By Keith Naughton, Adam Satariano and Duane D. Stanford
Sept. 4 (Bloomberg) -- At Activision Blizzard Inc., instilling a “culture of thrift” means you wait 13 years before you change the office carpet, according to Chief Executive Officer Bobby Kotick.
“A lot of other companies, when there is some sort of economic downturn, they go into triage mode where they are trying to figure out their costs,” Kotick said. “We do that all the time.”
Kotick acted quickly during the recession, merging his company last year with Blizzard, the game division of France’s Vivendi SA. Activision got “World of Warcraft,” an online role-playing game with more than 11 million subscribers paying $14.99 a month. That helped Kotick boost market share in North America and Europe by 2.8 percentage points to 12.7 percent even as industry sales fell 14 percent.
Activision offers one example of how companies well- positioned for the worst economic slump since the 1930s have gained a competitive advantage.
Wal-Mart Stores Inc. expanded electronics offerings after Circuit City Stores Inc. liquidated, McDonald’s Corp. rolled out low-priced lattes and casino owner Penn National Gaming Inc. is looking to expand into Las Vegas. J.M. Smucker Co. added Folgers, the best-selling ground coffee in the U.S., to its market-leading jelly, jam and preserve brand; Ford Motor Co. boosted output while U.S. rivals filed for bankruptcy; and Verizon Communications Inc. bought Alltel Corp.
Beating the S&P
Six of those seven companies have outperformed the Standard & Poor’s 500 Index since the recession began in December 2007, while Penn National, the only laggard, has outpaced the S&P since the benchmark’s March 9 low.
Analysts expect the gains to continue. Each of the seven companies has more buy ratings than holds or sells. Of 150 recommendations for the group, there are 106 buys, 38 holds and six sells, based on data compiled by Bloomberg.
“To be aggressive in this recession, it took a strong stomach and a good balance sheet,” said Mark Zandi, chief economist of Moody’sEconomy.com in West Chester, Pennsylvania. “The companies that panicked will suffer more in the long run.”
McDonald’s, the world’s largest restaurant chain, and its franchisees invested $1.12 billion to add McCafe gourmet coffee drinks at about 11,200 U.S. locations.
Investing in Coffee
The company’s share of the U.S. fast-food market has increased 1 percentage point since 2006, according to a spokeswoman, Heidi Barker. That growth was driven in part by last year’s introduction of the McCafe products, said Chief Financial Officer Peter Bensen. Coffee sales have grown to 5 percent of the Oak Brook, Illinois-based company’s sales, up from 2 percent in 2006, Bensen said.
“We’re hitting or exceeding our targeted unit movement across the country,” Bensen said, while declining to specify internal goals. “We think the combined beverage strategy, conservatively, can add about $125,000 to sales per store.”
U.S. McDonald’s restaurants average $2.3 million in annual sales, Bensen said.
Lattes at McDonald’s start at $2.29, compared with $3.29 for a small latte at some of Starbucks Corp.’s New York outlets. Seattle-based Starbucks said Aug. 20 it is lowering prices on coffees and lattes by as much as 15 cents while raising prices on frappuccinos and caramel macchiatos by as much as 30 cents.
Sales Growth
“We continue to focus on providing value to our customers, an area where we have made much progress against the misperceptions about Starbucks value proposition,” May Kulthol, a spokeswoman for Starbucks, said in an e-mailed statement.
McDonald’s shares are up 9.3 percent since their March 5 low this year. They rose 20 cents to $55.57 yesterday in New York Stock Exchange composite trading. Of 21 analysts covering the stock, 12 say buy and 9 say hold, based on data compiled by Bloomberg.
“We’ve had an intense focus on improving operations,” Bensen said. “The eating-out market is shrinking in the recession, and we’re grabbing an even bigger part of the market.”
U.S. restaurant-industry traffic fell 2.6 percent for the three months ended May 2009, according to market researcher NPD Group, the steepest drop since 1981. Sales at McDonald’s U.S. stores open at least 13 months gained 3.5 percent in the second quarter, the company said.
Breakfast Boost
While it’s too early to say whether the drinks strategy will meet McDonald’s goals, the coffee is “bringing people into McDonald’s more often and they’re spending more on breakfast and the rest of the menu,” said Richard Jeremiah, a restaurant analyst with marketing researcher IBISWorld Inc. in Los Angeles. “The key thing at the moment is getting that traffic.”
Smucker, the 112-year-old maker of Smucker’s jams and Jif, the top-selling peanut butter in the U.S., has also taken advantage of the decline in dining out.
“The shift to ‘at-home’ consumption is on an upward trend and we are well prepared to continue to play an important role,” Co-CEO Tim Smucker said in an Aug. 21 e-mail.
Net income at Orrville, Ohio-based Smucker more than doubled to $98.1 million for the three months ended July 31. Revenue nearly doubled when it acquired the Folgers coffee business from Procter & Gamble Co. for about $3 billion in November as Wall Street turmoil fueled a global financial collapse.
“Folgers was a sleeper that they have been able to reinvigorate,” said Edward Aaron, a Denver-based analyst with RBC Capital Markets.
On the Prowl
Folgers captured more than a quarter of ground-coffee dollar sales in the 13 weeks ended June 28, according to Information Resources Inc., a Chicago-based market researcher. IRI’s data does not include sales at Walmart.
Aaron, who advises buying Smucker, has a 12-month share- price target of $59, 14 percent more than yesterday’s NYSE close at $51.59. Of 11 analysts covering the company, 9 say buy and 2 say hold. Smucker has surged 51 percent since touching a 2009 low of $34.22 on March 11.
Penn National has $800 million in cash and is on the prowl for new casino licenses in states including New York, Kansas and Ohio, as well as existing properties being sold by debt-laden rivals, Chief Executive Peter Carlino has said since October.
“We are probably busier at the corporate office than we have ever been in terms of looking at new opportunities,” CFO Bill Clifford said in an Aug. 21 interview. “We have a lot more firepower, a lot more options available to us to take advantage of the opportunities being created indirectly by the bad economy.”
‘Distressed Property’
The prize the Wyomissing, Pennsylvania-based casino and race-track company is seeking: a mid-sized resort on the Las Vegas Strip. Troubled owners now reluctant to sell may have little choice next year after MGM Mirage’s CityCenter opens in December, adding almost 6,000 new hotel rooms amid the city’s worst decline.
“There are going to be some distressed property situations out in Las Vegas,” Clifford said. “It will play itself out early next year, and at that point in time I think it will be much easier to get something done.”
Of 16 analysts covering Penn National, 12 recommend buying and 3 say hold, according to data compiled by Bloomberg. The shares have soared 68 percent since a March 6 low. They rose 13 cents to $28.64 in Nasdaq Stock Market composite trading.
As U.S. auto buying fell to the lowest level in three decades, Ford CEO Alan Mulally forced the 106-year-old automaker to deal with its diminished place in a changing market.
“There was a move by the company to accept the reality of today rather than thinking things are going to get better,” CFO Lewis Booth said in an Aug. 21 interview. “This very strong view, led by Alan, is, ‘Accept reality and react to it. Don’t hope it’s going to go away.’”
Avoiding Bankruptcy
That attitude led the Dearborn, Michigan-based automaker to borrow $23 billion in late 2006. The move saved Ford from the bailouts and bankruptcies that beset the predecessors of General Motors Co. and Auburn Hills, Michigan-based Chrysler Group LLC.
Ford has cut its North American workforce by 42 percent, or 50,400 jobs, since December 2006 as it revamped its product line. It dropped the 10-miles-per-gallon Excursion sport-utility vehicle and added the 41-mpg Fusion hybrid.
As Chrysler and Detroit-based GM slipped into Chapter 11 in April and June, Ford boosted output 16 percent to win more buyers. Ford had 15.8 percent of U.S. auto sales through August, up from 15 percent in 2008. It’s faring better than it did after the 2001 recession, when its market share slid to 21.5 percent in 2002 from 24.1 percent two years earlier.
“We didn’t think of just surviving,” Booth said. “We thought that, as we went through this, we would continue to invest in the new products for the future.”
‘Stealing Share’
Ford has combined “cost cutting, product improvement and pricing enhancement,” said Brian Johnson, a Chicago-based Barclays Capital analyst who has a “neutral” rating on the stock. “Ford is not just stealing share from GM and Chrysler, they’re taking it from the Japanese as well.”
Ford rose 45 cents to $7.48 yesterday in composite trading on the New York Stock Exchange. The shares have more than tripled this year for the third-largest gain in the S&P 500.
Analysts still aren’t convinced a turnaround is at hand. Six recommend the shares while five say hold and five say sell.
Walmart, the world’s biggest retailer, loaded up on laptops, mobile phones and Blu-ray disc players as Circuit City liquidated in March. In the U.S., operating profit advanced 5 percent to $4.9 billion in the quarter ended July 31.
Walmart and Target
Customer visits during the period increased by 1.3 percent, reflecting store improvements that will help the Bentonville, Arkansas-based company keep shoppers when the recession ends, Eduardo Castro-Wright, U.S. stores chief, said on an Aug. 13 earnings call.
Sales by Walmart’s U.S. stores open at least a year rose 1 percent in the 26 weeks through July 31 as Target Corp. posted a 5 percent decline. Walmart had a 3.2 percent gain in 2008, when same-store sales for Minneapolis-based Target slid 2.9 percent.
“Based on same-store sales performance over the past year, Walmart has been outperforming the competition, which implies that the company is gaining market share,” Joseph Feldman, an analyst at New York-based Telsey Advisory Group, said Aug. 27.
A Target spokesman, Eric Hausman, said the second-largest U.S. discount chain “has continued to gain market share in many categories.”
“Market share is not a zero-sum game between these two companies,” he said.
Verizon’s Leap
Walmart’s ability to keep increasing sales in a slumping economy echoes the company’s experience in the 2001 recession. For the 52 weeks ended Feb. 1, 2002, Walmart’s same-store sales climbed 6.1 percent.
Walmart rose 82 cents to $51.74 in NYSE trading yesterday. Walmart has gained 11 percent since a 2009 low on Feb. 4, and 21 analysts recommend buying the stock, based on data compiled by Bloomberg. Six say hold.
Verizon used an acquisition to leapfrog AT&T Inc. and become the largest U.S. wireless provider this year. The Jan. 9 purchase of Alltel for $28 billion helped New York-based Verizon increase second-quarter sales by 11 percent amid a slowing market for phone services, and boosted the number of mobile customers by 18 percent.
Mobile Web Access
“Our business relationships have held up very well,” Verizon CFO John Killian said in an Aug. 19 interview from his office in Basking Ridge, New Jersey. “We’ve not lost any contracts.”
Verizon announced contracts this year with the Bank of New York Mellon Corp., Siemens Enterprise Communications and federal agencies such as the Department of Health and Human Services.
Revenue from mobile plans that let customers surf the Web jumped 53 percent last quarter from a year earlier. They will eventually comprise half of customers’ monthly wireless bills, up from 29 percent in the second quarter, Killian said.
Mobile Web access will speed up when Verizon rolls out its “fourth generation,” or long-term evolution, network next year. Verizon said it will be the first to deploy its LTE network in the U.S., ahead of AT&T’s planned 2011 rollout.
While global mobile-phone sales slid 6 percent in the second quarter, smart-phone sales rose 27 percent, according to research firm Gartner Inc.
“People want the cool thing,” said Brian Marshall, a technology analyst at Broadpoint AmTech Inc. in San Francisco. “They view that as a necessity.”
Verizon rose 10 cents to $30.24 yesterday in NYSE trading, pushing its gain to 16 percent since a March 9 low. Of 31 analysts covering the company, 17 say buy, 13 say hold and 1 recommends selling.
‘Even Out Earnings’
Like Verizon, game maker Activision looked to a merger to expand in the recession by combining with Vivendi’s Blizzard.
“Doing that merger and having a subscription base for a game such as ‘Warcraft,’ that really helps even out earnings,” said Geoff Chamberlain, a research analyst with Appleton Partners in Boston, which owned 272,000 Activision shares as of June 30, based on data compiled by Bloomberg.
Adding market share in an economic contraction isn’t new for Santa Monica, California-based Activision. In 2001’s fourth quarter, when the last recession ended, game titles featuring professional skateboarder Tony Hawk helped boost global market share by 1.7 percentage points from a year earlier to 12.4 percent, the company said.
Activision has surged 41 percent since its low for the year on Jan. 6 in Nasdaq trading. The shares fell 9 cents to $11.55 yesterday. All 29 analysts following the stock rate it as a buy.
As for the 13-year-old carpet at company headquarters, CEO Kotick said he recently replaced it at the landlord’s expense.
By Timothy R. Homan
Sept. 4 (Bloomberg) -- The pace of U.S. job losses slowed in August while the unemployment rate reached a 26-year high, signaling the recovery from recession will be slow to develop.
Employers cut payrolls by 216,000, fewer than forecast, after a 276,000 drop in July, Labor Department data showed today in Washington. The jobless rate rose to 9.7 percent; the so- called underemployment rate -- which includes part-time workers who’d prefer a full-time position and people who want work but have given up looking -- reached a record 16.8 percent.
Today’s figures stoke concern that the recovery forecast to take hold in the second half of the year won’t prompt a turnaround in the job market until 2010. With the ranks of long- term unemployed nearing 5 million, workers are at risk of losing skills, making it even tougher for them to eventually find work.
“The economy is no longer detonating, but we are still losing jobs,” David Rosenberg, chief economist at Gluskin Sheff & Associates Inc. in Toronto, said in an interview with Bloomberg Radio. “It’s going to be a very tough environment for the consumer.”
Stocks fluctuated after the release, and the Standard & Poor’s 500 Index was up 0.3 percent at 1,005.99 as of 11:23 a.m. in New York. Treasuries were lower, with benchmark 10-year notes yielding 3.38 percent from 3.35 percent late yesterday.
Rising joblessness underscores Treasury Secretary Timothy Geithner’s judgment this week that it’s “too early” to start exiting from the unprecedented stimulus measures aimed at stabilizing the economy.
Lowering Costs
AMR Corp. and Whirlpool Corp. are among the companies continuing to cut staff to lower costs and revive profits in the aftermath of the deepest recession since the 1930s.
“The labor market lags behind the rest of the economy, so we are first going to have to see positive GDP growth,” Christina Romer, chairman of the White House Council of Economic Advisers, said in a Bloomberg Radio interview. While 9.7 percent unemployment is “a tragedy,” Romer noted that the pace of job losses has slowed from 741,000 in January.
Romer said the Obama administration’s $787 billion fiscal stimulus is working to boost growth and declined to comment on whether a second effort will be needed.
Revisions subtracted 49,000 from payroll figures previously reported for July and June. The drop for July is now calculated at 276,000, compared with the 247,000 previously reported.
Payrolls were forecast to fall 230,000 in August according to the median of 79 economists surveyed by Bloomberg News. The jobless rate was projected to rise to 9.5 percent. Analysts in a monthly Bloomberg survey projected the jobless rate will reach 10 percent by early 2010 and average 9.8 percent next year.
Recession’s Toll
The latest numbers brought total jobs lost since the recession began in December 2007 to 6.9 million, the biggest decline in any post-World War II economic slump.
Among the 14.9 million unemployed Americans in August, 4.99 million were out of work for more than 26 weeks. The percentage of jobless who weren’t classified as on temporary layoff rose to 53.9 percent, up from 39.1 percent a year ago.
“Layoffs that we’re having are more structural and not cyclical, and that makes it more difficult to have a meaningful rebound in income growth, which is a key ingredient as I said for sustainable self re-enforcing expansion,” said Tony Crescenzi, a market strategist and portfolio manager at Pacific Investment Management Co., manager of the world’s biggest bond fund.
Breadth of Declines
All major job categories recorded losses in August, with construction payrolls tumbling 65,000, factories cutting another 63,000 and retailers firing 10,000 people.
Whirlpool, the world’s largest appliance maker, is among those firms still eliminating positions. The Benton Harbor, Michigan-based company said Aug. 28 it will close its Evansville, Indiana, manufacturing plant, resulting in the elimination of 1,100 jobs.
Fort Worth, Texas-based American Airlines, a unit of AMR, said this week it will furlough 228 flight attendants and put 244 more on involuntary leave.
Federal Reserve officials had “particular” concern about the job market when they met Aug. 11-12, minutes of the gathering showed this week.
“Long-term unemployment and permanent separations continued to rise, suggesting possible problems of skill loss and a need for labor reallocation that could slow recovery in employment begins to expand,” the Fed said in the minutes released Sept. 2.
Fed Rate Changes
Federal Reserve policy makers waited at least a year after unemployment peaked before raising interest rates in the aftermath of the previous two recessions.
Chairman Ben S. Bernanke, credited with preventing a second depression in winning nomination by President Barack Obama for a second term last month, has overseen a $1.2 trillion expansion of the central bank’s balance sheet to combat the credit crisis.
Today’s report also showed the average work week held at 33.1 hours in August. Average weekly hours worked by production workers remained unchanged from the month before, at 39.8 hours, while overtime also held at 2.9 hours. That brought the average weekly earnings up to $617.32 from $615.33.
“We’re still going to see some months of job cuts,” said Brian Bethune, chief financial economist at IHS Global Insight in Lexington, Massachusetts. “There is a whole range of options, like adding shifts or hours, that companies can put in place until it becomes necessary to hire people back.”
Workers’ average hourly wages rose 6 cents, or 0.3 percent, to $18.65 from the prior month. Hourly earnings were 2.6 percent higher than August 2008. Economists surveyed by Bloomberg had forecast a 0.1 percent increase from the prior month and a 2.2 percent gain for the 12-month period.
The U.S. recession “is bottoming out” and the economy is poised for “a slow return,” Alcoa Inc. Chief Executive Officer Klaus Kleinfeld said in a Sept. 2 interview. The head of the largest U.S. aluminum producer said government stimulus in the U.S. and China will affect the New York-based company’s earnings “positively” this year.
Coruscating on Thin Ice
The Obama administration is young and out of touch.
At a speech in Colorado someone asked if I was concerned about some of the appointees to the Obama administration. The questioner was referring obliquely to conservative dismay at Van Jones, special adviser for green jobs on the White House environmental council. Apart from a flirtation with radicalism (you have to hope it did not become a full, deep and continuing relationship), Jones, in February, thoughtfully attempted to capture the essence of the GOP in a speech in Berkeley, Calif. "Republicans are —," he explained. We don't print the word he used, but it refers to a body part involved in elimination. He was speaking at the inaugural ceremony of the Rahm Emanuel Center for the Study of Political Comportment. Ha, just kidding.
But Mr. Jones is not my concern. All early administrations draw to their middle and lower levels a certain number of activists from the edges—flakes. But because they are extreme, they become controversial, and because they are controversial, they become ineffective. In its way the system works.
A Doctor's Plan for Legal Industry Reform
My modest proposal to rearrange how lawyers do business.
RICHARD B. RAFAL
Since we are moving toward socialism with ObamaCare, the time has come to do the same with other professions—especially lawyers. Physician committees can decide whether lawyers are necessary in any given situation.
At a town-hall meeting in Portsmouth, N.H., last month, our uninformed lawyer in chief suggested that we physicians would rather chop off a foot than manage diabetes since we would make more money doing surgery. Then President Obama compounded his attack by claiming a doctor's reimbursement is between "$30,000" and "$50,000" for such amputations! (Actually, such surgery costs only about $1,500.)
Physicians have never been so insulted. Because of these affronts, I will gladly volunteer for the important duty of controlling and regulating lawyers. Since most of what lawyers do is repetitive boilerplate or pushing paper, physicians would have no problem dictating what is appropriate for attorneys. We physicians know much more about legal practice than lawyers do about medicine.
Following are highlights of a proposed bill authorizing the dismantling of the current framework of law practice and instituting socialized legal care:
• Contingency fees will be discouraged, and eventually outlawed, over a five-year period. This will put legal rewards back into the pockets of the deserving—the public and the aggrieved parties. Slick lawyers taking their "cut" smacks of a bookie operation. Attorneys will be permitted to keep up to 3% in contingency cases, the remainder going into a pool for poor people.
• Legal "DRGs." Each potential legal situation will be assigned a relative value, and charges limited to this amount. Program participation and acceptance of this amount is mandatory, regardless of the number of hours spent on the matter. Government schedules of flat fees for each service, analogous to medicine's Diagnosis Related Groups (DRGs), will be issued. For example, any divorce will have a set fee of, say, $1,000, regardless of its simplicity or complexity. This will eliminate shady hourly billing. Niggling fees such as $2 per page photocopied or faxed would disappear. Who else nickels-and-dimes you while at the same time charging hundreds of dollars per hour? I'm surprised lawyers don't tack shipping and handling onto their bills.
• Legal "death panels." Over 75? You will not be entitled to legal care for any matter. Why waste money on those who are only going to die soon? We can decrease utilization, save money and unclog the courts simultaneously. Grandma, you're on your own.
• Ration legal care. One may need to wait months to consult an attorney. Despite a perceived legal need, physician review panels or government bureaucrats may deem advice unnecessary. Possibly one may not get representation before court dates or deadlines. But that' s tough: What do you want for "free"?
• Physician controlled legal review. This is potentially the most exciting reform, with doctors leading committees for determining the necessity of all legal procedures and the fairness of attorney fees. What a wonderful way for doctors to get even with the sharks attempting to eviscerate the practice of medicine.
• Discourage/eliminate specialization. Legal specialists with extra training and experience charge more money, contributing to increased costs of legal care, making it unaffordable for many. This reform will guarantee a selection of mediocre, unmotivated attorneys but should help slow rising legal costs. Big shot under indictment? Classified National Archives documents down your pants? Sitting president defending against impeachment? Have FBI agents found $90,000 in your freezer? Too bad. Under reform you too may have to go to the government legal shop for advice.
• Electronic legal records. We should enter the digital age and computerize and centralize legal records nationwide. All files must be in a standard, preferably inconvenient, format and must be available to government agencies. A single database of judgments, court records, client files, etc. will decrease legal expenses. Anyone with Internet access will be able to search the database, eliminating unjustifiable fees charged by law firms for supposedly proprietary information, while fostering transparency. It will enable consumers to dump their clunker attorneys and transfer records easily.
• Ban legal advertisements. Catchy phone numbers such as 1-800-LAWYERS would be seized by the government and repurposed for reporting unscrupulous attorneys.
• New government oversight. Government overhead to manage the legal system will include a cabinet secretary, commissioners, ombudsmen, auditors, assistants, czars and departments.
• Collect data about the supply of and demand for attorneys.Create a commission to study the diversity and geographic distribution of attorneys, with power to stipulate and enforce corrective actions to right imbalances. The more bureaucracy the better. One can never have too many eyes watching these sleazy sneaks.
• Lawyer Reduction Act (H.R. -3200). A self-explanatory bill that not only decreases the number of law students, but also arbitrarily removes 3,200 attorneys from practice each year. Textbook addition by subtraction.
Enthusiastically embracing the above legal changes can serve as a "teachable moment" and will go a long way toward giving the lawyers who run Congress a taste of their own medicine.
Dr. Rafal is a radiologist in New York City.
Harry Jekyll and Harry Hyde
Never the two shall meet.
In the Aug. 6 edition of the Las Vegas Sun, readers saw an op-ed by Harry Reid. "I have never taken up the Washington hobby of pointing fingers for political gain," reassured Nevada's eminently reasonable, bipartisan, four-term senator.
A few hours later, Mr. Reid appeared for the national press, armed with a piece of Astroturf, to berate town-hall protestors as captive to "Internet rumor mongers and insurance rackets." The Republican Party "is run by a talk-show host," snapped Washington's eminently angry and partisan majority leader.
Welcome to Mr. Reid's bipolar world, which isn't about to fuse any time soon. As a senator up for re-election next year in a swing state that is on the economic ropes and wary of Democrats' liberal plans, Mr. Reid is under pressure from constituents to work with Republicans toward a reasonable agenda. As the public face of the Democratic Senate, Mr. Reid is under pressure from his liberal wing to tear up the opposition and advance his party's wild ambitions. Never the two Harry Reids shall meet, as Mr. Reid's dismal poll numbers are proving.
Senate Majority Leader Harry Reid
The Coming Reset in State Government
My fellow governors and I are likely facing a permanent reduction in tax revenues.
MITCH DANIELS
State government finances are a wreck. The drop in tax receipts is the worst in a half century. Fewer than 10 states ended the last fiscal year with significant reserves, and three-fourths have deficits exceeding 10% of their budgets. Only an emergency infusion of printed federal funny money is keeping most state boats afloat right now.
Most governors I've talked to are so busy bailing that they haven't checked the long-range forecast. What the radar tells me is that we ain't seen nothin' yet. What we are being hit by isn't a tropical storm that will come and go, with sunshine soon to follow. It's much more likely that we're facing a near permanent reduction in state tax revenues that will require us to reduce the size and scope of our state governments. And the time to prepare for this new reality is already at hand.
The coming state government reset will be particularly wrenching after the happy binge that preceded this recession. During the last decade, states increased their spending by an average of 6% per year, gusting to 8% during 2007-08. Much of the government institutions built up in those years will now have to be dismantled.
For now, my state's situation is far better than most, but it won't stay that way if we fail to act in Indiana. At present, we are meeting our obligations, without raising taxes, and still have over $1 billion in reserve. But the dominant reality is that even assuming the official revenue projections are accurate (and they have been consistently too rosy for the past two years), the state of Indiana will have fewer dollars to work with in 2011 than it did in 2007. Most other states face similar or worse prospects.
Stocks Hold Line After Jobs Data
Stocks climbed modestly after new data sent mixed signals about the pace of deterioration in the U.S. job market.
In the latest Labor Department report, the number of lost jobs in August was smaller than expected, but the unemployment rate was higher than anticipated, reaching its highest level since June 1983.
![[Markets Data]](http://s.wsj.net/public/resources/images/MDGpromo_D01222009151210.jpg)
Major indexes have swung in a narrow range between gains and losses in early action. The Dow Jones Industrial Average was recently up 29 points, or 0.3%, to 9374.46, helped by a 2% gain in component Bank of America.
The Nasdaq Composite Index was up 0.6%. The S&P 500 gained 0.4% to stay just above the key 1000 level. It was helped by slight gains in all its sectors except utilities and basic materials.
The market is still in the red for the week, thanks to a plunge on Tuesday that it never quite recovered from. Traders are wary of what will happen when many investors return from summer vacations after the Labor Day weekend. U.S. financial markets will be closed for the holiday Monday.
Safe-haven investments traded a little lower on Friday but didn't signal an all-out embrace of risk by the market participants who have stuck around. The 10-year Treasury note fell 3/32 to yield 3.353%. Gold futures fell $5.50 to $992.20 per troy ounce in New York. The dollar gained against the yen and euro.
Despite the yellow metal's pullback, it still has a loyal following among those who believe it is due for a renewed rally in the months ahead as an alternative to paper money.
"You've got so much more currency out there and a limited supply of gold," said Andrew Schiff, a broker at the portfolio-management firm Euro Pacific Capital, which has been a long-term buyer of gold and mining stocks. "With all the liquidity out there, here's a lot of reason to believe that the boom in gold and other commodities will get back on track," as investors seek tangible stores of value.
The Labor Department said nonfarm payrolls shed 216,000 jobs in August, slightly smaller than the loss expected. Revised data showed more job losses than previously reported in earlier months. The unemployment rate grew to 9.7%, the highest level since June 1983 when the rate was 10.1%. In July, the unemployment rate had declined for the first time since April 2008.
Among stocks to watch, shares of ratings firm Moody's were down nearly 1% after Berkshire Hathaway further reduced its holdings in the company, selling about 800,000 shares earlier this week. Since May, the Warren Buffett-led company has pared its stake in Moody's to about 40 million shares.
Asian stock markets benefited from the firmer gold and base metal prices, with Hong Kong's Hang Seng Index rising 2.8% and the Shanghai Composite Index up 0.6%. In Europe, shares were higher.
Job Losses Moderate, but Unemployment Rate Hits 9.7%
MAYA JACKSON RANDALL
WASHINGTON -- U.S. job losses softened last month but the unemployment rate soared to its highest level since June 1983, proving that it will take some time for the ailing labor market to recover from the worst financial crisis in decades.
Nonfarm payrolls declined 216,000 last month compared to a revised 276,000 drop in July, the Labor Department said Friday. The August drop is smaller than the 233,000 decline economists in a Dow Jones Newswires survey had expected.
Even though the loss is huge by historical standards, it's an improvement; monthly job cuts earlier in the year totaled as much as 700,000. The economy has lost 7.4 million jobs since the recession started in December 2007.
The unemployment rate, calculated using a survey of households as opposed to companies, grew to 9.7%, the highest level since June 1983 when the rate was 10.1%. In July, the unemployment rate had declined for the first time since April 2008. The unemployment rate was under 6% less than one year ago.
Data on U.S. employment has grown more mixed of late. While there has been improvement, economists expect a labor market recovery will be fairly sluggish. Meanwhile, U.S. Federal Reserve officials have grown more confident that the worst economic downturn in decades is ending. According to minutes of the August meeting held by the Fed's policy panel, Fed officials see growth resuming this year, and they expect the recovery to pick up in 2010. But they point out that the economy remains vulnerable to shocks.
Recently, some economic data has turned brighter. Earlier this week, National Association of Realtors data showed that pending home sales climbed to the highest level in more than two years. Also, factory activity in August expanded the first time since January 2008, according to the Institute for Supply Management report released this week.
At the same time, other data shows that the U.S. service sector contracted. And data the Labor Department released this week on jobless claims indicates significant challenges in the labor market, which in turn poses a threat to consumer spending. Meanwhile, economists such as Christina Romer, who heads President Barack Obama's Council of Economic Advisers, see unemployment reaching 10%.
"There's no doubt that we have a long way to go and I and the other members of this administration will not let up until those Americans who are looking for jobs can find them," President Obama said in a statement from the Rose Garden earlier this week.
The Fed's policy panel is slated to meet later this month. But the minutes from its August meeting suggest the Fed is unlikely to hike rates anytime soon. Many economists don't expect rate hikes until the unemployment rate has peaked. In August, officials held the federal funds rate a range near zero.
According to Friday's employment report, average hourly earnings were up $0.06 last month at $18.65. That was up just 2.6% from one year ago, a sign that inflation isn't a risk for the Fed.
Employment last month in manufacturing fell 63,000.
Construction employment, meanwhile, was down 65,000.
Employment in the service sector -- the main source of U.S. jobs -- fell 80,000. Business and professional services companies shed 22,000 jobs.
Retail trade cut 10,000 jobs and leisure and hospitality employment shed 21,000.
Meanwhile, education and health services rose by 52,000.
The government shed 18,000 jobs.
The average workweek was unchanged at 33.1 hours.
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