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To: Jim Willie CB who wrote (4239)	4/28/2003 10:56:48 PM
From: SOROS	Read Replies (1) \| Respond to of 5423

THE PROFIT TRAP During the past two years, sharply rising consumer and government spending have prevented a deep recession in the United States from beginning. Business investment spending suffered its steepest fall. It has been widely recognized that its rebound is the indispensable condition for a sustainable U.S. economic recovery. There is no sign of that happening. Profit conditions are, of course, crucial. But they are inexorably worsening. Focusing strictly on economic data, rather than the Iraq war, we see accelerating deterioration across the board. The question is whether or not a quick and positive outcome of the Iraq war will buy the economy a few more months of expansion. What truly matters are the looming, large imbalances and structural distortions that are the legacy of five or six years of unfettered money and credit creation. Around the world, economies are sliding into recession, stock markets are crashing, interest rates are plunging and budget deficits are soaring — and above all, profits and business fixed investment are slumping. There has been nothing like it in the whole postwar period. * * * * * * * * * Assessing global economic prospects, we strictly distinguish between the U.S. economy’s problems and those of the countries in the euro zone and Asia. They are of exactly opposite structural nature. The latter are economies with high rates of saving. In the past, these had their match in equally high levels of investment. But faltering investment in recent years has led to a chronic surplus of saving, implying a corresponding gap in domestic demand. With nothing in sight that may reduce this structural savings surplus, either through lower savings or higher investments, the world is looking with desperation for another fix from the American growth machine. Our preliminary brief answer is that the American growth machine has been derailed. * * * * * * * * * We started with the question of what effectively caused the U.S. economy’s downturn. Our answer was: It is primarily a correlated profits and capital spending crisis, and they both are the legacy of the bubble-related credit excesses that have further boosted consumption at the expense of available resources for investment and exports. The next compelling question, of course, is whether or not these maladjustments are being remedied, giving hope for a sustained recovery. What America needs, in short, is lesser consumption and more capital formation that also allows for more exports. Adjustment takes time, but in the United States — see the plunging net investments and the soaring trade deficit, on the one hand, and new records in consumer borrowing, on the other — the exact opposite is happening. * * * * * * * * * * The U.S. economy’s weakness has two main sources: totally unfettered money and credit creation, on the one hand, and a general, excessive bias in favor of consumption and financial speculation at the expense of capital formation. The merger and acquisition mania has been typical of this strong propensity. It was always in our view capitalism in perversity and stupidity that has in the long run effectively destroyed investment incentives (profits) and investment resources (saving). The reality behind building shareholder values was the greatest capital destruction. It is widely agreed that a sustained U.S. economic recovery depends crucially on rebounding business fixed investment. Of course, this, in turn, depends crucially on strengthened corporate balance sheets and improving profits prospects. The reality, however, is that both are dramatically worsening. After all, plunging stock prices oblige corporations to write off vast and increasing amounts of phony goodwill assets. While it does not burn cash, it burns capital. Cash, though, is increasingly burned through dividend payments in excess of corporate earnings. At the same time, all macro and micro signs point to further sharp falls in stock prices and corporate profits. The U.S. economy is inexorably heading for its longest and deepest recession. For Subscription Information Contact: THE RICHEBACHER LETTER 808 St. Paul Street Baltimore, MD 21202 agora-inc.com

To: Jim Willie CB who wrote (4239)	4/29/2003 9:53:03 AM
From: 4figureau	Read Replies (1) \| Respond to of 5423

U.S. First Quarter Employment Cost Index Rises 1.3% By Andrew Ward Washington, April 29 (Bloomberg) -- U.S. labor costs jumped the most in 14 years during the first quarter as expenses for benefits rose more than twice as fast as wages and salaries. The employment cost index, a gauge of U.S. companies' total labor expenses, gained 1.3 percent in the first quarter after increasing 0.7 percent in the fourth quarter, the Labor Department said. The rise matched biggest gain since the 1989 third quarter. Benefit costs surged 2.2 percent, reflecting higher expenses for health insurance and retirement benefits, the government said. Wages and salaries rose 1 percent as U.S. workers continued to become more productive. The jump in compensation costs in the January-March period came even as the economy lost 262,000 jobs. ``Higher benefit costs are really cutting into corporate profits,'' said Richard Yamarone, chief economist at Argus Research Corp. in New York, whose forecast of a 1.4 percent increase was the closest in a Bloomberg News survey. ``It doesn't bode well for the future job creation.'' Economists had expected a 0.8 percent gain, based on the median of 58 estimates in the Bloomberg survey. The index tracks the cost to companies for wages, benefits and employer-paid taxes such as social security and Medicare, with adjustments to spread cost increases over the course of a year. Employment costs rose 3.9 percent over the past 12 months, up from the 3.4 percent increase in the year through the fourth quarter. Wages and Salaries The jump in wages and salaries matched the largest since the first quarter of 2000 and compared with a 0.5 percent increase from October through December. Salaries for finance, insurance and real estate employees rose 5.2 percent, leading the increase, after a 0.1 percent gain in the previous quarter. Salaries fell 0.3 percent for retail workers. Benefit costs -- including severance pay, health insurance, vacation pay and referral bonuses -- had the biggest jump since the 1988 first quarter and followed a 1.3 percent gain in the fourth quarter. For the past 12 months, benefit expenses surged 6.1 percent, up from the 4.9 percent gain in the year-earlier period. ``Much of the increase in benefit costs stemmed from the continuing rise in the costs for health insurance and the recent upturn in retirement costs, particularly for defined benefit pension plans,'' the Labor Department said. Employer costs for benefits account for almost 30 percent of total compensation outlays, the government said. Companies have been reporting ``a lack of upward pressure on wages, but firms continued to note substantial increases in the costs of health care and insurance,'' the Federal Reserve said in its most recent survey of regional economic conditions, known as the Beige Book, issued last week. Health Insurance Premiums Health insurance premiums rose an average of 14 percent in the first quarter, according to a survey by Towers Perrin, a management and human resources consulting firm. That is the biggest obstacle for companies seeking to hire new workers, according to poll of 120 chief executives by the Conference Board, a New York-based research group. The Fed has held its overnight bank lending rate at a 41-year low of 1.25 percent for the past five months, as mild inflation allowed policy makers to push for stronger economic growth. The consumer price index, excluding food and energy prices, rose at a 0.8 percent annual rate in the first three months of the year. U.S. airlines have pushed for their employees to accept pay cuts amid mounting losses as traffic fell because of the threat of terrorist attacks, the slowing U.S. economy and the outbreak of a severe acute respiratory syndrome. AMR Corp.'s American Airlines, the world's largest air carrier, has leaned on its 109,060 workers to accept $1.8 billion in labor cost cuts as part of an effort to avoid being forced into a bankruptcy reorganization. quote.bloomberg.com