Finance & Business World

Prices of goods imported into the U.S. fell in July for the first time in six months as the cost of commodities such as petroleum, chemicals and natural gas decreased.

The 0.7 percent decline in the import price index followed a revised 2.6 percent increase the prior month that was smaller than previously estimated, according to a Labor Department report today in Washington. Prices excluding fuels fell 0.2 percent in July.

The first drop in oil costs since January takes pressure off of companies which were unable to raise prices because of low consumer demand, keeping inflation subdued. The Federal Reserve yesterday left the benchmark interest rate between zero and 0.25 percent, and said economic conditions mean the rate will stay “exceptionally low” for an “extended period.”

“Inflation truly is a down-the-road concern right now,” Guy Lebas, chief economist and fixed-income strategist with Janney Montgomery Scott LLC in Philadelphia, said before the report. “Import prices are a very commodity-heavy measure of inflation and oil prices were down.”

Economists forecast prices would fall 0.5 percent, according to the median of 49 responses in a Bloomberg News survey, after a previously reported 3.2 percent increase in May. Estimates ranged from a drop of 3 percent to a gain of 1.9 percent.

Today’s report showed that compared with a year earlier, prices of imported goods fell a record 19 percent, after an 18 percent year-over-year decline in June. Excluding petroleum, prices were 7.3 percent lower in the 12 months ended in July.

Price Gauges

The import-price index is the first of three monthly price gauges from the Labor Department. The government is scheduled to release the consumer price report tomorrow, followed by wholesale prices on Aug. 18.

Fed policy makers yesterday committed to keeping interest rates low to secure an economic recovery after wrapping up a two-day meeting in Washington.

The price of imported petroleum and petroleum products decreased 2.8 percent in July. Prices were 50 percent lower than a year earlier.

Recent futures indicate oil costs may be higher in August. Crude oil futures on the New York Mercantile Exchange closed at $71 fast cash.64 a barrel yesterday after averaging $64.33 in July.

A slumping dollar may also boost import prices in coming months. The greenback was down 10 percent through last week against a trade-weighted basket of currencies of major U.S. trading partners since reaching a five-year high in March.

Capital Goods

Today’s report showed the cost of imported capital goods, such as generators, machinery and trucks, increased 0.2 percent last month, the biggest gain in a year, compared with a 0.1 percent drop the prior month. Consumer goods excluding automobiles fell 0.4 percent and were down 1.2 percent over the last 12 months, the biggest year-on-year drop since June 2002.

Prices of imported automobiles, parts and engines rose 0.1 percent.

Prices of goods from China fell 0.2 percent, those from Japan rose 0.1 percent and those from the European Union rose 0.2 percent. Products from Latin America cost 1.2 percent less.

U.S. export prices fell 0.3 percent after increasing 1 percent the prior month. Prices of farm exports fell 4.9 percent, while those of non-farm exports rose 0.2 percent.

The U.S. trade deficit widened less than forecast in June, reflecting a second straight gain in exports spurred by a pick- up in economies around the world.

Price Drops

Huntsman Corp., the chemical maker that collected $1.4 billion in cash settlements after a failed merger, said Aug. 6 that average prices in the second quarter declined 22 percent from a year earlier and sales volumes dropped 18 percent.

Compared with the first three months of the year, prices fell 1 percent and demand dropped 11 percent, the company said.

Competition from rival Altria Group Inc. pushed Reynolds American Inc. to lower prices of its Kodiak snuff brand in the second quarter. The company lowered the price by 72 cents a can April 1, following a move by Altria to decrease distributors’ list price of Skoal and Copenhagen by 62 cents a can. Reynolds and Altria are the country’s two biggest tobacco companies.

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Bank of Japan Governor Masaaki Shirakawa said any recovery in the world’s second-largest economy is likely to be weak because there’s no guarantee that demand will gain momentum once global stimulus programs fade.

“Even if we have a recovery, I don’t think its strength will be impressive,” Shirakawa told reporters in Tokyo today after his board kept the key interest rate at 0.1 percent. “I can’t be confident about the strength of final demand after inventory adjustments and policy measures run their course.”

The Bank of Japan said it remains concerned about “downside risks to economic activity and prices” even as the country’s deepest postwar recession abates. While exports and production are improving, spending by companies and consumers remains sluggish and the outlook is “attended by a significant level of uncertainty,” the central bank said.

“The decision to keep the current rate reflects how careful and conservative the central bank remains about the economic recovery,” said Susumu Kato, chief economist in Tokyo at Calyon Securities, the investment banking unit of Credit Agricole SA. “The bank won’t likely raise the rate at least until late 2010.”

The yen rose to 96.79 per dollar at 6 p.m. in Tokyo from 97.15 yesterday after reports showed Chinese industrial output grew less than expected and exports fell, spurring demand for the relative safety of Japan’s currency. The yield on 10-year government bonds fell one basis point to 1.445 percent.

No New Steps

Shirakawa and his colleagues refrained from unveiling new measures a month after they extended credit-easing programs until the end of 2009. The central bank’s rate decision was expected by all 22 economists surveyed by Bloomberg News.

The policy board said the economy has “stopped worsening,” leaving its view unchanged from a month ago. Investment by companies is “declining sharply” and household consumption “remains generally weak amid the worsening employment and income situation,” it said in a statement.

The government also left its monthly economic assessment unchanged today, saying it’s “picking up recently,” yet conditions are still “difficult.” Prime Minister Taro Aso’s ruling Liberal Democratic Party trails the opposition Democratic Party of Japan in polls ahead of an Aug. 30 election.

Aso’s 25 trillion yen ($262 billion) in stimulus measures helped consumer confidence climb for a seventh month in July, a Cabinet Office report showed today no fax payday loans. More than $2 trillion in government spending worldwide have helped to ease the worst global recession since the Great Depression.

Return to Growth

Japan’s economy probably expanded 3.9 percent in the three months ended June 30 after contracting for four quarters, analysts predict a report will show next week.

Even so, growth may not be sustained because companies still have spare capacity and employees.

“These excesses will continue to weigh on consumer spending and capital investment,” said Seiji Shiraishi, chief economist at HSBC Securities Japan Ltd. in Tokyo. Japan’s jobless rate climbed to a six-year high of 5.4 percent in June.

Shirakawa said that while consumer prices are falling at a faster pace, that’s unlikely to snowball.

“We don’t see a risk of a deflationary spiral now, however price declines have accelerated in recent months, and that warrants close and careful monitoring,” he said.

Deflation Forecasts

Policy makers may forecast later this year that deflation will extend into 2011, and economists say that will force them to prolong their policy of keeping rates near zero. Consumer prices excluding fresh food slid a record 1.7 percent in June.

Shirakawa said prices are falling worldwide because of a dearth of demand and excess supply in the wake of the global economic crisis. It will take “considerable time” before price drops moderate, he said.

China’s exports slumped 23 percent in July from a year earlier and factory output grew a less-than-expected 10.8 percent, government reports showed. Elsewhere in Asia, the Bank of Korea left its benchmark rate at a record low of 2 percent on signs of a recovery. Singapore’s economy expanded at an annual 20.7 percent pace last quarter, revised figures showed.

Japan’s key rate will stay unchanged at least through 2010, according to 12 of 16 economists surveyed by Bloomberg News. The Bank of Japan last lowered the rate in December and has since begun purchasing corporate debt and providing unlimited loans backed by collateral to lenders. The central bank last month extended the credit programs by three months to Dec. 31.

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A below-average monsoon may shave as much as one percentage point off India’s economic growth this year, an adviser to Prime Minister Manmohan Singh said.

“The monsoon will have an effect, but not as devastating as it would have been in the past,” said Raghuram Rajan, who is also a professor of finance at the University of Chicago. “Now hopefully it takes a fraction of a percentage point or a percentage point off growth, which still looks reasonably healthy.”

The weather office today lowered its forecast for monsoon rainfall for a second time this season, saying the rain in the June-September season will be 87 percent of the average between 1941 and 1950, compared with a 93 percent forecast on June 24, said Ajit Tyagi, director general at the India Meteorological Department.

India’s monsoon rain, the main source of irrigation for the nation’s 235 million farmers, were 28 percent deficient as of Aug. 8, threatening harvests of crops such as sugar cane and rice. A normal monsoon is key to Prime Minister Singh’s efforts to push economic expansion back to a 9 percent pace and cool prices of essential commodities such as sugar and lentils.

South Asia’s largest economy may now grow about 6 percent this fiscal year, said Rajan, a former chief economist at the International Monetary Fund.

Indian stocks declined today, with the Bombay Stock Exchange’s Sensitive Index falling 0.5 percent at 11:51 a.m. in Mumbai on concern below-average monsoon rainfall may slow the country’s economic growth.

Rural Weakness

“What a monsoon does is create wide bands around any forecast,” Rajan said in an interview in Kuala Lumpur yesterday, ahead of the World Capital Markets Symposium starting today. “The weakness in the rural areas will be offset by urban growth.”

India now aims to increase production of winter-sown crops to compensate for a possible shortfall in summer-sown rice, Singh said last week. The area under rice cultivation, the worst hit by delayed rain, has declined by 15 million acres, he said no teletrack payday loans.

Rajan said India’s central bank should think “carefully” about whether it should maintain an expansionary monetary policy, predicting less-than-normal monsoon rain and government payments to villages through a national employment-guarantee scheme could spur food-price inflation.

Food-Price Inflation

“Food-price inflation especially catches the eyes of politicians,” he said, declining to give an inflation forecast. “The large government deficit could play a role down the line and it shouldn’t appear that the central bank is going to accommodate that on its balance sheet,” he said.

India’s benchmark wholesale-price index declined 1.58 percent in the week to July 25 from a year earlier after falling 1.54 percent in the previous week, the government said Aug. 6. That was the eighth straight weekly decline.

The current negative spell of inflation shouldn’t be interpreted as deflation as there is no evidence of demand contraction and food-price inflation remains “elevated,” Central Bank Governor Duvvuri Subbarao said last month.

Inflation has slowed from a 16-year high of 12.91 percent in August 2008 as oil prices fell from an unprecedented $147.27 a barrel in the previous month. Global crude prices have gained more than 50 percent this year, rekindling inflation concerns.

India’s budget deficit is likely to widen to 6.8 percent of gross domestic product in the fiscal year to March 2010 as the government seeks to borrow an unprecedented 4.51 trillion rupees ($94 billion) this year to fund spending on creating more rural jobs and building roads, ports and utilities.

Subbarao, who last month left borrowing costs unchanged at record lows, said a higher deficit may lead to inflation and require the central bank to “reverse” its expansionary policies.

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Bank of England Governor Mervyn King is betting that he can keep pumping money into the economy without an outbreak of inflation once growth returns.

The central bank yesterday added 50 billion pounds ($84 billion) to its asset purchase plan, taking it beyond the previous limit granted by the Treasury. Economists say King’s move risks stoking excessive inflation as the bank pumps a total of 175 billion pounds into the economy, equivalent to 12 percent of gross domestic product.

“It’s a gamble,” said Peter Dixon, a London-based economist at Commerzbank AG, Germany’s second-biggest bank. “The more we throw at this problem, the bigger the potential exit strategy risks will be.”

The Bank of England said yesterday that Britain’s recession has been deeper than officials anticipated. Deputy Governor Charles Bean warned in July that the bank risks stoking inflation if it waits too long before withdrawing stimulus and King has said that the timing of an exit strategy will still be a “tricky judgment.”

The pound has dropped 1.4 percent against the dollar since yesterday’s decision. The U.K. currency traded at $1.6743 as of 10:34 a.m. in London. The 10-year gilt yield has fallen 15 basis points to 3.678 percent. Eight of 12 primary dealers that bid at government debt auctions had predicted the central bank would announce a pause yesterday.

ECB Contrast

The scale of King’s commitment contrasts with the European Central Bank, which has so far only bought 5.1 billion euros ($7.3 billion) in covered bonds and is focusing its emergency measures on pumping money into the economy through refinancing operations.

“We are not in a situation where the instruments we have utilized are complicated and would hamper an exit,” ECB President Jean-Claude Trichet said in an interview on Bloomberg Television in Frankfurt yesterday. “We chose instruments that are easy to exit.”

Inflation in the U.K. will be the fastest in the Group of Seven nations next year, which may force the Bank of England to raise interest rates before other central banks, the Paris-based Organization for Economic Cooperation and Development predicts.

Producer prices in Britain unexpectedly rose 0.3 percent last month after manufacturing picked up the previous month, data from the Office for National Statistics showed today.

The bank said yesterday that the pound’s weakness has put “upward pressure” on consumer prices. The U.K. currency has fallen 9.6 percent from a year ago against a basket of currencies of Britain’s major trading partners.

Slowing Inflation

U credit reports free.K. central bank officials are for now emphasizing that deflation remains the economy’s bigger threat. They predicted in May that inflation may slow below 1 percent in the fourth quarter and will release new forecasts on Aug. 12. The projections may show whether the bank has become more concerned that inflation will be even slower.

The inflation rate fell to 1.8 percent in June, dropping below the bank’s 2 percent target for the first time since September 2007. The government’s former inflation measure, the retail price index excluding mortgage interest payments, has already dropped to 1 percent.

Bean told the BBC last month that “we’re not going to get inflation without having had a recovery first,” and that “we’ll get inflation if we pump too much extra money into the economy and then we don’t withdraw it fast enough.”

Outstanding Debt

The bank’s move has now left it committed to buying up as much as 22 percent of the total amount of outstanding U.K. government bonds.

“It’s an enormous amount now,” said Neville Hill, an economist at Credit Suisse Group in London and a former U.K. Treasury official. “They’re over-clubbing it. This means they think the consequences of downside risks materializing are just so severe that it’s better to play along to the upside risks.”

King’s move may nevertheless help Prime Minister Gordon Brown, who is trying to ensure the economy revives before national elections which he must call by June next year.

“If it helps support a recovery, it’s helpful for the government,” said Jeavon Lolay, an economist at Lloyds Banking Group Plc in London.

Some economists say that the U.K. recession is deep enough to curb inflation. The slump has shrunk the economy by 5.7 percent, compared with a total 6 percent drop in the contraction that ended in 1981. Royal Bank of Scotland Group Plc today reported a first-half loss as it set aside 7.52 billion pounds to cover bad loans and declining asset values.

“I don’t think it’s a gamble,” said Andrew Milligan, head of global strategy at Standard Life Investments Ltd. in Edinburgh and a former U.K. Treasury official. “I see little harm in expanding quantitative easing at this time. We’ve stopped a multi-year recession and have generated signs of a recovery. The damage is going to take time to repair, and unconventional policies are warranted.”

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Just as banks from JPMorgan Chase & Co. to Deutsche Bank Securities Inc. rushed to raise their forecasts for U.S. growth in coming quarters, Nobel laureate Edmund Phelps warned the economy is in for a “long slog.”

The divergence emerged after the Commerce Department said July 31 the economy has now contracted the most since the 1940s. Benchmark revisions to the department’s National Income and Product Accounts also showed consumer spending has tumbled 2 percent since the end of 2007, a magnitude unseen since the 1980 slump that ushered President Jimmy Carter out of office.

The deeper decline sets the stage for a faster recovery in the second half of the year, said Bruce Kasman at JPMorgan and Joseph LaVorgna at Deutsche Bank. It’s what comes later that worries Phelps and others, including Mark Gertler, the New York University economist who was a research partner of Ben S. Bernanke before he became Federal Reserve chairman.

“I’m not convinced that there’s going to be another wave of innovation in the offing” to propel growth, leaving the economy facing a “long slog,” said Phelps, a professor at Columbia University in New York. Gertler said “financial headwinds” will restrain growth by limiting credit to households and companies.

Phelps foresees real, or inflation-adjusted, gains in gross domestic product of 2.5 percent in the years following the current slump. That’s weaker than the average expansion rate during any postwar decade except the current one, in which growth has been pulled down by two recessions. Growth averaged better than 3 percent in the 1990s, 1980s and 1970s, and exceeded 4 percent in the 1960s.

Jobs Outlook

“Employment is going to be on the weak side” for several years, added Phelps, who won the 2006 Nobel economics prize for his theories on the interplay between inflation expectations and joblessness.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said last week that corporate profits will be depressed because GDP, unadjusted for inflation, will grow at a 3 percent pace in coming years, compared with a 5 percent to 7 percent average the past 15 years. He cited “massive overcapacity” — from retail shopping outlets to automobile production volume — as a legacy of the downturn.

Some analysts countered that the recession, caused by a bust in homebuilding and a credit crunch that has seen financial institutions lose or write down $1.5 trillion so far, hasn’t hurt the economy’s underlying potential.

‘Robust’ Recovery

“Nothing here changes our view that the economy is set to recover in a pretty robust way,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. in New York, who previously researched consumer spending at the Fed in Washington. Maki’s colleague Tim Bond, head of global asset allocation in London, said in a report last week the “prevailing consensus forecast of a very weak recovery is at odds with history.”

Maki said U unique business cards.S. GDP will increase 3.4 percent in the fourth quarter of 2010 from 2009. Deutsche Bank, on the same basis, predicts 3.2 percent growth next year.

Gary Becker, another Nobel laureate in economics, counted himself among those “a little more optimistic” about the outlook. Demand from China, Brazil and other emerging markets will help aid U.S. growth, and credit flows are poised to recover because of the Fed’s actions, he said. Hundreds of billions of dollars in so-called excess reserves that banks have on deposit at the Fed give lenders fuel to extend lending.

Becker’s Worry

“If the economy picks up as I expect it will” there will be “a big inflationary potential,” said Becker, who won the Nobel economics prize in 1992 for applying economic principles beyond markets. “We will see considerable inflation,” he warned, and said he’s skeptical whether the central bank will be able to address the threat adequately, given likely “political pressure” to hold off.

Kasman, chief economist at JPMorgan in New York, raised his estimate for the expansion in the current quarter to 3 percent — the best performance in two years, and up from a prior estimate of 2.5 percent. LaVorgna, chief U.S. economist at Deutsche Bank in New York, lifted his average growth forecast for the second half of 2009 to 2.25 percent from 0.5 percent.

Some economy-watchers warned that weaker growth is poised to undermine the nation’s long-term fiscal health.

“It is worrisome how we can finance the deficit without having inflation,” said Allan Meltzer, a Fed historian and economics professor at Carnegie Mellon University in Pittsburgh.

Budget Deficit

Bernanke, in congressional testimony last month, urged Congress and the Obama administration to lay out a plan that would bring the budget deficit down to a “sustainable” level of 2 percent to 3 percent of GDP.

The International Monetary Fund predicted last week that the U.S. will fall short of that goal for at least five years, forecasting a ratio of 4.7 percent of GDP in 2014.

Another threat to the U.S. outlook is that the slump is in danger of returning next year, according to some economy- watchers.

Former Fed Chairman Alan Greenspan, speaking on ABC’s “This Week” program yesterday, warned that a “double dip” — or return to contraction — is a risk because house prices have yet to stabilize. A further decline of 10 percent in home values may trigger another wave of mortgage foreclosures, he said.

Treasury Secretary Timothy Geithner, also speaking on ABC, said the threat of a double dip is “something we’re very focused on.” The Obama administration is committed to maintain its stimulus and credit-providing programs “until we’re very confident we have a strong, private sector-led recovery in place.”

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The U.S. economic recovery is likely to be “gradual” and officials should be prepared to inject more monetary and fiscal stimulus should the rebound falter, the International Monetary Fund said.

“If downside risks materialize, additional credit easing and a strengthened commitment to maintaining a highly accommodative monetary stance could be considered,” the IMF’s board said in a statement released today. “Additional fiscal stimulus could also be used, although the immediate focus should be on implementing the current fiscal measures and monitoring their impact.”

Directors welcomed the U.S. authorities’ “strong and comprehensive policy measures” that have helped ease the pace of economic contraction. Still, they said they expect a “gradual” recovery, with risks “tilted to the downside” and warned that potential growth “could remain well below past trends for a considerable period.”

Gross domestic product shrank at a slower pace in the second quarter, contracting at a less-than-projected 1 percent annual rate after shrinking 6.4 percent in the prior three months, the most in 27 years, Commerce Department figures showed today in Washington. Revisions showed the economic downturn last year was even deeper than previously estimated.

The IMF directors’ statement was released as part of the annual “Article IV” assessment of the U.S. economy.

Recovery Timeline

Charles Kramer, head of the IMF’s North America division, said in an interview on Bloomberg Television that the lender predicts the world’s largest economy will start “recovering decisively” by the middle of next year. The nation’s unemployment rate will peak above 10 percent in 2010, he said.

The IMF forecasts the world’s largest economy will contract 2.6 percent this year before expanding 0.8 percent in 2010. In the staff report that directors used as a basis for discussion, the fund said the dollar was “moderately overvalued, although the assessment was subject to unusually high uncertainty cash advances.”

At the same time, directors called it a “key priority” to craft “comprehensive exit strategies to unwind the extraordinary crisis-driven interventions, once a sustainable recovery is under way.” Clear communications on such plans, combined with international coordination, would help market confidence, they said.

The U.S. needs an “ambitious medium-term fiscal consolidation” with adjustment that “would most likely need to focus on the revenue side.”

Fiscal Shortfall

The U.S. budget gap, at 13.5 percent of gross domestic product, will be the largest of the world’s top 20 advanced and emerging economies, the IMF said in a report yesterday.

A transfer to the U.S. Treasury of the Federal Reserve’s so-called Maiden Lane companies, the three entities it set up in 2008 to hold investments acquired in the rescues of Bear Stearns Cos. and American International Group Inc., “would reduce its exposure to credit risk,” the IMF said.

While financial conditions have improved, directors called cleaning balance sheets “a priority,” adding that “more steps might be needed to encourage writedowns of underwater mortgages.”

Restarting private securitization is also “crucial,” the fund said, supporting the government’s proposals such as “improving disclosure about the ratings process and underlying credit quality” or “differentiating ratings for securitized products.”

The directors commended the U.S. administration’s proposals for strengthening regulation, seeing “scope for further actions.” Some directors “also encouraged consideration of regulations aimed at discouraging size and complexity.”

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