Finance & Business World

A Greek government inquiry uncovered a series of swaps agreements with securities firms that may have allowed it to mask its growing debts.

Greece used the swaps to defer interest repayments by several years, according to a Feb. 1 report commissioned by the Finance Ministry in Athens. The document didn’t identify the securities firms Greece used. The government turned to Goldman Sachs Group Inc. in 2002 to obtain $1 billion through a swap agreement, Christoforos Sardelis, head of Greece’s Public Debt Management Agency between 1999 and 2004, said in an interview last week.

“While swaps should be strictly limited to those that lead to a permanent reduction in interest spending, some of these agreements have been made to move interest from the present year to the future, with long-term damage to the Greek state,” the Finance Ministry report said. The 106-page dossier is now being examined by lawmakers.

European Union leaders last week ordered Greece to get its deficit under control and vowed “determined” action to staunch the worst crisis in the euro’s 11-year history. Standard & Poor’s and Fitch Ratings are questioning Greece over its use of the swap agreements, said two people with direct knowledge of the situation, who declined to be identified because the talks are private.

“Greece used accounting tricks to hide its deficit and this is a huge problem,” Wolfgang Gerke, president of the Bavarian Center of Finance in Munich and Honorary Professor at the European Business School, said in an interview. “The rating agencies are doing the right thing, but it may be too little too late. The EU slept through this.”

Euro Criteria

Lucas van Praag, a spokesman for New York-based Goldman Sachs, the most profitable securities firm in Wall Street history, didn’t respond to e-mails seeking comment.

Greece, whose burgeoning budget deficit caused it to fail the criteria for joining the single European currency in 1999, joined the Euro in 2001. Member nations had to reduce their budget deficit to less than 3 percent of gross domestic product and trim national debt to less than 60 percent of GDP.

Greek Prime Minister George Papandreou, who came to power in October after defeating two-term incumbent Kostas Karamanlis, more than tripled the 2009 deficit estimate to 12.7 percent. Greek officials last month pledged to provide more reliable statistics after the EU complained of “severe irregularities” in the nation’s economic figures free business cards.

‘Political Interference’

The Finance Ministry report blamed “political interference” for the collapse of credibility in Greece’s statistics. There were “serious weaknesses” in data collection, especially with spending figures, as information often came from second-hand sources, the report found.

The Goldman Sachs transaction consisted of a cross-currency swap of about $10 billion of debt issued by Greece in dollars and yen, Sardelis said. That was swapped into euros using a historical exchange rate, a mechanism that implied a reduction in debt and generated about $1 billion of funding for that year, he said. Eurostat, the EU’s Luxembourg-based statistics office, and the rating companies were both aware of the plan, he said.

Officials for Eurostat couldn’t be reached for comment. Officials for Fitch, Moody’s and Standard & Poor’s didn’t return calls seeking comment outside regular office hours yesterday.

‘Deal Restructured’

Sardelis said the agreement was restructured “a couple” of times while he was still in office. He left in 2004 and joined Banca IMI, the investment-banking unit of Italy’s Intesa Sanpaolo SpA’s. He said the fees, or the spread that Goldman Sachs was paid on the contract, were “reasonable.” The New York-based firm made about $300 million from the agreement, the New York Times reported Feb. 14.

Goldman Sachs bankers including President Gary Cohn traveled to Athens in November to pitch a deal that would push debt from the country’s health-care services into the future, the newspaper reported, citing two people briefed on the meeting. Greece rejected the offer, the New York Times said.

The government met with major international banks over the last month in order to explore options and discuss their involvement in financing Greek national debt, said an official at the Greek finance ministry who declined to be identified. Debt-financing operations are conducted transparently in order to be fully Eurostat-compliant, the official said.

Goldman Earnings

Goldman Sachs reported net income of $13.4 billion in 2009’s fiscal year, outpacing the $11.6 billion profit in 2007, its next-best year. The shares doubled last year to $168.84.

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Former Federal Reserve Chairman Alan Greenspan said a U.S. economic recovery is “going to be a slow, trudging thing,” and that he “would get very concerned” if stock prices continue to fall.

A drop in stock prices is “more than a warning sign,” Greenspan said yesterday on NBC’s “Meet the Press” program. “It’s important to remember that equity values, stock prices, are not just paper profits. They actually have a profoundly important impact on economic activity.”

U.S. stocks on Feb. 5 finished a fourth consecutive weekly decline, the longest such stretch since July. The Dow Jones Industrial Average through Feb. 5 had fallen 4 percent in 2010.

Unemployment likely will stay around 9 or 10 percent for most of this year, Greenspan said. “It’s very difficult to make the case that unemployment is coming down any time soon,” the former Fed chief said.

The U.S. has lost 8.4 million jobs since the recession, the deepest since the Great Depression of the 1930s, began more than two years ago. Unemployment topped 10 percent in October — the first time that’s happened in a quarter century — before retreating to 9.7 percent in January, according to Labor Department statistics.

Greenspan, who served as Fed chairman from 1987 until 2006, said the most useful step Congress could take to create jobs at this point would be to enact tax cuts for small businesses.

“They are the big creator of jobs,” he said. “But they won’t hire anybody if they don’t have any business.”

Economic Growth

Greenspan said the fourth-quarter’s economic growth rate was helped by inventory rebuilding, suggesting the U.S. economy “shot our ammunition” at the end of 2009. That means economic growth now “doesn’t have the strong momentum I hoped it would have,” Greenspan said.

The economy grew at a 5.7 percent annual rate during the last three months of 2009, the fastest pace in six years, according to Commerce Department data. That was the second quarterly increase in gross domestic product following four consecutive declines, the longest stretch of losses since records began in 1947.

In the residential property market, Greenspan said home prices are “bottoming out.” The housing market was the epicenter of the recession, and foreclosures are projected to set a record this year, according to private forecasts.

Regarding the federal budget deficit, which the Obama administration projects at more than $1 trillion for the second consecutive year, Greenspan said a tax increase will be needed and that the budget shortfall threatens the country’s standing in financial markets.

Tax Increase

“I have no doubt that we have to raise taxes in order to close this huge deficit, but we cannot do it wholly on the tax side, because that would significantly erode the rate of growth in the economy and the tax base, and the revenues that would be achieved would be far less” than one would expect, Greenspan said.

On Feb. 4, Congress approved increasing the federal debt limit by $1.9 trillion, to $14.3 trillion, enough to prevent lawmakers from having to raise it again before November’s midterm elections. The increase was more than twice the size of any of the four previous debt increases approved in the past two years.

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Vietnam raised $1 billion from its second global bond sale, offering higher yields than Philippines and Indonesia, amid the busiest start to a year for global borrowing by developing nations since 2005.

The Southeast Asian government sold 10-year bonds to yield 6.95 percent, or 332.7 basis points more than Treasuries, according to a person close to the transaction who declined to be identified because he’s not allowed to speak publicly. A basis point equals 0.01 percentage point.

The Philippines sold debt due in 2020 at 5.67 percent on Jan. 7, while Indonesia offered similar-maturity notes at 6 percent on Jan. 12. Both countries carry lower debt ratings than Vietnam from Standard & Poor’s.

“I like the country and see continuing inflows into emerging markets,” Francesca di Cesare, a bond manager who helps oversee the equivalent of $10 billion at Aletti Gestielle SGR SpA in Milan, said in an interview before the bond pricing. “Vietnam is not a frequent issuer and thus offers a diversification factor.”

AllianceBernstein L.P. and Western Asset Management Co. last week said Vietnam needed to offer at least 7 percent as the government struggles with a currency trading near a record low, accelerating inflation and a widening trade deficit. Before today’s sale, countries from Turkey to Slovenia and Philippines have sold more than $13 billion of debt, the most in the same period since 2005, data compiled by Bloomberg show guaranteed payday loans.

Market Volatility

The government delayed the pricing on Jan. 22 because of increased market volatility after President Barack Obama unveiled measures to curb risk-taking by U.S. banks. The JPMorgan Chase & Co. Emerging Market Bond Index Global fell 0.5 percent last week, the most since October. Vietnam has a 0.23 percent weight in the index that tracks debt of 37 emerging- market countries.

“If the market sentiment is less supportive like last week, the spreads could widen after the sale,” said di Cesare, who bid for the securities.

Vietnam is struggling to balance policies that spur growth with efforts to ensure its economy remains stable, Moody’s Investors Service said Jan. 15. The nation is rated Ba3 by Moody’s, three levels below investment grade, with a negative outlook. The ranking is on par with the Philippines and one grade weaker than Indonesia. S&P rates Vietnam BB, one level higher than the BB- ranking for Indonesia and the Philippines.

The government sold $750 million of 10-year bonds to yield 7.125 percent at its inaugural sale in October 2005, a premium of 2.56 percentage points over similar-maturity Treasuries. The January 2016 notes yielded 6.15 percent yesterday, according to Bloomberg data.

Barclays Plc, Citigroup Inc. and Deutsche Bank AG managed the sale.

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Despite the frenetic pace of bank failures this year, 552 lenders are still at risk of going under, according to a government report published Tuesday.

The Federal Deposit Insurance Corp. said that the number of banks on its so-called problem list climbed to its highest level since the end of 1993. At that time, the agency red-flagged 575 banks.

Mounting bank failures have proven costly for the FDIC, the government agency created to cover the deposits of consumers and businesses in the event that a bank is shut down.

On Tuesday, the agency revealed its deposit insurance fund, as a result, slipped into the red for the first time since 1991.

At the end of the quarter on Sept. 30, the value of the fund was $8.2 billion in the hole. But that number accounts for $21.7 billion the agency has set aside in anticipation of future bank failures.

FDIC Chairman Sheila Bair, who has won praise both in Washington and on Main Street for shepherding the industry through a particularly difficult period, said the industry’s fate is tied to the broader recovery.

"I think that it really is all about the economy at this point," said Bair.

The banks that end up on the problem list are considered the most likely to fail because of difficulties with their finances, operations or management.

Still, history has shown just 13% of banks on the list have failed on average.

Regulators however, never make public the names of the banks on the list out of fear the publicity could cause customers to pull out their deposits.

Tuesday’s report did reveal that the number of assets controlled by those institutions climbed to $345.9 billion from $299.8 billion in the previous quarter.

The ongoing recession has already claimed 124 banks so far this year. But fears persist that the number will multiply in months ahead because banks are still taking losses on mortgage-related loans and face growing problems with commercial real estate.

In the event of a failure, the FDIC fully insures individual accounts up to $250,000 for single accounts.

Fund in focus

In anticipation of future bank failures, the FDIC has been scrambling to shore up its ailing deposit insurance fund low fee payday loans.

Earlier this year, the agency imposed a special assessment on all banks. And just recently, it approved having banks prepay their insurance premiums for the next three years.

The move is expected to generate roughly $45 billion for the FDIC. However, due to accounting rules, the fund would not be back in the black until 2012.

One lingering question is whether, at some point, the agency would need to tap its $500 billion credit line with the Treasury Department, which was approved earlier this year.

The agency however, has been averse to the idea, hoping instead it can instead navigate the crisis using the tools already at its disposal.

Mixed signals

Tuesday’s report however, wasn’t all bad news.

The roughly 8,100 institutions that make up the nation’s banking industry earned $2.8 billion during the third quarter. In the previous quarter, banks were in the red, losing a combined $4.3 billion.

Stronger sales and the rising values of some securities certainly helped, but those gains were capped as lenders again set aside massive amount of cash to cope with future loan losses. All told, banks earmarked $62.5 billion for future loan losses.

While that was down slightly from the previous quarter, Bair cautioned not to read too much into the numbers, adding that number could jump back up in the current quarter.

"I think we need to live with this a bit longer," she said. "I wouldn’t read too much in quarter-to-quarter trends."

One persistent trend, however, was that credit continued to remain tight. In fact, loan balances at the nation’s lenders fell 2.8% of $210.4 billion, representing the largest quarterly decline since banks started reporting this figure in 1984.

Some economists have argued that the lack of available credit to borrowers, such as small business owners, is choking off the economic recovery. Banks, on the other hand, have argued that demand for loans is way off, as both consumers and businesses try to pay down debt. 

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Liberty Bancorp Inc. announced the results of a tender offer for common stock held by investors with 99 or fewer shares, part of its effort to get below the 300 shareholder limit, which would enable it to go private.

The Liberty-based company (Nasdaq: LBCP), the holding company for BankLiberty, said in a Tuesday release that it had acquired 4,631 shares for $15 a share, for a total of $69,465. The company also offered a $50 bonus for all trades executed before the deadline, but it did not say how many shareholders were involved in the trades.

The company didn’t say whether it reached the goal of reducing the number of shareholders to fewer than 300.

Liberty Bancorp CEO Brent Giles couldn’t immediately be reached for comment Wednesday cash advance loans.

Giles had said in October that the bank’s board determined that Securities and Exchange Commission regulations and legislation, such as the Sarbanes-Oxley Act of 2002, which the bank will be subject to starting in 2010, were getting too burdensome on the company’s financial and personnel resources.

“We hope that by reducing the number of shareholders and, if eligible, deregistering with the SEC, the company will substantially reduce the costs associated with complying with these regulations and reporting requirements,” Giles said in an earlier release.

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German business confidence probably increased to a 14-month high in November, suggesting the economic recovery may gather pace next year.

The Ifo institute in Munich will say its business climate index, based on a survey of 7,000 executives, increased to 92.5 from 91.9 in October, according to the median of 37 forecasts in a Bloomberg News survey of economists. That would be the highest reading since September last year. The index reached a 26-year low of 82.2 in March. Ifo releases the report at 10 a.m. today.

Economic growth accelerated in the third quarter as export orders rose and companies increased production and investment. The manufacturing industry expanded for a second month in November and the country’s benchmark DAX share index has advanced 19 percent this year. Unemployment, the euro’s strength and the expiry of government stimulus measures may still damp growth in 2010.

“New orders are strong, the inventory cycle is turning around and the manufacturing sector has just left recession, which means there’s a lot of room for improvement in the economy,” said Carsten Brzeski, senior economist at ING Group in Brussels. “Germany should continue leading the euro-zone economies for quite some time.”

The government last month raised its economic outlook, forecasting growth of about 1.2 percent in 2010 after a 5 percent contraction this year.

GDP Breakdown

Gross domestic product rose 0.7 percent in the third quarter from the second quarter, preliminary figures showed on Nov. 13. The Federal Statistics Office in Wiesbaden will release a detailed breakdown at 8 a.m. today.

Germany’s Beiersdorf AG, the maker of Nivea products, on Nov. 3 raised margin forecasts after reporting third-quarter profit that beat analysts’ estimates, saying its tape-making Tesa unit is seeing a “trend reversal in its industrial business.”

Ifo’s gauge of the current situation will increase to 88 from 87.3 while an index of executives’ expectations will advance to 97.3 from 96.8, according to the survey of economists.

Chancellor Angela Merkel’s government is spending about 85 billion euros ($127 billion) on measures to stimulate growth, including infrastructure projects and a 2,500-euro payment for people who junk an old car and buy a new one. The so-called cash-for-clunkers fund ran dry in September.

‘Propped Up’

“Growth so far has been propped up by stimulus,” said Costa Brunner, an economist at Natixis in Frankfurt. “There’s not a self-supporting recovery and the stimulus will run out. We see a W-shaped recovery, and a recession in the second half of 2010 isn’t out of the question.”

German investor confidence declined more than economists forecast in November on concern that the economic upswing isn’t sustainable.

Exports, the motor of German economic expansion this decade, have so far weathered the euro’s 20 percent appreciation against the dollar since mid-February.

“Exports will continue to steam ahead on the recovery in world trade and the pick-up in the global economy,” said Aline Schuiling, an economist at Fortis Bank Nederland in Amsterdam. “Ifo will continue, slowly, to move ahead.”

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The imperative of greater global currency stability means the world can no longer rely, as it has done since the end of the gold standard, on a currency issued by a single country, the head of the IMF said on Tuesday.

Dominique Strauss-Kahn, the managing director of the International Monetary Fund, restated his view that a new global currency might evolve out of the Special Drawing Right, the Fund’s in-house unit of account.

“That probably has to be a basket,” Strauss-Kahn said of the eventual replacement for the dollar. “In a globalized world there is no domestic solution,” he told a forum.

Speaking later at a news conference, Strauss-Kahn reiterated the message that has been a constant refrain during his visit — that China needs a stronger yuan as part of a package of policies to help rebalance its economy by promoting domestic demand.

“For us, because it just is consistent with the new economic policy in China, the sooner the better. How fast? It will take time. It is not something which will change in one step overnight,” Strauss-Kahn said.

China has kept the yuan, also known as the renminbi (RMB), pegged around 6.83 per dollar since July 2008, following a 21 percent rise over the previous three years, to help its exporters weather the global economic crisis.

“We do believe firmly in the IMF that the RMB is undervalued and that it is not only in the interests of the global economy but also in the interests of China to have a revaluation of the currency,” he said no credit check payday loans.

An undervalued currency introduces economic distortions, which might confer certain advantages but at a cost to other parts of economy, Strauss-Kahn explained.

“So China has a trade advantage, but it also has the wrong prices, leading to wrong decisions about investment in the long run. It is now time for China, having accumulated a lot of advantages from an undervalued currency, to look more forward to investment and long-term stability, and this long-term stability goes with getting rid of this distortion,” he said.

The United States in particular has argued that an undervalued yuan is exacerbating economic imbalances that were a root cause of the global financial crisis.

However, visiting U.S. President Barack Obama referred only fleetingly to the issue after talks with President Hu Jintao.

“I was pleased to note the Chinese commitment made in past statements to move toward a more market-oriented exchange rate over time,” Obama said.

NO TIME TO LOSE

Strauss-Kahn expressed concern that political willingness to overhaul the international monetary system will falter if, in a year’s time, the visible signs of the economic crisis have faded.

He said the momentum to cooperate had already eased somewhat, six months after the London summit of the Group of 20 agreed on a need for change to ensure a more stable global financial order. 

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While foreclosure rates are easing in some of the hardest-hit cities, the crisis is beginning to expand into new metro areas.

On Wednesday, RealtyTrac released its list of cities with the biggest foreclosure problems during the third quarter. As expected, towns in California, Florida and Nevada dominated the top 10, with Las Vegas taking the top spot with a rate of 1 in 20 homes. That’s a 53% increase over the third quarter 2008.

But there was a bright spot: Half of the cities in the top 10 showed year-over-year declines in their foreclosure rates, and 60% showed improvement compared with the second quarter.

For example, second place Merced, Calif., saw foreclosures fall by 11% from last year and 13% from last quarter, to 1 out of every 27 homes. And Stockton, Calif., slipped to No. 4 from No. 2 last quarter. The city, which is 80 miles east of San Francisco, had ranked highest for all of 2008.

"We’re not sure if that will be a one-time thing or a true continued trend, but it’s one of the first positive signs we’ve seen," said Rick Sharga, a senior vice president at RealtyTrac.

New hotspots. But if Las Vegas was the big loser, its neighbor, Reno, Nev., was hot on its heels. The No. 9 city posted an 80% gain in foreclosures — 1 in 37 homes — compared to the third quarter of last year. And it’s just one of several smaller metro areas that are creeping their way up RealtyTrac’s foreclosure list payday advance loan.

"Foreclosure activity is spreading from primary cities into secondary areas," said Sharga. "These aren’t your LAs and Phoenixes — it’s moving into outlying regions."

Boise, Idaho, cracked the top 20 for the first time as foreclosures jumped 141% — the largest increase from 2008. Similarly, Provo, Utah, rose 120%.

The pair of cities "are the first two cases where areas with very high unemployment are breaking into the top spots," Sharga said. "That will continue over the next few months."

Outlook. "The fact is, we’re still seeing record levels of foreclosure activity," said Sharga, who doesn’t expect rates will peak until 2010 because many option-ARMs will reset over the next several months.

Still, the housing market seems to be adjusting, because home prices are stabilizing — albeit at a lower level, Sharga said.

A record number of properties "are coming down the foreclosure pipeline" as well, Sharga said, and they will be trickling into the housing market over the next four years.

"We expect a longer, less robust recovery for the housing market," Sharga said. "We won’t know what’s what until everything gets worked out of the system." 

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Danish Central Bank Governor Nils Bernstein said Denmark would have been hurt less by the financial crisis had it adopted the euro, calling the common European currency an “insurance policy” for the economy.

“The crisis has shown us this is not just a political problem,” Bernstein, 66, said in an interview in Copenhagen on Sept. 28. “The crisis has shown that we can manage economically outside the euro, but it has also demonstrated that there are big advantages during a crisis to be inside and much more protected against turmoil and to have access to the euro system’s facilities.”

Denmark pegged the krone to the euro in 1999, obliging the central bank to use policy to steer the currency. Nationalbanken raised the benchmark rate to 5.5 percent in October as policy makers defended the krone from a sell-off while the European Central Bank cut its main rate. That led to higher mortgage payments for Danish holders of adjustable-rate loans and increased the euro’s appeal among voters.

“The big interest rate differential we had last year wouldn’t have been necessary had we been inside the euro zone,” Bernstein said. “We were under pressure.”

Denmark would have had earlier access to dollars had it been a member of the common European currency, he said. In September last year, Nationalbanken was one of several central banks outside the euro zone to receive swap lines with the U.S. Federal Reserve.

‘Safe Harbor’

“We had to make an agreement with the Fed and a euro agreement with the ECB to help us through our problems, which demonstrates that in a storm it’s better to be in a safe harbor than alone at sea,” Bernstein said.

Momentum in favor of switching to the common currency has ebbed as the crisis abated and the Danish central bank cut its lending rate to a record low of 1.25 percent on Sept. 24. After rising to a three-year high of 53.4 percent in November, Danish voter support for the euro fell to 48.9 percent of respondents, a poll commissioned by Danske Bank A/S showed this month.

The government will probably break its pledge to hold a referendum on joining the euro this electoral term, which ends in 2011, as polls show dwindling support, government officials, who spoke on condition of anonymity because an official announcement has yet to be made, said this month.

Economists have said if Danes rejected the euro for a third time, after votes in 1992 and 2000, the issue could be sidelined for at least 15 years.

‘Not Very Convincing’

“My expectations are that there won’t be a referendum until we are sure to get a ‘yes’,” Bernstein said. “But the polls fluctuate a lot and are not very convincing. We’ve lost before, and you can’t try too often. It’s the government’s job to convince the voters.”

Former Prime Minister Anders Fogh Rasmussen, who has said not having the euro “damages” Danish interests, handed the premiership to Lars Loekke Rasmussen in April. The former promised a vote by 2011; his successor has gone on the record to say setting a deadline is “impossible,” though he’s stopped short of officially canceling Fogh Rasmussen’s pledge.

Danish support for the euro may recede further as the central bank continues to cut rates. Bernstein signaled the bank may take more steps to ensure market interest rates better reflect the fixed exchange-rate policy, adding the difference between market spreads and benchmark interest rate spreads was something the bank is “tracking continuously, attentively.”

‘No Target’

In an effort to reduce the difference between European and Danish interbank offered rates, the central bank has widened the spread between its own lending and deposit rates, reducing the return banks can get if they use central bank facilities.

“While there is no target for the spread between the lending and deposit rates, we can see signs that the difference between the two is starting to work according to plan,” Bernstein said. “The result is that financial institutions are making less use of the central bank’s facilities.”

The bank on Sept. 28 lowered the rate it pays on certificates of deposit to 1 percent from 1.15 percent, widening the spread between its lending and deposit rates to 25 basis points.

The difference between the three-month European interbank offered rate and the equivalent Danish rate dropped to 0.874 points today. That compares with 1.0943 points on June 30 and 2.036 points on Jan. 2.

More Cuts

“It’s quite likely that we’ll see more rate cuts, both with the lending rate and also the deposit rate,” Jacob Graven, chief economist at Sydbank A/S, Denmark’s third-biggest bank, said today. The bank probably hasn’t finished cutting rates, he said. He expects the spread to the ECB key rate to end at around 0.10 to 0.15 point. “There’s still a pretty hefty spread in market rates and that’s making the krone very attractive.”

The difference between the bank’s lending and deposit rates may widen to as much as 50 basis points, Graven said. “But this is untested terrain, so it’s hard to estimate.”

Lower rates may support the property market, after house prices dropped for the last six quarters, to slump a record 11.4 percent in the three months through June. According to Bernstein, prices probably won’t rise next year.

“Maybe in the third or fourth quarter the housing market will trough,” Bernstein said in an interview in Copenhagen on Sept. 28. “It will be flat in 2010, we don’t have big expectations that it will suddenly start to rise.”

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The U.S. economy probably contracted at a faster pace in the second quarter than previously estimated as companies made even bigger cuts in inventories, economists said before a government report today.

Gross domestic product shrank at a 1.5 percent annual rate from April to June compared with the 1 percent drop reported last month, according to the median forecast of 75 economists surveyed by Bloomberg News. Another report may show claims for unemployment benefits fell for the first time in three weeks.

Companies from Wal-Mart Stores Inc. to Macy’s Inc. cut costs and stockpiles to bolster profits as job losses caused consumers to curb spending. Leaner stocks and government programs to revive demand, including “cash-for-clunkers” and first-time homebuyer credits, are boosting manufacturing and housing, helping the economy emerge from the recession.

“The inventory adjustment is further along than thought, setting the stage for increased production in coming months,” said Nigel Gault, chief U.S. economist at IHS Global Insight in Lexington, Massachusetts.

The Commerce Department’s GDP report is due at 8:30 a.m. in Washington. Survey estimates ranged from declines of 1.8 percent to 0.8 percent. The world’s largest economy shrank at a 6.4 percent pace in the first three months of the year.

A drop would be the fourth in a row, the longest contraction since quarterly records began in 1947. The world’s largest economy has shrunk 3.9 percent since last year’s second quarter, making this the deepest recession since the 1930s.

Fewer Claims

A report from the Labor Department may show applications for first-time jobless benefits last week fell to 565,000 from 576,000, according to the survey median.

Today’s GDP report, the second of three estimates, will include figures on corporate profits not available in the advance figures issued in July.

Consumer spending, which accounts for 70 percent of the economy, probably fell last quarter at a 1.3 percent annual pace, a bigger drop than first estimated, the survey showed.

Reports so far this month have shown government efforts to thaw credit markets and boost spending may be taking hold. Combined sales of new and exiting homes in July reached a 5.67 million annual pace, the highest level since November 2007, the month before the recession began.

Auto Sales

Industry data showed sales of cars and light trucks rose to an 11.2 million annual unit rate in July, the highest since September. General Motors Co. and Chrysler Group LLC, both out of bankruptcy, are among firms set to ramp up production as government efforts lift demand.

The “cash for clunkers” program, which offered buyers discounts of as much as $4,500 to trade in older cars and trucks for new, more fuel-efficient vehicles, produced almost 700,000 automobile sales before ending on Aug. 24, the Transportation Department said yesterday.

A drop in other purchases last month signals a lack of spending may temper the recovery. Retail sales excluding auto dealers unexpectedly fell in July as Americans cut back on furniture, electronics, building materials, groceries and sporting goods, figures from the Commerce Department showed.

Target Corp., the second-largest U.S. discount retailer, is among companies trimming costs to make up for slower sales. The Minneapolis-based company reported second-quarter profit that fell less than analysts estimated as the company avoided markdowns.

‘Challenging’ Environment

“We continue to conservatively manage our inventories to help us navigate the challenging sales environment,” Kathryn Tesija, Target’s vice president for merchandising, said in an Aug. 18 conference call.

Business investment is another area that may be improving. Orders for goods meant to last several years jumped in July by the most in two years, the Commerce Department said yesterday. The report also showed a measure of shipments used in calculating GDP climbed for a second month.

The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years, according to the median estimate of 53 forecasts in a Bloomberg News survey earlier this month. Economists at Morgan Stanley were among those lifting growth estimates for this quarter after yesterday’s report on durable goods.

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