Colombia

Peace for Colombia?

Why the FARC's defeat looks to be only a matter of time

PRESIDENTS have come and gone over the past four decades in Colombia but one man remained constant. Pedro Antonio Marín, better known by the noms de guerre of Manuel Marulanda or “Tirofijo” (“Sureshot”), led his FARC guerrillas through army bombardments, bogus ceasefires and failed peace talks, never giving up his quixotic and destructive campaign to turn a large South American democracy into a clone of the long-vanished Soviet Union. Mr Marulanda's death was always going to be of moment for Colombia. In the event, it has almost certainly coincided with the FARC’s demise as a serious military threat to the state.

A FARC commander announced that Mr Marulanda died on March 26th of a heart attack. Army chiefs believe that he might have expired as a result of their bombardments. In the same month, two other members of the FARC’s seven-man secretariat were killed, Raúl Reyes by a bombing raid on his camp across the border in Ecuador and Iván Ríos by his own bodyguard. Mr Marulanda will be replaced by Alfonso Cano (real name: Guillermo León Sáenz), the FARC's chief ideologue. But there are reasons to suppose that the guerrillas will never recover from their March setbacks.

Mr Marulanda was the last link to the FARC’s origins as a peasant self-defence force against landowners, an offshoot of a rural civil war in the 1940s and 1950s between Liberals and Conservatives. A man of peasant cunning and stubbornness, he was said never to have visited any city larger than Neiva, of some 315,000 people. Later recruits were middle-class Marxist students, such as Mr Cano.

The FARC survived the end of the cold war, but at the cost of its ideological purity, by turning to drug-trafficking and kidnapping. Mr Marulanda was by the mid-1990s leading a force of 19,000 operating in large units, overwhelming army garrisons and threatening Bogotá, the capital. That prompted the government to open peace talks, abandoned after three years in which the FARC carried on kidnapping, bombing and recruiting.

Colombians turned in despair to Álvaro Uribe, their tough president since 2002. He has expanded the security forces by a third, to 270,000, including a core of 80,000 professional soldiers, some of them in mobile brigades and special forces. They are backed by a large helicopter fleet, Brazilian-made Super Tucano tactical bombers and American advice, especially in intercepting communications.

This build-up transformed the war, driving the FARC away from the towns. Recent changes of government strategy are now bearing fruit. These involve encouraging guerrilla desertions and targeting the leadership. The FARC are now losing more deserters than they are gaining new recruits, according to General Freddy Padilla de León, the armed-forces’ commander. “They are reduced militarily, isolated politically, have a reduced social base and we are cutting their finance [by acting against their drug business]. It’s impossible for them to return to the cities,” he says.

What has worried Colombian officials most has been signs that Venezuela has been helping the FARC. But Venezuela’s government is likely to be more circumspect after evidence of ties emerged from documents on Reyes’s computers.

So what future do the guerrillas have? Mr Cano is sometimes portrayed as a moderate, in contrast to Jorge Briceño (aka “Mono Jojoy”), the FARC’s military commander. But in a two-hour interview with The Economist in 2001, Mr Cano showed himself to be a rigid Marxist, unprepared to accept democracy. “Our struggle is to do away with the state as now it exists in Colombia,” he said. The FARC wanted power and would not demobilise in return for “houses, cars and scholarships” or a few seats in Congress.

Mr Cano’s first task will be to prevent the FARC from fragmenting into its constituent “fronts”. Constant army pressure means the fronts now find it hard to communicate with each other. Some, including Mr Cano’s in the centre-south, are on the run; others, such as that in Nariño, in the south-west, are still awash with drug money. Yet others rely on havens across the borders in Venezuela and Ecuador.

By maintaining the pressure, the government hopes to force the FARC into negotiations. Relations of hostages kidnapped by the guerrillas hope that the death of the obstinate Mr Marulanda will speed their release. Neither may happen soon. “Marulanda’s death is not the death of the FARC,” says Camilo Gómez, who negotiated for the government during the peace talks. Since perhaps 9,000 guerrillas are still under arms, that is clearly true. But defeat looks only a matter of time.

Getting to the Bottom of a Russian's 26 Toilets

Commentary by Michael Lewis

May 29 (Bloomberg) -- For some months now I've made a point of popping into Bloomberg's offices every now and again to share with readers the secret thoughts of a successful hedge-fund manager.

People like me -- that is, people with more than $1 billion under management and in excess of $100 million in net worth -- seldom tell ordinary people what we actually think, for the obvious reason that it doesn't pay.

As a result, ordinary people -- defined as anyone with a net worth of less than $10 million -- know very little about the inner lives of the seriously rich, even in places where there are lots of seriously rich people. The uproar in Greenwich, Connecticut, about the rich Russian and his toilets strikes me as an excellent case in point.

To recap:

In 2005 Valery Kogan, a Russian whom no one outside of Russia had ever heard of, turns up in Greenwich and buys a five- acre lot with a 20,000-square-foot house on it.

Naturally -- he being Russian, this being Greenwich -- he expects to tear down this old house and erect his own new 54,000- square-foot place. Like me, Valery Kogan overcame great odds to become a capitalist success. (I went to Penn, for example; Valery was born in a police state, and given a girl's name, to boot.)

Having made it this far he clearly never imagined that anyone might try to stop him from going even further. But then he met the organized proletariat of Greenwich. And before he knew it he was all over the American newspapers as the Slavic lout who wanted to build in their suburban idyll a palace with a 12-car garage, a Finnish spa, a dog-grooming salon and 26 toilets.

Need Versus Want

I would have thought the dog-grooming salon would have caused him his biggest problem with the masses, but it is these toilets that have proven his public-relations nightmare. His desire for a 26-holer is the thing no ordinary person, even in Greenwich, seems capable of understanding.

``Who needs that many toilets?'' one of the protesting nimrods of Greenwich put it to Bloomberg News, speaking for the whole miserable rabble.

Well, for a start, Valery Kogan needs 26 toilets. He also needs someone to explain the need. Allow me.

To begin with -- and it depresses me that I find myself instructing citizens of Greenwich on the special needs of the very rich -- the seriously wealthy don't use their houses as ordinary people do.

The Great Indoors

When a rich Russian says he is going for a hike, for instance, he doesn't mean outside. Out of doors he will encounter ordinary people, who not only don't understand his need for 26 toilets, but also pester him for money. He can always tell them to go away, of course, but in the process he's wasted his valuable time. This is one of many reasons a rich Russian requires a 54,000-square-foot mansion: so he might hike, indoors.

But there is of course one thing that every man knows before he sets off on a long hike: he's going to need to pee. Ordinary hikers pee in the woods. But Russian multimillionaires aren't ordinary hikers. No one wants to find himself half an hour into a long rappel down a spiral staircase, or in a hand-over-hand climb along a wall, only to have to retrace his steps to some remote rest room.

Better to have one wherever in your indoor wilderness you happen to be.

This brings us to a second practical consideration ignored by the ordinary people of Greenwich: the delicate waste-disposal needs of the rich.

Hidden Treasure

Here's a question you probably have never asked yourself: What, at bottom, is a toilet? To an ordinary person, it's a device for transferring ordinary human waste from the body to the sewer, as discreetly and sanitarily as possible. But just as all humans are not ordinary, all human waste isn't ordinary, and the waste of Russians is no exception.

The richer the Russian the more likely he is to have failed to fully digest something or someone of serious value. To simply elbow the silver knob and flush it all down, without further thought or study, would be wasteful and self-destructive, like tossing out a savings bond before the final coupon has been clipped, or closing a silver mine before sifting the tailings.

The toilets of the rich aren't just toilets, in other words. They're bank vaults. And you can never have too many of those.

But these are just the most obvious, pragmatic reasons for owning a house with 26 toilets. Pressing as they are, they are dwarfed by a deeper emotional impulse: the need of every truly successful person to have things that ordinary people can't imagine the need for.

Bowl Superiority

Put this way you can see the true genius of Valery Kogan. Virtually every other form of conspicuous consumption in America has been bought and paid for; in the brain space that ordinary people reserve for the obsessive contemplation of the rich, there was hardly any real estate left.

Cars, houses, animals, furs, jewels, islands: From the point of view of the ordinary person looking for something to envy all are ``been there, done that.''

``Toilets!'' I can imagine Valery saying to himself, late on one cold Russian night, ``I will buy more toilets than any man on earth and the American people will speak of me with wonder.'' And they do.

McClellan Says He Became `Disillusioned' While Working for Bush

May 29 (Bloomberg) -- Former White House Press Secretary Scott McClellan, defending his new book that criticizes the Bush administration, said he became disillusioned while working for President George W. Bush and that his memoir carries lessons for the current presidential campaign.

``I think it's timely for us to look at these issues and learn the lessons from these experiences so that we can make better decisions,'' McClellan said in an interview on NBC's ``Today'' show.

He noted that Senator John McCain of Arizona, the presumptive Republican presidential nominee, and Senator Barack Obama of Illinois, who holds a commanding lead in the race for the Democratic nomination, are stressing themes that Bush emphasized in winning the presidency in 2000.

``Senator McCain just a few weeks ago talked about the importance of ending the permanent campaign and changing politics as usual,'' McClellan said. ``You have Senator Barack Obama talking about changing the way Washington works, a message that is very similar to the one that the president ran on in 2000 when he talked about being a uniter, not a divider.''

McClellan, 40, a Bush loyalist from the president's time as governor of Texas, is critical in his new book of the administration's handling of the Iraq War and the leak of CIA operative Valerie Plame's identity.

A fierce defender of Bush during his years at the White House as deputy press secretary and then chief spokesman, McClellan left the administration in April 2006.

`Political Propaganda'

In his book, ``What Happened: Inside the Bush White House and Washington's Culture of Deception,'' McClellan writes that Bush manipulated public opinion through a ``political propaganda campaign'' to justify going to war in Iraq.

McClellan said today that, when he went to work for Bush in 1999 in Texas, he ``had all this great hope that we were going to come to Washington and change it.''

``I'm disappointed that things didn't turn out the way that we all hoped they would turn out,'' McClellan said. ``By the last 10 months or so of my time at the White House, I grew increasingly disillusioned.''

White House spokeswoman Dana Perino said yesterday that Bush was ``surprised'' and ``disappointed'' by the tone of the book when he was informed about it. ``He doesn't recognize this as the Scott McClellan that he hired and confided in and worked with for so many years,'' she said.

White House Response

Dan Bartlett, a former adviser to Bush, said in a separate interview on the ``Today'' show that ``the part that strikes all of us as a bit odd'' is that McClellan talks about ``wanting to change the tone in Washington.''

``Yet at the same time, Scott uses these very inflammatory words like `shading the truth' and `propaganda machine,''' Bartlett said. ``As I read the book, I'm finding that there's not a lot of evidence to back that up.''

Obama told reporters yesterday on his campaign plane that he hasn't read the book. ``The only news is that somebody within the administration has confirmed what a lot of us had thought for some time,'' Obama said.

Big Brown Owner, Fined by NASD, Plans $100 Million Hedge Fund

May 28 (Bloomberg) -- Michael Iavarone, owner of Triple Crown contender Big Brown, was fined, censured and suspended by securities regulators for unauthorized trades in 1999.

Iavarone, 37, a former stockbroker, hasn't disclosed the regulatory actions as he plans to raise $100 million for a hedge fund that will invest in racehorses. Big Brown, a three-year old colt, would be the first horse to win the Triple Crown in 30 years, if it finishes first in the Belmont Stakes on June 7.

Iavarone, who rang the opening bell at the New York Stock Exchange this morning, is co-chief executive officer of International Equine Acquisitions Holdings Inc., a privately held Garden City, New York, company that owns Big Brown and about 80 other racehorses. IEAH, which will manage the fund, describes Iavarone on its Web site as a ``high-profile investment banker on Wall Street'' who became a horseracing executive. The site, www.ieah.com, doesn't mention his regulatory history.

``To me as a prospective investor in his hedge fund, that's clearly material information I'd want to know,'' said Alan Bromberg, who teaches securities law at Southern Methodist Law School in Dallas.

Iavarone, in an interview yesterday, said his seven-year Wall Street career consisted of selling penny stocks at four different brokerage firms, including A. R. Baron & Co. They are Lloyd Wade Securities Inc., Maidstone Financial Inc., both in New York City, and Joseph Dillon & Co., in Great Neck, New York.

Regulators Shut Down Firm

New York-based A.R. Baron pleaded guilty in 1997 to one count of enterprise corruption, a felony. Regulators shut the firm down. Iavarone was not charged with any crimes.

While Iavarone initially denied having had any sanctions in his career in the securities industry, he next said he had been fined, censured and suspended from trading by the NASD for 10 days in 1999.

The NASD, or National Association of Securities Dealers, a self-regulatory group, merged into the Financial Industry Regulatory Authority in 2007.

There were other complaints against Iavarone after he left A.R. Baron.

Keeneland Association of Lexington, Kentucky won a $554,156 judgment against Iavarone for failing to pay for five horses he bought at auction in 2003. The Internal Revenue Service obtained a $130,000 lien against him in 2004 for unpaid 2002 income taxes.

Paid the Judgments

``Back in 2003, I wasn't in good financial shape,'' Iavarone said. He said he paid all the judgments.

Iavarone was sued by the Showboat Hotel and Casino in Atlantic City in January 1999 for writing a bad check for $20,000, Superior Court of New Jersey court records show.

In the lawsuit, the casino alleged that it ``repeatedly made demands upon the Defendant for the aforesaid amount, but to no avail.'' In January 2000, the Superior Court of New Jersey entered a judgment against Iavarone when he failed to respond, for $14,090 plus costs. Iavarone paid the casino in July 2000, court records show.

Iavarone said an imposter was responsible. ``There was no bad check ever written,'' he said. ``Somebody took out a marker in my name, illegally.''

Big Brown won the Kentucky Derby on May 3 and the Preakness Stakes on May 17 by a combined 10 lengths. If he wins the Belmont Stakes, he would join Affirmed, Seattle Slew and Secretariat as the only horses to sweep the Triple Crown in the past 60 years.

Crack in Hoof

The Triple Crown is a demanding feat because it requires a horse to win at three different distances and on three different tracks over a five-week period.

Big Brown developed a crack in a hoof in recent days that has forced his trainer, Rick Dutrow Jr., to scale back his training ahead of the Belmont. Hoof injuries sidelined Big Brown for months last year and early this year.

The undefeated brown colt has produced a windfall for Iavarone and IEAH's investors. IEAH sold Big Brown's breeding rights for more than $60 million to Midway, Kentucky-based Three Chimneys Farm on May 17 just before the horse romped to victory in the Preakness, Iavarone said.

IEAH had bought a 75 percent stake in Big Brown for $2.5 million eight months earlier.

Iavarone, who was raised in Bethpage, Long Island, graduated from St. Joseph's College of Patchogue, New York, where he earned a bachelor's degree in business in 1993.

`That's a Mistake'

His IEAH's Web site includes an article about him from the Thoroughbred Daily News that says Iavarone has a bachelor's degree from the University of California at Los Angeles. ``That's a mistake,'' Iavarone says.

Iavarone has come a long way from his past as a stockbroker. In 1995, while working at A.R. Baron, Iavarone made unauthorized trades on three occasions, the NASD found.

He bought and sold more than $20,000 of stock without the permission of his clients, the NASD said. Iavarone, who wasn't charged criminally, was fined $7,500 and suspended for 10 days in 1999.

``I needed to make it go away as fast as possible,'' said Iavarone, adding that he neither admitted nor denied guilt. The records show he did consent to the findings of fact and violations by the NASD.

A.R. Baron defrauded investors out of more than $75 million before filing for bankruptcy protection in 1996, according to the New York District Attorney's office.

`Ran Up Prices'

One of Iavarone's customers at A.R. Baron was Vernon Bell, now a 65-year-old partner in a Huntington, West Virginia, heating and air-conditioning company.

``They invested your money in these supposedly up-and- coming stocks,'' said Bell, who filed a complaint with the NASD in 1997 stating he lost $62,000. He said in the complaint that Iavorone made unauthorized trades in penny stocks.

``They ran the prices up and then the bottom dropped out after they sold their shares,'' Bell said. ``I learned a lesson.'' He says he accepted a $10,000 settlement from Iavarone.

``That doesn't mean I did something wrong,'' says Iavarone, who recalls paying settlements to customers, but said he doesn't remember Bell.

Iavarone worked for A. R. Baron from 1993 until just before it closed in 1996. After that, he went to Lloyd Wade Securities for five months. Then he worked at Maidstone Financial for 10 months.

`I Did Very Poorly'

He ended his brokerage career at Joseph Dillon, where he worked for three years until December 2000.

Iavarone says he spent the next two years as a self- employed day-trader after the Internet stock bubble collapsed.

``Like everyone else, I did very poorly,'' he said.

In February 2003, he incorporated IEAH at his home in Holbrook, New York and entered the horseracing business, which he says has intrigued him since childhood.

After a rough start, he says he's raised more than $40 million, with plans to raise another $100 million for the hedge fund.

``Obviously Big Brown has become a big promotion for us and will really help us going forward in the advertising and promotion of the fund,'' Iavarone says in a video on IEAH's Web site. The video is from an interview by CNBC. He said in the interview yesterday the hedge fund would not own any interest in Big Brown.

As Iavarone uses the excitement surrounding Big Brown to drum up interest in his racehorse hedge fund, Bell, his former customer at A. R. Baron, urges prospective investors to be cautious.

``I know his past history,'' Bell said. ``I don't know if he's mended his ways. I wouldn't give him a second chance.''

Treasury's Ryan Considered for Fed Board Vacancy, Officials Say

By Scott Lanman

May 29 (Bloomberg) -- The White House is considering nominating Anthony Ryan, an assistant Treasury secretary, to fill a slot on the Federal Reserve board opened by the resignation of Governor Frederic Mishkin, two officials familiar with the matter said.

Treasury Secretary Henry Paulson is pushing for a nomination of Ryan, a former portfolio manager who took his current post in December 2006, the officials said on condition of anonymity. Ryan is responsible for financial markets and has worked as coordinator of the President's Working Group on Financial Markets, which includes the Fed.

The Bush administration hasn't decided on a final nominee, who would need to be confirmed by the Senate, which has yet to vote on three outstanding Fed board nominations. The Fed said yesterday Mishkin plans to depart on Aug. 31.

White House spokeswoman Dana Perino declined to comment.

Oil Falls After U.S. Says `Temporary Delays' Caused Supply Drop

May 29 (Bloomberg) -- Crude oil fell more than $2 a barrel after the Energy Department said the biggest drop in U.S. oil inventories in more than three years was caused by ``temporary delays'' in unloading oil tankers on the Gulf Coast.

Supplies declined 8.88 million barrels to 311.6 million last week, the biggest drop since Sept. 17, 2004, when Hurricane Ivan forced the closing of U.S. oil platforms in the Gulf of Mexico. Analysts surveyed by Bloomberg News were split over whether the report would show an increase or decrease in supplies.

``The initial reaction to the numbers was a big jump,'' said Tom Bentz, a broker at BNP Paribas in New York. ``There are a lot of questions about the numbers, which explains why prices didn't stay up at those levels.''

Crude oil for July delivery fell $2.58, or 2 percent, to $128.45 a barrel at 11:44 a.m. on the New York Mercantile Exchange. Futures reached a record $135.09 on May 22. Prices have more than doubled over the past year.

Oil traded at $129.23 a barrel, down $1.80, before the release of the report at 10:30 a.m. in Washington. Futures rose more than $2 to $133.12 a barrel after the report's release.

Brent crude oil for July settlement declined $2.42, or 1.9 percent, to $128.51 a barrel on London's ICE Futures Europe exchange. The contract touched a record $135.14 on May 22.

``In the text they say the decline was due to temporary delays in the Gulf but the import numbers weren't down by much,'' Bentz said.

Imports fell 3 percent to 8.96 million barrels a day, the lowest since the week ended April 11, the report showed.

``The report just doesn't seem to make sense,'' said Christopher Edmonds, the managing principal of FIG Partners Energy Research & Capital Group in Atlanta. ``I can't help but wonder if next week there will be a reaction and we'll get a large inventory build.''

U.S. Economy: First-Quarter Growth Estimate Raised (Update2)

May 29 (Bloomberg) -- The U.S. economy grew more than previously estimated in the first quarter as Americans shunned imports and exports climbed to a record.

The 0.9 percent gain in gross domestic product compares with an advance estimate of 0.6 percent, the Commerce Department said today in Washington. Fourth-quarter growth was 0.6 percent. Separate figures today showed the number of Americans continuing to receive jobless benefits rose to a four-year high this month.

``It's basically like an airplane at stall speed, just skimming above the water,'' Jeffrey Frankel, an economist at Harvard University who is a member of the panel that dates U.S. economic cycles, said in a Bloomberg Radio interview. ``I wouldn't rule out going into a recession'' later in the year.

Trade remains the bright spot for an economy that is likely to slow this quarter as surging fuel and food bills and falling home values force consumers to cut back. The economy will expand just 0.1 percent this quarter as spending slows further, according to economists surveyed by Bloomberg this month.

``We are somewhere in the twilight zone between an expansion and a recession,'' said Michael Feroli, an economist at JPMorgan Chase & Co. in New York. ``We will have a poor pace of growth through the year.''

First-time claims for unemployment insurance rose to 372,000 last week, higher than economists had forecast, from 368,000 the previous period, the Labor Department reported. Those continuing to receive benefits jumped to 3.104 million in the week ended May 17, the highest level since February 2004.

Stocks, Treasuries

Stocks rose, with the Standard & Poor's 500 index up 0.7 percent at 1,400 at 11:55 a.m. in New York. Treasuries slid after benchmark 10-year note yields yesterday climbed above 4 percent for the first time since January. The yields were at 4.10 percent, from 4 percent late yesterday. The dollar rose 0.7 percent to $1.5531 per euro.

Honeywell International Inc., the world's largest maker of airplane controls, said last week it is confident in its full- year forecasts as demand outside the U.S. remained robust. Record oil prices have boosted orders for refining equipment and building projects in the Middle East, India and China has pushed up sales of its energy conservation devices.

This year ``is going to be another strong year in a more difficult environment,'' Honeywell's Chief Executive Officer David Cote said on May 19 at a conference in Florida.

Gains Abroad

Eaton Corp., the world's second-largest maker of hydraulic equipment, reaffirmed its full-year profit forecast on May 28 and projected international markets will grow as much as 6 percent. The company's U.S. markets will expand 2 percent to 3 percent this year.

Procter & Gamble Co., the world's largest consumer-products company, said last month that third-quarter profit rose on increased sales overseas and higher prices.

While a recession is often described as consecutive declines in GDP, the National Bureau of Economic Research, the official arbiter in the U.S., defines contractions as a ``significant'' decrease in activity over a sustained period of time.

The group says that in a recession, decreases would be visible in payrolls, production, sales and incomes, in addition to GDP.

For that reason, the U.S. is probably already ``in a mild recession,'' said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto. ``The economy will be pretty flat on its back through much of this year.''

The Bush administration is betting the U.S. will keep growing as the economy benefits from the impact of tax rebates and seven interest-rate cuts by the Federal Reserve since September.

White House View

``We think that it will'' avoid a recession, Keith Hennessey, director of the White House National Economic Council, said in an interview with Bloomberg Television. ``We think that growth is continuing in the second quarter'' and will strengthen in the second half of the year, he said.

Today's GDP report is the second of three estimates. The median forecast of 74 economists surveyed by Bloomberg News was for a 0.9 percent pace. Projections ranged from gains of 0.6 percent to 1.3 percent.

Following a 0.6 percent growth rate in the fourth quarter, the reading was the smallest six-month expansion rate in five years.

The trade deficit shrank to an annual pace of $480.2 billion, the smallest since the third quarter of 2002. Trade's contribution to growth jumped to 0.8 percentage point, four times more than previously estimated.

Consumer Spending

Consumer spending, which accounts for more than two-thirds of the economy, rose at a 1 percent annual rate in the first quarter, the same as estimated last month. The gain was the smallest since the 2001 recession.

The revisions also showed bigger gains in incomes than previously estimated, easing concern that spending will collapse.

Personal income increased at a 5.1 percent annual pace from October through December, compared with an initial projection of 4.2 percent. For the first quarter, income growth was revised up to 4.7 percent from 4.4 percent.

Income growth may slow in coming months as the labor market softens. The U.S. has lost jobs for four consecutive months this year, and payrolls may post another decline for May, according to the Bloomberg survey.

Inventories Drop

The gain in growth last quarter would have been even larger if not for a reduction in estimates for inventories. Companies cut stockpiles at a $14.4 billion annual rate, compared with an initial estimate of a $1.8 billion gain. The figures added 0.2 percentage point to growth, less than the previously estimated contribution of 0.8 percentage point.

A measure of total sales, which strips out stockpiles, was revised to a gain of 0.7 percent at an annual rate rather than a 0.2 percent drop. Sales rose at a 2.4 percent pace in the fourth quarter.

There are signs that demand is slowing even more. Auto sales in April slid to a 14.4 million annual rate, the lowest level since 1998, industry figures show. Spending this quarter will grow at a 0.5 percent pace, the smallest gain since 1991, according to the median estimate in a monthly Bloomberg survey.

Fed policy makers last month trimmed their economic growth projections for this year by about 1 percentage point to 0.3 percent to 1.2 percent.

``A number of participants were of the view that financial headwinds would probably continue to restrain economic activity through much of next year,'' minutes of the Fed's April meeting showed last week.

Construction Slump

Residential construction decreased at a 25.5 percent pace, less than previously estimated, though still the biggest drop since 1981.

Reports this month showed declines in home building will remain a drag on growth. Builders began work in April on the fewest single-family houses in 17 years.

The figures today also included a first look at corporate profits for the quarter. Earnings adjusted for the value of inventories and depreciation of capital expenditures, known as profits from current production, increased 0.3 percent to an annual rate of $1.57 trillion.