
Discover's managed 30-day delinquency rate rose to 5.10 percent from 5.08 percent in the prior quarter, but jumped from 3.85 percent a year earlier.
The higher percentage is reflected in the current "challenging environment," CEO David Nelms told analysts on a conference call.
"Although loan losses in the third quarter came in a bit better than we expected, we believe that we have still not quite reached peak loan losses," Nelms said, adding that Discover expects its charge-off rate to be in the range of 8.5 percent to 9 percent for the fourth quarter.
Earlier this year, Discover became a bank holding company and received $1.2 billion from the federal government under the Troubled Asset Relief Program.
The company joins hundreds of financial-services companies — including rival American Express Co. — that have gotten government capital during the financial crisis. In June, American Express said it repaid the $3.39 billion it received last fall.
Discover has yet to pay back the government.
"We do have a process that we will go through with our board and our regulators and that we have not yet reached a decision that the time is right," Nelms said.
In an interview with The Associated Press, Nelms said he was increasingly confident of a repayment. "We are very conservative," he said. "I see no benefit in rushing to do something."
During the most recent quarter, Discover card sales volume fell to $23 billion, down 7 percent from last year.
Income from Discover's third-party payments business — which processes ATM and debit transactions — fell to $27.1 million from $28.5 million a year earlier. Last year, Discover acquired Diners Club International from Citigroup Inc.
In August, Discover said its customers will soon be free of fees for charging over their credit limits.
The move comes before credit card regulations set to take effect in February limit the way credit card issuers may charge such fees. Under the legislation signed by President Obama in May, consumers must agree to pay a fee before they can charge more than their credit limit, and card issuers must tell their customers how much those fees would be.
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U.S. housing starts, permits touch 9 month high
New construction of U.S. homes and permits for future building scaled a nine-month high in August, and the number of people filing new claims for jobless benefits fell last week, proof a recovery was under way.
But a drop in groundbreaking activity in single-family homes and a rise in the number of Americans drawing long-term unemployment compensation tempered optimism that the economy would see a sharp rebound from its worst slump in 70 years.
The Commerce Department said on Thursday housing starts rose 1.5 percent from July to an annual rate of 598,000 units, a touch below market forecasts for 600,000 units.
In another report, the Labor Department said the number of workers filing new claims for jobless benefits fell by 12,000 last week to 545,000, the lowest level since early July, defying market expectations for a rise to 555,000.
Factory activity in the country's Mid-Atlantic region rose in September to the highest level since June 2007, the Philadelphia Federal Reserve Bank said. However, employment and new orders measures slipped.
"We are at that stage where an economy exits recession. The the recovery is going to be moving along due to policy initiatives and inventory restocking. It's a U-shaped recovery, with some parts a little bumpy," said Joseph Brusuelas, an economist at Moody's Economy.com in West Chester, Pennsylvania.
Data ranging from retail sales to industrial production have pointed to solid third-quarter economic growth, but questions over the sustainability of the recovery continue to linger amid stubbornly high unemployment.
In a further boost to the economy, a Federal Reserve report showed U.S. households' net worth rose by $2 trillion to $53.1 trillion in the second quarter, the first increase since before the recession began in 2007.
U.S. stocks slipped in volatile trade, as investors focused on the drop in single-family units groundbreaking activity (.N). U.S. government bond prices rose.
Single-family home construction fell 3 percent last month to a 479,000 unit rate -- after five straight monthly increases. Such homes are the largest segment of the housing market and were hardest hit by housing downturn.
Starts for the volatile multifamily segment jumped 25.3 percent to a 119,000 rate, reversing the previous month's slump. Housing starts are down 29.6 percent over the past 12 months, the Commerce Department said.
HOUSING TO CONTRIBUTE TO GROWTH
The housing market, the main trigger of the recession that started in December 2007, is showing steady signs of healing. Despite the setback for single-family homes in August, analysts expect home-building activity to contribute to economic growth this quarter.
"We expect that real residential investment grew about 30 percent annualized in the third quarter, a robust increase that would be the first quarterly rise since 2005," said Abiel Reinhart, an economist at JP Morgan in New York. "Residential investment should continue to increase over the coming year."
Activity has been supported by the government's $8,000 tax credit for first-time buyers and Federal Reserve purchases of government and mortgage related debt that have depressed home loan rates.
Treasury Secretary Timothy Geithner said on Thursday the Obama administration had not yet decided whether to extend the program when it expires at the end of November, but looking was closely looking at the issue.
The Fed's policymaking committee meets next week and debate is likely to center on a strategy to withdraw the extraordinary support the central bank is providing the economy. It is expected to leave its benchmark overnight lending rate near zero.
A survey on Wednesday showed confidence among home builders reached its highest level in 16 months in September, which bodes well for future home construction.
New building permits, which give a sense of future home construction, climbed 2.7 percent to 579,000 units in August. That compared to analysts' forecasts for 580,000 units.
Compared to the same period a year-ago, building permits were down 32.4 percent.
The Labor Department report showed the number of people still on jobless aid after an initial week of benefits increased by 129,000 to 6.23 million in the week ending Sept 5, the latest for which data is available.
It was the largest one week gain since late June and a reminder that the labor market remained fragile, though companies have significantly cut back on layoffs.
"That might be because companies are profoundly skeptical about the sustainability of the upturn," said Ian Shepherdson, chief U.S. economist at High Frequency Economics in Valhalla, New York.
"But, unless they believe the economy is about to suffer a serious broad relapse, we think they will have to reduce the rate of job losses."
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Consumer prices rise in August on higher gas prices
Consumer prices rose slightly in August due to higher gas prices, another sign the weak economy is keeping inflation in check.
Excluding volatile food and energy prices, the so-called "core" Consumer Price Index also rose slightly over the 12 months ending in August, but is well within the Federal Reserve's comfort zone. That means the central bank faces little pressure to raise its benchmark interest rate, a step it takes to ward off high inflation. The Fed has reduced the interest rate it charges banks for overnight loans to record low of nearly zero in an effort to revive the economy.
The Labor Department said Wednesday that the CPI rose 0.4 percent in August, after a flat reading in July. Wall Street economists expected a 0.3 percent increase, according to a survey by Thomson Reuters. Prices fell 1.5 percent in the past year, as gas prices dropped sharply from record levels last summer.
The core price index rose 0.1 percent, matching expectations. It rose 1.4 percent in the 12 months ending in August, the smallest increase in more than five years.
A 1.3 percent drop in the price of cars last month, the steepest fall in nearly 37 years, held back the core index. Discounts stemming from the government's Cash for Clunkers program — which provided rebates of up to $4,500 to consumers who traded in older cars for newer, more fuel-efficient models — caused the decline.
Gas prices rose 9.1 percent in August on a seasonally adjusted basis and accounted for 80 percent of the rise in the consumer price index. Still, gas prices are 30 percent below last year's record levels, when prices at the pump topped $4 a gallon.
Consumers have cut sharply back on their spending in response to the worst recession since the 1930s. That has made it difficult for retailers and manufacturers to raise prices, keeping inflation at its lowest levels in decades. Last month, the department said consumer prices fell 2.1 percent in the 12 months ending in July, the steepest drop since 1950.
Still, there are signs the economy is recovering and consumers may be willing to spend again. Retail sales jumped 2.7 percent in August, the Commerce Department said Tuesday, the biggest increase in more than three years.
And Federal Reserve Chairman Ben Bernanke said Tuesday the recession is likely over, though he noted that the economy isn't likely to grow fast enough to lower unemployment anytime soon. Most economists expect the jobless rate to top 10 percent next year, up from its current 9.7 percent.
"It's still going to feel like a very weak economy for some time," Bernanke said.
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JBS to take stake in Pilgrim's Pride in $2.8B deal
Chicken producer Pilgrim's Pride Corp. confirmed Tuesday that Brazilian beef producer JBS SA will buy a majority stake in the company in a deal that values the company at $2.8 billion.
Pilgrim's Pride has agreed to sell 64 percent of stock in the reorganized company to JBS for $800 million in cash. Existing shareholders will receive shares totaling 36 percent of the company.
In addition, the plan calls for an exit financing of $1.75 billion.
Pittsburg, Texas-based Pilgrim's Pride was the nation's largest chicken producer before it filed for bankruptcy protection late last year, hobbled by debt and high feed costs.
The sale, of which rumors surfaced earlier this month, gives JBS an entry in the U.S. poultry market, buying up a major player in the category. JBS is already one of the top producers of beef and pork in the U.S.
It's not clear if the deal will be subject to antitrust clearance. Regulators earlier this year sued to block JBS' acquisition of a major beef producer, citing concerns for consumers and producers. The $560 million deal with National Beef Packing Co. was dropped.
Under terms of the plan, all creditors holding allowed claims will be paid in full by cash or issuance of a new note. Pilgrim's Pride said if the deal is approved by the Bankruptcy Court for the Northern District of Texas, it could emerge from bankruptcy protection by December.
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Industrial production better than expected in August
Industrial companies boosted production more than expected in August, making more cars, clothing and other goods in the early stages of a broad economic recovery.
The Federal Reserve said Wednesday that output at the nation's factories, mines and utilities rose 0.8 percent in August. Economists surveyed by Thomson Reuters expected a 0.6 percent increase.
Last month's gain marked the second straight increase after the global recession dried up the appetites of customers worldwide.
Factories boosted production of cars, machinery, food products, clothing and other goods in a fairly broad-based pickup in August.
The Fed also said industrial production jumped 1 percent in July, twice as much as originally reported. Car production drove that gain.
Auto sales jumped due to the government's Cash for Clunkers program, which provided people with up to $4,500 for trading in less efficient gas guzzlers. With auto dealers facing thin inventories, manufacturers boosted production to meet a spurt in demand generated by the program.
Production at factories — the single-biggest slice of overall industrial activity — also rose for the second straight month. It posted a 0.6 percent gain in August, following a 1.4 percent rise in July.
Car production led the way, rising 5.5 percent last month. That followed a whopping 20.1 percent gain in July as General Motors and Chrysler reopened many plants that had been closed in May and June as the companies restructured and emerged from bankruptcy.
Even with production of autos and parts stripped out, manufacturing activity increased 0.4 percent last month.
Production of machinery rose 0.8 percent in August. Output for primary metals — including steel — increased 0.9 percent. Production of food, beverages and tobacco products jumped 1.6 percent. Production of apparel and leather goods rose 0.8 percent. Chemical production was up 0.7 percent.
Meanwhile, mining output rose 0.5 percent in August, following a 0.6 percent gain in July. Production at utilities jumped 1.9 percent, after a 1.6 percent drop in July as temperatures swung from an unseasonably mild to slightly warmer than usual in August.
With production rising, industrial companies idled less of their plants and equipment in August. The overall operating rate rose to 69.6 percent in, up from 69 percent in July.
Still, industrial companies are operating well below capacity. The operating capacity in August was 11.3 percentage points below its average between 1972 and 2008. A healthy level is around 80 percent.
Because companies still have a lot of their plants unused, that will be a force tamping down any inflation pressures.
Wednesday's fresh snapshot of industrial activity provides the latest evidence that the economy has entered a new phase: recovery.
Federal Reserve Chairman Ben Bernanke on Tuesday said the recession is probably over, although he warned that the pace of the recovery likely won't be strong enough to drive down the unemployment rate quickly.
Many analysts predict the economy is growing at a pace of at least 3 percent in the current July-September quarter.
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Bernanke says recession 'very likely over'
Federal Reserve Chairman Ben Bernanke said Tuesday that the worst recession since the 1930s is probably over.
Bernanke said the economy likely is growing now, but it won't be sufficient to prevent the unemployment rate, now at a 26-year high of 9.7 percent, from rising.
"The recession is very likely over at this point," Bernanke said in responding to questions at the Brookings Institution.
The Fed boss also said he is confident that Congress will enact a revamp of the nation's financial rule book to prevent a future crisis from happening.
"I feel quite confident that a comprehensive reform will be forthcoming," Bernanke said. It has been "too big a calamity" over the past year, with the near meltdown of the U.S. financial system, for Congress not to take action, he added.
President Barack Obama on Monday urged Congress to enact legislation this year.
Bernanke's speech to at Brookings was identical to the one he delivered last month at a Fed conference in Wyoming. Analysts predict the economy is growing in the current quarter, which ends Sept. 30, at an annual rate of 3 to 4 percent. It contracted at a 1 percent pace in the second quarter.
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Kroger cuts guidance as 2Q profit falls 8 pct
The Kroger Co.'s second-quarter profit fell nearly 8 percent as bargain-minded households cut spending more deeply and the grocer cut prices to hold onto shoppers.
Cincinnati-based Kroger, the nation's largest traditional grocery chain, said Tuesday that sales also fell in the quarter. It cut its earnings guidance for the full year, saying it expects continued economic weakness and customer cutbacks. The company said it's attracting more frequent shoppers who are loading more items in their carts, but buying cheaper items.
Total sales, including fuel, were $17.7 billion, down 2.2 percent from $18.1 billion a year ago. Net earnings totaled $254.4 million, or 39 cents per share, down from $276.5 million, or 42 cents per share. Lower gas prices this year at Kroger's service stations dragged down revenue, and the company said total sales without fuel were up 3.5 percent for the quarter.
Analysts surveyed by Thomson Reuters expected 44 cents per share on $18.2 billion.
Kroger shares tumbled in early trading Tuesday, down $1.67 or 7.5 percent, to $20.44.
Kroger said same-supermarket sales, a key gauge of retail strength that compares sales at stores open at least five quarters, increased 2.6 percent excluding fuel.
Kroger confirmed its full-year guidance for sales growth at established stores of 3-4 percent, without fuel, but dropped earnings guidance to $1.90 to $2 per share from earlier guidance of $2 to $2.05.
Kroger officials, who have increased shopper frequency with a variety of discounts, said they will continue their focus on long-term growth. Milk and other staples have fallen in price in the past year, and Kroger frequently offers such promotions as 10 items-for-$10 or $5 instant rebates on featured items.
"We remain on our plan. Our approach and the investments we are making continue to strengthen Kroger today and position us well for future growth," David B. Dillon, Kroger's chairman and CEO, said in a statement.
For the first half of the fiscal year, profits are up 4 percent, rising to $685.5 million, or $1.05 a share, from $662.5 million, or $1 per share last year. Sales are down to $40.5 billion from $41.2 billion.
Kroger operates 2,470 supermarkets and multi-department stores in 31 states under two dozen local banners that include Ralphs, Fred Meyer, Food 4 Less, Fry's, King Soopers, Smith's, Dillons, QFC and City Market.
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Stocks mixed after retail sales, earnings reports
Stocks traded in a narrow range early Tuesday as investors weighed mixed signals on the economy.
A report on August retail sales beat expectations, but earnings from Best Buy and Kroger disappointed investors.
The Commerce Department said retail sales climbed 2.7 percent last month, faster than the 2 percent jump expected by economists polled by Thomson Reuters. Consumers are considered a key to any economic recovery as their spending accounts for more than two-thirds of all economic activity.
Excluding auto sales, which were boosted by the government's popular Cash for Clunkers program, retail sales rose 1.1 percent, topping the 0.4 percent increase expected.
Meanwhile, electronics retailer Best Buy reported worse-than-expected fiscal second-quarter results as sales fell at established stores. However, the company raised its profit and sales forecast for the year, saying customer traffic is stabilizing. Grocery store chain Kroger Co. also reported earnings that fell short of analysts expectations and cut its earnings outlook.
Separately, the Labor Department said inflation at the wholesale level increased 1.7 percent in August, more than double the 0.8 percent jump economists had forecast — a sign inflation fears might becoming to fruition.
Another government report showed business inventories fell 1 percent in July for the 11th straight month. The decline in inventories has put a drag on production at factories as manufacturers slow their work to match a slowdown in demand from businesses. Business sales rose 0.1 percent.
The U.S. market has risen sharply throughout the spring and summer on hopes of a recovery. Now investors are looking for evidence of actual growth, having slowed the market's surge as they hunt for signs of improvement.
The Dow Jones industrial average fell 12.39, 0.1 percent, to 9,614.41. The Standard & Poor's 500 index dipped 2.41, or 0.2 percent, to 1,046.93, while the Nasdaq composite index rose 0.16, or 0.01 percent, to 2,091.94.
About seven stocks fell for every six that rose on the New York Stock Exchange, where volume came to 259.2 million shares.
In other trading, the Russell 2000 index of smaller companies slipped 0.87, or 0.2 percent, to 599.16.
Stocks rose moderately Monday, recovering from an early slide that was driven by worries over growing trade tensions between the U.S. and China. Investors seized on the Monday morning dip to buy into utility and financial companies. The Dow rose 21 points, and major indexes hit their highest levels in nearly a year.
Bond prices fell following the economic data. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 3.45 percent from 3.43 percent late Monday.
Oil prices rose 84 cents to $69.70 a barrel on the New York Mercantile Exchange.
The dollar rose against the euro and the British pound, while gold prices fell.
Overseas, Japan's Nikkei stock average rose 0.2 percent. In afternoon trading, Britain's FTSE 100 rose 0.8 percent, Germany's DAX index rose 0.5 percent, and France's CAC-40 added 0.9 percent.
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Economy still troubles most Americans
One year after Wall Street teetered on the brink of collapse, seven out of 10 Americans lack confidence the federal government has taken safeguards to prevent another financial industry meltdown, according to a new Press-GfK poll.
Even more — 80 percent — rate the condition of the economy as poor and a majority worry about their own ability to make ends meet. The pessimistic outlook sets the stage for President Barack Obama as he attempts to portray the financial sector as increasingly confident and stable and presses Congress to act on new banking regulations.
The public sentiment also poses a challenge to central elements of Obama's governing agenda. Half of those surveyed said deficit reduction should be a national priority over increased spending on health care, education or alternative energy.
"I know a lot of people who don't have health care and really can't afford it," said Judy Purkey, a 57-year-old grandmother from Morristown, Tenn., who has raised four grandchildren and is living on disability payments. But she added: "The economy is so bad. You've heard the expression getting blood out of a turnip? — Well, that's what's going on."
The president, in a CBS interview that aired Sunday on "60 Minutes," acknowledged the public's quandary.
"This is a very difficult economic environment. People are feeling anxious," he said. "And I think it is absolutely fair to say that people started feeling some sticker shock."
Still, Obama generally avoided public blame for the recession or the condition of the banking sector.
Only one out of five surveyed said Obama bore responsibility for the recession; 54 percent blamed former President George W. Bush and 19 percent blamed former President Bill Clinton.
Financial institutions, however, bore the brunt of the criticism — 79 percent of those surveyed said banks and lenders that made risky loans deserve quite a bit of the blame. Sixty-eight percent held the federal government responsible for not adequately regulating banks and 65 percent blamed borrowers who could not afford to repay loans.
In a glimmer of good news for the administration, 17 percent of those surveyed said the government's massive economic stimulus has improved the economy, a 10 percentage point increase over July. Nearly six out of 10, however, said they are not confident that $787 billion that Congress approved to lower taxes and inject spending into the economy will do any good.
The White House has been promoting the stimulus package as a job creator and job saver that has helped keep unemployment from rising above its current 9.7 percent level — the highest since 1983.
Michael Painter, a 38-year-old unemployed plumber from Orlando, Fla., said that while he believed that spending package would ultimately stimulate the economy, it had yet to help him or his laid-off wife and teenage daughter.
He said he approved of Obama's job performance so far, but not Congress'. "The people in Congress need to quit bickering about party issues and start worrying about people issues."
The Obama administration also has begun to portray the financial sector in more upbeat terms, eager to make the case that government interventions begun under then-President Bush and continued, altered or expanded under Obama have brought stability to the markets.
Obama plans to deliver a speech Monday — the anniversary of Lehman Brothers' bankruptcy — to outline the administration's achievements and press Congress to enact changes in bank regulations.
But the AP-GfK poll illustrates the difficulty he faces.
More Americans worry about facing big, unexpected medical expenses now than they did in July — up 7 percentage points to 68 percent among those polled. Likewise, more worry that the value of their stocks and retirement investments will drop — up 4 percentage points from July to 68 percent.
In October, then-President Bush pushed a $700 billion financial rescue package through Congress on the condition that only half could be spent without further congressional authority. Obama, upon becoming president in January, succeeded in getting the second amount released, despite growing apprehension among lawmakers about the wisdom of such a bailout.
Obama has repeatedly said that the rescue of the financial sector would be incomplete without a new regulatory regime that would prevent a recurrence of the crisis. Obama has sent the outlines of possible regulation to Congress. Key banking lawmakers in the House and Senate have promised Obama legislation by the end of the year, but there is vigorous debate over key elements of Obama's plan, including a new consumer finance protection agency and the designation of the Federal Reserve as the main overseer of large institutions that could pose risks to the system.
The survey of 1,001 adults with cell and landline telephones was conducted from Sept. 3-8. It had a margin of sampling error of plus or minus 3.1 percentage points.
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