the world as we write it
Wednesday, April 29, 2009
U.S. economy tumbles steeply in first quarter
Wednesday, Apr 29, 2009 5:27PM UTC
By Lucia Mutikani
WASHINGTON (Reuters) - The U.S. economy contracted at a surprisingly steep 6.1 percent rate in the first quarter, dragged down by a record plunge in business inventories and a slump in exports, data showed on Wednesday.
However, the data did not change views the economy would emerge from the recession, now in its 16th month, in the second half of the year. Next month, the downturn is on track to become the longest since the Great Depression.
The Commerce Department said inventories were drawn down by a record $103.7 billion -- potentially good news for the economy because it suggests businesses have cut the stockpile of unsold merchandise to levels that will let them start placing new orders, which would stimulate production.
"The larger-than-expected decline in first-quarter GDP is good news for the upcoming quarters. We expect that the recession will be over in the second half of the year," said Harm Bandholz, an economist at Unicredit Markets and Investment Banking in New York.
While the drop in gross domestic product, which followed a 6.3 percent fourth-quarter decline, was much steeper than economists had expected, investors were cheered as they saw it laying the groundwork for a recovery.
U.S. stocks rose, further helped by unexpectedly strong earnings from Time Warner Inc and Qwest Communications International, with the blue-chip Dow Jones industrial average up about 143 points at midday.
GDP, which measures total goods and services produced within U.S. borders, has now dropped for three straight quarters for the first time since the 1974-1975 recession. That downturn, which started in 1973, lasted 16 months.
The data came as the Federal Reserve resumed a two-day meeting. The Fed, which has cut interest rates to almost zero and pumped about a trillion dollars into the economy to try to break its downward spiral, is expected to nod to signs hinting at economic improvement in a post-meeting statement.
SILVER LINING IN GRIM DATA
Christina Romer, the head of the White House Council of Economic Advisers, told Reuters Financial Television the decline in inventories and a rise in consumer spending offered a silver lining in an otherwise bleak report.
"To the degree that that's a sign that firms are bringing down some of their inventories ... that combined with consumers coming back to life could mean we need to start producing things again," she said. "It could put us in a position for perhaps a less dreary number going forward."
The inventory plunge accounted for 2.79 percentage points of the drop in GDP. Excluding inventories, GDP contracted 3.4 percent. Business investment, which is typically made when companies are planning production increases, tumbled a record 37.9 percent in the first quarter.
However, consumer spending, which accounts for over two-thirds of U.S. economic activity, rose 2.2 percent, after collapsing in the second half of 2008. Consumer spending was bolstered by a 9.4 percent jump in purchases of durable goods, the first advance after four quarters of decline.
"We can expect some moderation in the pace of the economy's decline. The larger question now surrounds the intense weakness we have seen in business investment," said Bob DiClemente, chief economist at Citigroup in New York.
"It's going to draw much attention as a potential source of aggravating factor for the recession going forward."
HOUSING ACTIVITY STILL SLIDING
Home-building activity slid at a 38 percent rate, the biggest decline since the second quarter of 1980. There are signs, however, that a big drop in construction activity is starting to slow and analysts expect this component to begin showing improvement in the quarters ahead.
Exports collapsed 30 percent, the biggest decline since 1969, after dropping 23.6 percent in the fourth quarter as recession took hold around the globe. The decline in exports knocked off a record 4.06 percentage points from GDP.
The Commerce Department said a $787 billion government package of spending and tax cuts, approved in February, had little impact on first-quarter GDP. Part of the stimulus package is designed to bolster state and local government spending, which fell at a 3.9 percent rate in the first quarter, the largest drop since 1981's second quarter.
A separate report showed U.S. home loan applications fell 18.1 percent last week to the lowest level since mid-March, even as mortgage rates clung to record lows.
(Additional reporting by Tim Ahmann in Washington and Lynn Adler in New York; Editing by Jan Paschal)
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CEO Forum: Media mogul Diller on Twitter, Ticketmaster, etc.
There's one consistent quality in IAC/InterActiveCorp (IACI) CEO Barry Diller's long career, one that has made him a force in television, movies, home shopping and the Internet. He loves to challenge conventional wisdom about business and himself.
Consider Diller's most recent and controversial pivot: After years of opposing media mergers, he's earned the wrath of pop icon Bruce Springsteen and others with an effort to create a concert colossus.
Diller, 67, wants to join the dominant ticketing and music-management company Ticketmaster, where he's chairman with Live Nation, the leading owner of arenas, which also now manages performers and sells tickets. The outcome is in the hands of antitrust officials.
But the effort is characteristic of a CEO who has become a celebrity in his own right after shaking up entertainment programming at ABC, reviving Paramount with blockbuster movies including Saturday Night Fever and Raiders of the Lost Ark, creating Fox Broadcasting and then ditching Hollywood to become a retail and digital entrepreneur.
His online empire now includes such disparate properties as Citysearch, Ask.com, Expedia, The Daily Beast, CollegeHumor, Match.com and Evite. With so many properties that depend on consumer spending and advertising, the gloomy economy poses the toughest challenge yet to Diller's programming and dealmaking skills.
He shared his views about prospects for business, his companies, the Internet and traditional media with USA TODAY's David Lieberman at the 10th USA TODAY CEO Forum, in conjunction with the Olin School of Business at Washington University in St. Louis.
The interview took place in front of an audience. Edited for length and clarity, here are Diller's thoughts on:
Q: You're stockpiling cash. Are you waiting for prices to drop more before you buy something?
A: I'd like to spend it intelligently. You can't have it get hot in your pocket. Unfortunately, it's really shocking to me, but I cannot find anything that is worthwhile buying today. I hope to God I do.
Q: What kind of things are you looking at?
A: We've been in the consumer part of the Internet for a long time. But I can't find anything in the Internet area. So, what you have to do when that happens is redefine what (your) area is so you can keep growing.
Q: How about AOL?
A: Oh, that's a good question. We talk with AOL a lot, and there's a lot of common relationships there. We're, I think, the seventh- or eighth-largest Internet network, and I think AOL is one or two slots behind us. There's a really good idea for a combination there, but it's complicated to do. It's inside Time Warner, which wants to get rid of it. It's hard to engineer because of its legacy. But, industrially, it makes sense.
A: I'm sure there are some commercial applications for Twitter, but they don't really interest me. I mean, 140 characters? I am really not interested in Ashton Kutcher's daily walks. Not for me.
A: Facebook's the real deal. Nobody can buy Facebook now. Everybody has taken an angle at it. But Facebook may be the place that organizes everybody's personal information. It's got a very good chance of being that.
Q: Back in 1994 you tried to buy Paramount. With the benefit of hindsight, are you glad you lost?
A: We lost Paramount in the sense that we didn't make the last bid. And I think it was a big mistake. I wish we owned Paramount.
A: I would have loved to have played in (the digital media revolution) in television and motion pictures. I think it would have been interesting, and I think we would have done OK with that asset.
I didn't do it because I was chicken. I had just come from being a corporatist, and I clutched at the last minute and I shouldn't have, and I know what it was due to. It was due to lack of experience. And it was a good lesson for me because it taught me not to do that.
Q: You said a few years ago that you were concerned the cable industry would take over broadband. Is that still a concern?
A: I very much believe in net neutrality. We have all lived through a world which has been dominated by distribution scarcity. There were only so many cable programs you could have because (cable operators) conned everybody into thinking that (their lines) could only carry so much. But, they were interested in it being scarce. They could say (to programmers): If you want to get on, give us half your business. It was a great scam while it lasted, this idea of scarcity.
Well, the Internet is this miracle. It is an absolutely extraordinary idea that you can press a send button, and you are publishing to the world.
And what cable companies want and telephone companies want, of course, is to say: No, wait a minute. If you're going to publish a book, you publish to us, and then we transmit it on from there. And, therefore, we want the Internet not to be neutral. We have invested all this money, and this is how we'll get our return. I think that's a horrendous idea.
Q: Time Warner Cable's been talking about usage-based pricing for broadband.
A: Well, I'm not against usage. You pay for electricity only by how much you use. I don't think there's anything wrong with paying, so long as it's a common carrier meaning there has to be regulated pricing like there is for utilities, which is not going to happen.
So, I think the idea of charging for usage is a good idea. The problem is: If you've got little competition there, then the prices can just be, excuse me, ridiculous.
Print and TV
Q: What's the future of print media in the Internet age?
A: If you've got ink on your hands, which means that you're a print person, you're finished. These news-gathering organizations depended upon being the only place in town. And everybody has advertising now. So, it's a very tough transition.
You're going to pay for information that you want. And you're going to pay directly, which means there's going to be either micropayments or subscriptions. Advertising in the new world order can't support much of anything. Therefore, you're going to have hybrid business models that are going to have subscription revenues and other types of revenues.
We're going to have professional news-gathering operations. I do not think we're going to be a world where we're going to have citizen reporters doing all of the work. I think that it's going to be a really tough period, it will get worse, and then I think it will come out the other end by being supported by other revenue streams.
Q: How about TV's big-budget shows?
A: No. Forty years ago you had three channels. Then, with cable, you had more channels. But we're just getting to the point where there's enough bandwidth that we're going to have unlimited opportunity to get whatever we want.
Because there is no longer scarcity, an hour-long drama is not going to exist at the multimillion-dollar production level and not in the current distribution scheme. For everybody in that world, you talk about creative destruction. General entertainment is absolutely going to change for all of us.
Q: Live Nation is the country's largest owner of arenas. Ticketmaster is the largest ticketing company and has deals with several stars. Why shouldn't we be nervous about seeing them get together?
A: Well, you can be nervous all you wish. It sounds awfully arrogant. It's not meant that way. The thing is: These companies don't compete with each other directly. We don't own venues as Live Nation does. And Live Nation just entered the ticketing business but they don't compete with us at this point. So, it's vertical, and there's nothing legally wrong with vertical.
The issue is: Will consumers pay more? No. I actually think that what the combination will do will allow us to develop what was really lacking. The big players are getting rather old. The Rolling Stones are out there now. What we don't have is a great development process for new talent.
The recorded music business now is, in a sense, the loss leader for live entertainment. And the truth is that they should have symbiotic relationships, and I think we can bring that. But it's under review at the Justice Department and we'll know whenever they get around to dealing with this.
Q: Fleetwood Mac will be playing in St. Louis in a couple weeks. You can get a midpriced ticket for about $77, then there's a convenience charge of $9.70, a building facility charge of $2.50, and for the privilege of printing out my own ticket at home, I've got to pay you $2.50.
A: I would tell you what a great privilege it is for you to be able to do that and how much infrastructure we had to create and desks we had to make in order for you to do that. But here's the thing: Ticketmaster is the definition of an unloved company. Many more people are denied tickets than we are able to give them because there are only so many seats in the house.
The problem with the ticketing business is: It's the essence of non-transparency. And the reason is that everybody has an ax to grind. Artists do not want consumers to know that they have a take of different parts of the ticketing package. People who own venues want to put in service charges. So I think there's going to be legislation which is going to force transparency, and I think that would be great for everybody.
Video on the web
Q: You've been very excited about video on the Web. But no one's making money at it yet.
A: That's definitely true. We have a site called CollegeHumor.com some of you have probably seen. A few years ago it started to produce videos, and over a relatively short period they built up this little group, about 30 people, and they now make about eight videos a week.
And they're extremely successful in the sense that a lot of people view them. They get spikes in the millions of hits, and the quality is very good. And it's not expensive to produce a three- to five-minute video. Now people are getting used to the fact that they're going to have some commercial interruption of videos.
Q: So what's the business opportunity?
A: Go back almost 100 years to the beginning of the motion picture business. They began with "one-reelers." A lot of them were serials. They were at that time anywhere from seven to 10 minutes. Cecil B. DeMille, one of the great movie makers of all time, was making 30 of these a year.
So, I see this little group who are using modern techniques. They're going to graduate as the form evolves just like the movie business did, from two-reelers to 10-reelers. In other words, it will expand as the Internet and bandwidth is able to deliver video that will not just be seen on small little form factors, but on screens in your house or screens of any size.
Q: The credit markets seem to be easing, but employment looks pretty grim. Have we seen a bottom yet or, as Paul Krugman says, is it just getting worse more slowly?
A: It seems impossible that you could say that we actually know the duration or the depth (of the recession), because there are really three areas that most impact us.
One is unemployment, which is undoubtedly going to rise from where it is now. We have not seen what will happen with commercial real estate, because commercial real estate is primarily based upon huge amounts of leverage.
And the other area we haven't seen is corporate debt, which is also based upon huge amounts of leverage, and those two haven't yet washed through this.
Q: So, what takes us out? Can you count on consumer spending coming back, or would it likely be some other engine?
A: Well, for sure we're going to count on government spending coming back. I mean, they're throwing everything that can be imagined at this. Everything has a very short life span now; we may have this very sharp, quick resolution.
Q: A couple of years ago you were the highest-paid executive in the country. Do you think that, in retrospect, you went too far?
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The Times' Rorshach Geithner Story
The New York Times has provided a handy blogging point for today in the form of a long piece on the relationships Tim Geithner formed while head of the New York Fed. The story is based in part on the results of a Times FOIA request, for the contents of Geithner's daily calendar while at the bank, and bloggers have primarily approached the story as a search for potentially nefarious activities. As examples, we see Paul Kedrosky concluding that there's no real "smoking gun," and Yves Smith writing that the story is far too kind, as it mysteriously excises all the times Geithner was scheduled to dine on babies and puppies in the company of Satan and AIG executives.
For the life of me, I don't know why we're not spending at least a little more time on the opening anecdote:
Last June, with a financial hurricane gathering force, Treasury Secretary Henry M. Paulson Jr. convened the nation's economic stewards for a brainstorming session. What emergency powers might the government want at its disposal to confront the crisis? he asked.
Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation's most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.
The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.
Smith notes the line and proceeds to throw of a line constituting one of the most epic examples of point missing in recent memory:
The story fails to note this was almost assuredly the most bank friendly program possible.
To begin with, that's not even true. The most bank friendly program possible is handing the banks a lot of money with no strings attached. But how does Smith miss that this would not only have been a very smart and prescient move, but it might also have laid the groundwork for a much tougher bank policy? Guaranteeing all the bank debt was, of course, one of the key ingredients of the Swedish bank rescue so beloved by fans of nationalization. Smith just assumes Geithner is looking to help his Wall Street buddies, but he might just as easily have been reading directly from the Swedes' playbook.
Moreover, this move would have entirely changed the calculus in September. It would have made the government much more reluctant to let Lehman fail, which I believe we can agree would have been a good thing. Had they nonetheless decided that Lehman should be allowed to go down, in the knowledge that the government would have to make the debtholders whole, then we would have avoided most of the negative effects of the actual Lehman collapse. No money market fund would break the buck. No freeze in commercial paper markets would have resulted. And no emergency rush to TARP would have followed. Correspondingly, no intense fear of bank failures or nationalizations would have cast its shadow over all subsequent decisions.
This should be getting more attention, and it should also be causing Geithner-haters to rethink what they think they know about the man -- about his timidity, subservience, and allegiances. But it's already clear that it won't.Related Links
Geithner's Brave New Regulatory World: An IMterview
Finally, Drama! A Geithner vs. Bair Clash?
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