Business News: June 2009

A monthly Bloomberg News survey indicates that the U.S. jobless rate will reach 9.4 percent this year and remain elevated through 2011, threatening the nation’s longer-term growth potential.  This peak in unemployment surpasses the 8.8 percent reported last month from a median of 54 projections between March 2 and March 9. The survey shows average unemployment rates for the next two years to exceed the 25-year high of 8.1 percent.

 

“Even if things become less apocalyptic it doesn’t mean the unemployment rate will come down,” said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. “It’ll be a long-term restraint on growth.  Even when the economy gets back to normal, what’s normal is going to be defined down.”  The survey shows the Obama administration’s forecasts, submitted with its budget proposal last month, are out of kilter with most analysts.  The White House projected the jobless rate will decline to 7.9 percent next year; analysts say a worse performance means President Barack Obama’s $787 billion stimulus plan may not prove sufficient.

 

The Swine Flu Influenza has reportedly driven up stocks for companies such as CVS, Rite Aid and Walgreens as people buy up face masks, antibacterial soap and other precautionary products. Sales and profits have increased dramatically for these companies as a result.

 

A slump in global trade and commodity prices hurts poor countries, increasing the threat of political conflict and even war, Strauss-Kahn said in a speech to African central bank governors and finance ministers in Dar es Salaam, Tanzania.  “The IMF expects global growth to slow below zero this year, the worst in most of our life time,” Strauss-Kahn said. “Continuing de-leveraging by world financial institutions, combined with the collapse in consumer and business confidence is depressing domestic demand across the world.”  The IMF forecast in January that the global economy would expand 0.5 percent this year. The World Bank stated in a March report that the international economy would shrink for the first time since World War II and trade to decline by the most in 80 years.

 

Tucked away on page 122 of President Obama’s budget is a proposal that has the fast money crowd up in arms: “Tax carried interest as ordinary income.”  It sounds like something only a certified public accountant would care about. But in fact, Obama’s administration wants to close one of the biggest tax loopholes on Wall Street—one nobody seemed to notice in good times, when everyone was minting money.  As things stand now, private equity firms and hedge funds get a much better deal from the taxman than most. They are taxed at a mere 15% — the capital gains rate — on most of their income, instead of the higher regular income-tax rate.  For the past two years, they have scrambled to keep it that way. And with the economy swooning, the industry was hoping that lawmakers might just forget about this little tax giveaway.  How do they justify it? Private equity types and other investors argue that they’re in the business of investing, so they should be taxed just like investors who make money in the public markets. The “carried interest” in question—the bulk of these firms’ profits refers to the 20% cut of profits that they take when they sell or exit investments.

 

This tax deal has always struck a lot of people as too nice.  A study commissioned last year by a Congressional committee estimated that executives would save $30 billion in taxes over the next 10 years if the rules did not change—before the current financial downslide started.  Buyout firms and executives mostly invest using other people’s money, like pension funds.  So their 20% cut of profits is closer to a commission than a true capital gain.  

 

According to the U.S. Bureau of Labor Statistics the unemployment rate in the U.S. has risen to 8.9 percent in April 2009  from 8.5 percent in March 2009.  The nations unemployment rate was 5 percent just one year ago in April 2008. It is estimated that since the recession started in December 2007, 5.7 million jobs have been lost.

 

The New York Times Company said that it had raised $225 million through a sale and leaseback of part of its headquarters building, one in a series of moves to pay down its debts and increase its cash cushion during a drastic slump for the newspaper industry.  The sale-leaseback agreement with W.P. Carey & Company, an investment firm, might last as long as 15 years, but  it gives the Times Company the option of buying the building back after 10 years for $250 million, an option both sides expect the Times Company to exercise. W.P. Carey specializes in corporate financing, not real estate, and both companies characterized the agree- ment more as a loan secured by the building than as a real-estate transaction.  “W.P. Carey was able to clearly understand our company, our facility and our objectives,” said Janet L. Robinson, the president and chief executive of the Times Company, in a statement.  In the last few months, the company borrowed $250 million from the telecommunications billionaire Carlos Slim Helú, suspended its dividend for the first time in four decades as a publicly traded company searched for a buyer for its minority stake in the Boston Red Sox team and any related assets.  At the end of 2008, the Times Company was $1 billion in debt. It still faces a principal pay- ment on long-term borrowing of $49.5 million due in November, plus a payment of $250 million due in March 2010.  The company spent $600 million on a building on Eighth Avenue in Midtown Manhattan, which was completed in 2007. The Times Company owns 58%, and its development partner, the Forest City Ratner Companies, owns the rest.

 

Dow Chemical and Rohm finally settle a dispute over a $15.3 billion merger. This settlement is a victory for Rohm investors, who happily watched their shares skyrocket 40 percent as the long-awaited resolution to the contested deal appeared more likely.

 

Within the United States household wealth has fallen drastically by trillions of dollars. The average American house holds lost an astonishing nine percent of their wealth in the last three months of 2008, the most that national income has fallen in more than 57 years.

 

China is growing ever more concerned by the day regarding U.S. investments. It seems that the United States government’s largest creditor is “worried” about its investments in the U.S. and wants assurances that their investments will be safe, Prime Minister Wen Jiabao says.

 

Japan has promised more spending, and increased backing of the United States’ policies.  Siding with the United States on the urgent need for aggressive measures, Prime Minister Taro Aso promised an increased third round of spending to help the economy emerge from the current recession.

 

The failure of supplier companies, such as American Axle, Lear and Visteon, could disrupt current auto  production and plunge GM, Chrysler and Ford into even further financial straits which many see coming in the form of bankruptcy and additional government bailouts.  This also means a loss of auto industry jobs at foreign-owned auto plants that rely on some of the same supplier companies is right around the corner.

 

Staples and its competitor Office Depot have designed their own stimulus packages to aid anxious job hunters in their search. Staples is offering 20 free single-sided resume copies and 40 free instant business cards through June 13. In turn, Office Depot has joined in by offering 25 single-sided resume copies and five domestic faxes at no cost until May 30.