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Japan posted a current-account surplus in January as exports climbed for a second month, an indication overseas demand is sustaining the nation’s recovery.

The gap was 899.8 billion yen ($9.9 billion) compared with a deficit a year earlier, the Ministry of Finance said in Tokyo today. The median estimate of 26 economists surveyed by Bloomberg News was for a 783.9 billion yen surplus.

The report highlights the role overseas shipments have continued to play in propping up the world’s second-largest economy. Further export gains in coming months will prompt businesses to boost spending on plant and equipment, helping support the rebound, according to economist Akiyoshi Takumori.

“This confirms that the economy is recovering, led by solid overseas demand,” said Takumori, chief economist at Sumitomo Mitsui Asset Management Co. in Tokyo. “Although the level is still low, the recovery will fuel production and make companies more comfortable with increasing investment.”

Today’s data adds to signs of sustained expansion in the first quarter. Factory production rose at the fastest pace since May and the unemployment rate fell to a 10-month low in January. The Finance Ministry said last week capital spending also fell 18.5 percent in the three months ended Dec. 31. While that was the 11th straight decline, it was also the smallest drop in a year.

The current-account gap increased by 1.032 trillion yen from a year earlier, the second highest jump since comparable data were made available in 1986, the government said. Exports rose 40.6 percent in January from a year earlier, also the biggest advance since 1986, and imports advanced 7.1 percent.

China Shipments

Shipments to China rose at the fastest pace since 1985 in January, while exports to the U.S. advanced for the first time in more than two years, customs-cleared trade data showed last month. Today’s figures don’t include regional breakdowns.

The export rebound has been driven in part by favorable year-on-year comparisons. Shipments had plunged last year in the wake of a global credit crunch caused by the collapse of Lehman Brothers Holdings Inc. Japan posted its first current-account deficit in 13 years in January 2009 as a result.

Overseas shipments of Nissan Motor Co. cars rose 29.6 percent in January, while Mitsubishi Motor Corp. shipped more than double the amount of vehicles compared with the same month a year ago, according to the Japan Automobile Manufacturers Association.

Economy Expanded

The Cabinet Office will say the economy expanded at a revised 4 percent annualized pace last quarter, according to the median estimate of 27 economists surveyed by Bloomberg News. Preliminary figures showed 4.6 percent growth. The report is due on March 11 at 8:50 a.m. in Tokyo.

“Right now the economy is being pulled by exports and inventory adjustments,” Naoki Iizuka, a senior economist at Mizuho Securities Co. in Tokyo, said before the report was released. “Once we enter the second quarter, manufacturers’ capital spending will be a new contributor to the economy’s growth.”

A separate report today showed bank lending fell for a third consecutive month in February, sliding 1.6 percent from a year earlier, as companies cut spending.

On a seasonally adjusted basis, the current-account surplus widened to 1.71 trillion yen in January. Exports rose 8.8 percent from December, and imports climbed 2.3 percent.

The income surplus, the difference between money earned abroad and payments made to foreign investors in Japan, narrowed 8.1 percent to 911 billion yen in January from a year earlier, the ministry said.

The current account tracks the flow of goods, services and investment income between Japan and its trading partners. It includes trade not shown in the customs-cleared balance.

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Dubai’s debt troubles have exposed the fallacy of its once much-vaunted “model” of raising shining cities in the desert with foreign residents, finance and labor.

They have also set in train a power shift toward Abu Dhabi.

On Wednesday, Dubai’s government said it will ask creditors of two of its flagship firms, Dubai World and property group Nakheel, for a debt standstill as it restructures the Dubai World group.

Questions are now being raised by investors about whether Abu Dhabi will bail out Dubai and at what price?

Though Abu Dhabi is the United Arab Emirates capital, the seat of most of its oil wealth and the largest of the seven self-governing emirates by size, it took a back seat in recent years as Dubai undertook spectacular real estate projects as a tourism and finance hub.

Dubai’s population rocketed to 1.5 million, as white-collar professionals from around the world took plum jobs in a country marketed as a liberal enclave in the Gulf sun.

An army of Asian workers was hired to construct the glitzy projects, drawing accusations of slave labor from rights groups, while Dubai’s own citizens dwindled to a small minority, bringing strains as cultural values mixed warily.

Since the financial crisis, the credit-driven boom has ground to a halt, many of the more affluent foreigners have left and the freewheeling emirate — a dynastic autocracy under the Al Maktoum family — is left with up to $80 billion in debts.

Abu Dhabi has stepped in to help, but avoided a direct bail-out of its neighbor — but it could be drawn into more direct backing if its own prestige is affected by Dubai’s woes.

“In exchange for Abu Dhabi providing cash, it wants Dubai to eliminate or reform a lot of the tangled web of competing of Dubai-based companies,” Eurasia Group said on Wednesday.

“Dubai has been resistant to some of Abu Dhabi’s demands, and its leaders have seen their political power and prestige dissipate in wake of the financial crisis.”

The federal central bank — effectively under Abu Dhabi control — took up $10 billion of a $20 bond issue by Dubai government earlier this year, and this week two Abu Dhabi banks took up $5 billion.

POWER SHIFT

The fiasco is playing into Abu Dhabi’s ambition to unify UAE policies, clean up the Gulf state’s image and project the country as a political power in the region.

The power shift is a sensitive issue — Dubai ruler Sheikh Mohammed bin Rashid al-Maktoum said this month the UAE was one big family and detractors who talk of division should “shut up.” 

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Goldman Sachs Group Inc could have suffered dramatic losses if the federal government had not intervened to prop up American International Group Inc, according to a government report.

The report by the special inspector general for the government bailout program raises doubts about Goldman’s previous claims that it was hedged against potential AIG losses.

Last fall, as the financial services industry stood on the brink of collapse, the government stepped in with an unprecedented effort to rescue the system. AIG was among the companies that received billions of dollars from the U.S. Treasury’s Troubled Asset Relief Program.

If AIG had collapsed, it would have made it difficult for Goldman to liquidate its trading positions with AIG, even at discounts, the report said. It also would have put pressure on other counterparties that “might have made it difficult for Goldman Sachs to collect on the credit protection it had purchased against an AIG default.”

Finally, the report said, an AIG default would have forced Goldman Sachs to bear the risk of declines in the value of billions of dollars in collateralized debt obligations bad credit cash loans.

A Goldman spokesman called the risks discussed in the report a “moot point.”

“Goldman Sachs has consistently said its exposure with AIG was collateralized and hedged and therefore we had no direct credit exposure,” Goldman Spokesman Michael DuVally said. “Given the hedges, collateral, and government backing as a result of the bailout, the additional risks of declining market values in the event of an AIG default are a moot point.”

AIG has received pledges of up to $180 billion in taxpayer aid since last fall to help save it from collapse. It was revealed in March that Goldman received $12.9 billion in payments and collateral from AIG.

David Viniar, Goldman’s chief financial officer, in March told reporters that the Wall Street bank did nothing wrong when it accepted payments to close out trades with AIG.

The full report can be viewed at: here

(Reporting by Steve Eder; editing by John Wallace and Tim Dobbyn)

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General Motors Co. will announce Monday it plans to start repaying a $6.7 billion loan to the U.S. Treasury by year-end due to modest operating improvements, a source knowledgeable about the situation said.

GM , due to unveil its first post-bankruptcy earnings report Monday, will begin making $1 billion quarterly installments on the loan on Dec. 31. At the same time, the automaker also will start repaying a $1.4 billion loan to Canada at a rate of $200 million per quarter.

GM was not required to make any payments on the U.S. loan before it matured in July 2015, but better-than-expected vehicle sales will let it start repayments much sooner than expected.

"The reason GM is in a position to do that is that they have seen performance that has been modestly ahead of what the expectation was when GM went into bankruptcy and emerged from bankruptcy," said the person, who was not authorized to speak publicly about the repayment plan.

GM vehicle sales fell off less than expected during its government-supported bankruptcy in June and July, which lasted only about 39 days. Sales since then, aided partly by government "cash for clunkers" incentives, have performed ahead of plan.

Early exit

As a result, GM has not been forced to burn through some $16 billion in taxpayer cash provided to the company when it emerged from bankruptcy. The source said GM has used only about $3 billion of these funds, which are contained in a restricted escrow account that cannot be accessed without Treasury approval.

GM will make its loan payments from the escrow account, the source said, adding that the arrangement resulted from discussions between the Obama administration’s auto task force and the GM board no credit check payday loans.

"It is consistent with the U.S. government’s focus on exiting the position as early as practicable," the source said.

The government stepped in to bail out both GM and Chrysler Group to save a key portion of the U.S. manufacturing sector from collapse amid the recession.

The $6.7 billion in senior debt is only a small portion of the more than $50 billion in taxpayer funds provided to GM. Much of this was converted to a nearly 61 percent equity stake, making the Treasury GM’s largest shareholder. Treasury officials have said they hope to sell shares in a GM initial public offering in the next year.

The source said this would not happen in the first half of the year, so the repayment plan would let GM reduce the loan by at least $3 billion "before any plausible IPO."

The repayment schedule also could be altered to accommodate IPO plans or accelerated payments, should conditions warrant.

But the source cautioned that GM’s condition was only modestly better than expected and it was not yet ready to repay the full loan amount.

"While there are modest improvements which were important and put them in the position to do this, they are at the very beginning of a difficult restructuring and are not in any way out of the woods," the source said. 

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Federal Reserve Chairman Ben S. Bernanke’s efforts to stoke a U.S. economic recovery may be undermined by the central bank’s other goal of restoring the banking system to health.

The Federal Open Market Committee, at the conclusion tomorrow of a two-day meeting, will probably maintain its assessment that “tight” bank credit is impeding growth, said economists including former Fed Governor Lyle Gramley. Lending contracted for five straight weeks through Sept. 9, a drop that in part reflects Fed orders to banks to raise more capital and toughen lending standards, analysts say.

A failure to restore the flow of bank credit carries the risk that the economic recovery will be slower than the Fed anticipates, or even that the U.S. lapses into another recession, economists say. That would make it more likely the Fed will keep its main interest rate close to zero for a longer period.

“They would be absolutely delighted if banks went out and raised a lot more private capital and then began to lend more,” said Gramley, now senior economic adviser with New York-based Soleil Securities Corp. “Until that happens, the Fed has to continue to try to encourage economic growth through easy money.”

The FOMC, composed of Bernanke, Fed governors and regional Fed-bank presidents, started meeting at 2 p.m. and is expected to release a statement tomorrow at about 2:15 p.m. New York time. Economists surveyed by Bloomberg News unanimously forecast the Fed will leave its benchmark interest rate unchanged.

Extend End Date

The central bank may also decide to extend the end date of its $1.45 trillion program to buy housing debt, now set to expire at the end of the year, and to gradually reduce the size of the purchases.

Banks have become more careful about lending. A Fed report released last week shows banks had $6.85 trillion of loans and leases outstanding to businesses and households as of Sept. 9, down for a fifth straight week and below the record $7.32 trillion in October 2008. Real estate loans, the biggest portion, stood at $3.79 trillion, up $7.5 billion from the prior week while down from a peak of $3.9 trillion.

The Fed’s second-quarter survey of senior loan officers, released Aug. 17, showed U.S. banks tightened standards on all types of loans and said they expect to maintain strict criteria on lending until at least the second half of 2010.

‘Worthy Households’

“While it is important for economic recovery that lenders provide credit to worthy households and businesses, they also must maintain enough capital to withstand losses — even if economic conditions turn out to be worse than anticipated,” San Francisco Fed President Janet Yellen said in a Sept. 14 speech.

“The financial system is still far from healthy and tight credit is likely to put a damper on growth for some time to come,” Yellen continued.

Fed-led stress tests of the 19 biggest U.S. banks earlier this year were designed to ensure that the firms had enough capital to withstand a more severe economic downturn. The tests found that the banks need to raise $75 billion to withstand potential losses.

Separately, regional and some smaller U.S. banks may need $12 billion to $14 billion in additional capital to cope with troubled loans still on their books, the Congressional Oversight Panel said in August.

Banks have a Nov. 9 deadline from the Fed to raise the amount of capital determined by the stress tests. Bernanke said in June that the 10 firms that required capital had raised or announced actions to generate $48 billion of new common equity. The firms included Bank of America Corp., Wells Fargo & Co. and GMAC LLC.

Mortgage Rules

The Fed has taken other steps to make sure banks avoid riskier loans. In July 2008, it tightened mortgage rules by requiring lenders to determine a borrower’s ability to repay and barring other practices that led to the collapse of the housing market.

Minimum regulatory-capital requirements may change as officials in the U.S. and abroad craft new financial rules. Consumers are less credit-worthy as the job market deteriorates and after a record loss of wealth from plunging share prices and real estate values.

Rising unemployment will slow the pace of the recovery, Bernanke said on Sept. 15.

‘Very Weak’

“Even though from a technical perspective the recession is very likely over at this point, it’s still going to feel like a very weak economy for some time,” Bernanke said in response to a question after a speech in Washington. Fed officials in June predicted that GDP will expand 2.1 percent to 3.3 percent next year after shrinking 1.5 percent to 1 percent this year, according to the central tendency of their forecasts.

Banks have plenty of reasons to hold back on lending, analysts say.

Americans fell behind on their mortgage payments at a record pace in the second quarter, with delinquencies rising to 9.24 percent, according to an August report by the Mortgage Bankers Association.

“Consumers aren’t necessarily that creditworthy a proposition right now,” said John Ryding, chief economist and founder of RDQ Economics LLC in New York.

Falling values of commercial real estate are also a problem for banks, with an “uncertain degree of losses” to come, said Ryding, a former Fed researcher. Loans made for commercial property will probably sour and lenders will need to raise more capital to cover credit losses, Mike Mayo, a banking analyst at CLSA Ltd., said today at a conference in Hong Kong.

‘Ratchet Back’

“Banks are all trying to ratchet back their credit exposure,” said Eric Hovde, chief executive officer of Hovde Capital Advisors LLC, who manages about $1 billion with a concentration in financial and real-estate related companies and is chairman of Sunwest Bank in Tustin, California.

For instance, JPMorgan Chase & Co. now requires mortgage borrowers to make bigger down payments than before the crisis, and it has stopped allowing so-called stated-income loans that don’t require documentation of earnings, said Tom Kelly, a spokesman.

Neal Soss, chief economist at Credit Suisse in New York, predicts the lending lull will end within a few months after businesses finish depleting inventories and financial firms better determine how much in capital governments will require them to have.

“Bank lending is going to pick up all by itself as banks go looking for ways to add more juice to their earnings profile,” said Soss, who used to work as an aide to former Fed Chairman Paul Volcker. Soss said he forecasts 3.5 percent economic growth in 2010, on the high end of analyst projections.

Index Rallies

The 24-company KBW Bank Index rallied 69 percent from March 31 through yesterday as concern faded that lenders might not survive the economic slump.

Even as banks hold back, Fed policy makers have been trying to encourage borrowing to stoke an economic recovery. The Fed and other U.S. regulators told banks in November to maintain lending to “creditworthy” borrowers while warning against paying dividends that would cut funds available for loans.

In March, the Fed started an emergency program, the Term Asset-Backed Securities Loan Facility, to restart the loan- securitization markets that help form the so-called “shadow banking” system. That has helped generate investor demand for debt tied to auto and credit-card loans, unfreezing part of the credit markets.

“The question for the Fed, which is a very difficult question, is: what is the appropriate level of bank lending?” said Joseph Mason, a Louisiana State University banking professor and former economist at the Office of the Comptroller of the Currency. “It’s not bubble lending, it’s some subset of that. That is where the art of central banking lies.”

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Russia’s government will focus on becoming less reliant on oil and gas to help the world’s biggest energy exporter rebound from its worst crisis in a decade, Prime Minister Vladimir Putin said.

“Soon the government will start to draw up a so-called crisis exit strategy,” Putin today said at an investment forum in the Black Sea resort town of Sochi. “It will include steps to oversee the modernization of the economy and ensure its post- crisis development.”

Russia’s failure to wean itself off its reliance on commodities has condemned the country to sluggish economic growth as it recovers from a record 10.9 percent contraction in the second quarter, economists say. Energy, including oil and natural gas, accounted for 69.1 percent of exports to countries outside the former Soviet Union and the Baltic states in the first seven months of the year, according to the Federal Customs Service.

Putin called on businesses to invest in overhauling their businesses and modernizing the economy. Emergency state spending is “by no means the only anti-crisis prescription,” he said.

The government will seek to encourage investment by cutting red tape and taking steps to improve the banking sector and stock markets, Putin said, adding that Russia received $17 billion in foreign direct investment in the first half.

‘Not Just Money’

“Its not so much just money and how much money, though this of course is important, but first and foremost, the knowledge and experience that the leading global players posses,” Putin said.

Since the end of May, signs of recovery have emerged with gross domestic product growing a seasonally adjusted 1 payday loan no faxing.5 percent in August for a third consecutive month of expansion, Finance Minister Alexei Kudrin said this week.

“It would be a serious mistake to think that we are through it, that it’s all in the past,” Putin said. “Now it is extremely important to continue work on the systemic problems that gave rise to the crisis.”

Putin suggested “some kind of general agreement on general rules of conduct,” or the use of “several global reserve currencies,” to overcome what Russia has termed an over- reliance on the dollar in the global economy.

Energy Dependence

Though the country’s energy dependence has left it exposed to the fallout of a decline on global demand for commodities, nascent recovery signs mean the price of Russia’s energy exports could be higher than the government is forecasting, Putin said.

“Our forecasts are conservative, but we are sure that the reality will be better,” Putin said. “Much better than we plan.”

Kudrin said yesterday that current oil prices are “overheated,” and a “correction” is likely in the next six months, state television channel Vesti-24 reported. The average oil price over the next three years will be between $57 and $60 a barrel, he said.

Emergency stimulus measures should stay in place for the next six month, Kudrin said in London on Sept. 4.

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Europe’s economy probably returned to growth in the current quarter after governments spent billions of euros to pull the region out of the worst recession in more than six decades, the European Union said.

The euro-area economy may expand 0.2 percent in the third quarter and 0.1 percent in the fourth after contracting 0.1 percent in the three months through June, the European Commission, the EU executive in Brussels, said today in updated economic forecasts. For the full year, the economy may shrink 4 percent, the commission said, maintaining its May projection.

European companies from Germany’s ThyssenKrupp AG to France’s L’Oreal SA have reported results that beat analysts’ estimates, suggesting government efforts to encourage spending are feeding into the broader economy. European Central Bank President Jean-Claude Trichet on Sept. 3 cited “increasing signs” of stabilization. EU Monetary Affairs Commissioner Joaquin Almunia said today that the second-half outlook may be revised upward by one-quarter percentage point.

“We expect to see a relatively good third quarter partly as a consequence of fiscal and monetary stimulus,” said Laurent Bilke, a senior economist at Nomura in London. “I wouldn’t call it a recovery, however. The economy will be a bit more resilient in 2010 to face the end of stimulus measures.”

Largest Economy

The economies of Germany and France unexpectedly returned to growth in the second quarter. In Germany, Europe’s largest economy, gross domestic product will probably rise 0.7 percent in the third quarter and 0.1 percent in the fourth, the commission said today. The French economy probably will expand 0.4 percent in the current quarter.

Italy probably emerged from the recession during the third quarter, while Spain’s economy will continue to shrink through 2009, according to the forecasts. The U.K., which isn’t in the euro region, may resume growth this quarter and expand 0.5 percent in the fourth quarter, the EU estimates.

“We know that part of these improvements are due to policy-driven measures and factors,” Almunia told a press conference in Brussels. “We’re not sure that this positive evolution will be sustained during 2010, so we need to be very prudent.”

The ECB earlier this month raised its forecasts for the euro region to predict expansion of about 0.2 percent in 2010 instead of a previously projected 0.3 percent contraction. In 2009, the economy will shrink about 4.1 percent, less than the 4.6 percent contraction predicted three months ago. The EU forecasts a 0.1 percent contraction next year.

Cosmetics Maker

Paris-based L’Oreal, the world’s largest cosmetics maker, on Aug. 28 posted a smaller-than-forecast drop in earnings and said sales will gradually improve through the second half. Dusseldorf-based ThyssenKrupp, Germany’s biggest steelmaker, last month said there are signs that prices and sales volumes for some products have bottomed out.

Rising unemployment and the expiration of government stimulus packages may damp economic growth next year. International Monetary Fund Managing Director Dominique Strauss- Kahn said on Sept. 4 that there is a “real danger” policy makers will withdraw support measures for their economies too soon, jeopardizing the global recovery from recession.

In the U.S., the world’s largest economy, the recovery may be the slowest since World War II to regain all the ground lost during the recession, according to JPMorgan Chase & Co. chief economist Bruce Kasman. The Federal Reserve may hold U.S. rates between zero and 0.25 percent through 2010, he said.

Key Rate

The ECB on Sept. 3 kept its key rate at a record low of 1 percent to encourage spending. The Frankfurt-based central bank providing banks with unlimited cash for 12 months and is buying covered bonds to fight the crisis.

“It seems that the period of strong economic contraction is behind us,” ECB council member Yves Mersch wrote in the quarterly bulletin of the Bank of Luxembourg published on Sept. 10. Still, the recovery will “be very gradual and volatile, partly because of the temporary nature of some of its underpinnings, such as government stimulus,” he said.

The financial “crisis, with a lag of two or three quarters, is taking a serious toll on our labor market,” Almunia said. The job market “is still in very bad shape.”

Air France-KLM Group said on Sept. 4 that it will eliminate 1,500 jobs and slash capacity by 5 percent in order to bring down costs. Siemens AG, Europe’s largest engineer, has said that it plans 1,600 job cuts beyond the 17,000 announced last year and has placed 15,000 workers on reduced hours. Euro-area employment declined 0.5 percent in the second quarter, while industrial output fell 0.3 percent in July, data showed today.

European Stocks

European stocks pared their declines after the EU forecasts were published. The Dow Jones Stoxx 600 Index was 1 percent lower at 3:05 p.m. in London, after trading down as much as 1.6 percent earlier.

Companies are cutting costs just as retreating oil prices are pushing down inflation. Euro-area consumer prices have posted annual declines for three straight months. The ECB said on Sept. 10 that, while “inflation rates are projected turn positive again within the coming months,” price developments will remain “subdued” amid “ongoing sluggish demand.”

Euro-area consumer prices probably will drop 0.3 percent this quarter before rising 0.7 percent in the three months through December, the commission forecast today. For the full year, inflation may average 0.4 percent, it said. The ECB aims to keep inflation just below 2 percent.

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Rebecca Alvarez, a 48-year-old single mother looking for work for more than a year, has won a one-month reprieve.

The Monrovia, California resident who lost her job as a computer-network administrator in March 2008 is due tomorrow to begin a stint staffing a booth at the L.A. County Fair — at half her previous pay.

Alvarez first appeared in a Bloomberg News article July 10 about the growing ranks of Americans unemployed for more than six months. Her story shows how hard it is for America’s unemployed to find a job even as the nation starts to emerge from the worst recession since the 1930s. Many are settling for any work they can get and watching their earnings fall. That’s limiting consumer spending and may hamper an economic recovery.

“I haven’t given up on a full-time job, not at all,” Alvarez said in a telephone interview this week. “Then again, I’m not waiting for it to come to me. When you’ve been unemployed for a long time, you go through savings, pensions, and 401(k)s, you have to start out at zero.”

Federal Reserve officials are concerned that long-term unemployment and the need for “reallocation” away from workers’ former jobs will cause a loss of skills, hindering any pickup in hiring, the central bank said two days ago.

‘No Fuel’

“We’re in a situation where we can’t have a normal recovery — there’s no fuel for that,” said Dean Baker, co- director of the Center for Economic and Policy Research in Washington. “We’re almost certain to continue losing jobs through 2009 and possibly into 2010.”

The jobless rate in August jumped to 9.7 percent, the highest since 1983, from 9.4 percent, and employers cut another 216,000 jobs, according to a Labor Department report today.

The economy has lost 6.9 million jobs from the start of the recession in December 2007, the most of any downturn since the Great Depression.

In addition to the 14.9 million Americans who were unemployed in August, 9.1 million were forced to settle for part-time jobs because they couldn’t find full-time work, according to Labor Department data. Another 2.3 million were classified as “marginally attached,” or available for work but hadn’t searched in a year.

When the underemployed and marginally attached are included with the unemployed, the so-called rate of underutilization was 16.8 percent in August, seasonally adjusted.

Delivering Pizza

For Dante Shafala, a graphic designer with 20 years of experience, underemployment means making deliveries for Domino’s Pizza Inc. in his BMW 325I convertible.

“Sitting around the house was just killing me,” said Shafala, a 41 year-old resident of Emeryville, California personal business card. “There’s nothing out there for people with experience. Everybody’s looking for entry-level people.”

Fed officials had “particular concern” about the state of the job market when they met Aug 11-12, minutes of the Federal Open Market Committee gathering showed this week. They “expected no more than moderate growth in consumer spending going forward,” the minutes said, even after the deepest consumer retrenchment since 1980.

As competition for available jobs intensifies, wage growth is slowing. Average hourly earnings rose 2.6 percent in August from a year earlier, the smallest increase in more than four years, to $18.58.

‘Weak’ Income Growth

“The large number of unemployed and underemployed people means that income growth remains quite weak,” said Charles McMillion, president & chief economist of MBG Information Services in Washington, who studied the labor market for more than 30 years. “The best we can hope for is a tough slog that is stable and doesn’t fall back into a recession next year.”

Rising unemployment hasn’t stopped some analysts from projecting a jump in gross domestic product this quarter. Morgan Stanley analysts estimate at least a 4 percent annual gain, led by a manufacturing rebound and leveling out in home construction.

In California, where Alvarez lives, the unemployment rate rose to 11.9 percent in July, the highest since records began in 1976, according to the U.S. Labor Department.

Alvarez said her one-month job at the L.A. County Fair will help make ends meet as she looks for another job and builds her own business as a direct seller of automotive-fuel treatments, which she says has the potential to bring in $10,000 a month.

The temporary stint — finding potential customers for a home-landscaping company — will pay $12 to $15 an hour, half of what she earned in her last full-time position.

Long-Term Unemployed

Alvarez is among the almost 5 million Americans classified as “long-term unemployed” — those who have been seeking work for more than 26 weeks. She has gone through all her savings, and said her $200 weekly unemployment benefits ended in August. She has sent out hundreds of resumes.

She said she spent 12 years as a computer-network administrator at companies such as Cox Communications Inc., now Cox Enterprises Inc., and TransWestern Publishing Co., which Yell Group PLC acquired in 2005.

“I’m still cutting back,” Alvarez said. “Things can only get better. The only way they can get worse is if I don’t go out and do anything.”

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Confidence among U.S. homebuilders rose to a one-year high, another sign that the worst of the housing decline that began in 2006 has passed.

The National Association of Home Builders/Wells Fargo confidence index climbed to 18, matching forecasts by economists and reaching the highest level since June 2008, the Washington-based group said today. A reading below 50 means most respondents view conditions as poor.

Lower prices and government tax credits for first-time buyers have stabilized home sales, setting the stage for builders to gradually step up construction from record lows. Job losses, rising foreclosures and tight credit are a reminder that any recovery in housing will be slow to develop, limiting sales at builders such as D.R. Horton Inc. and Pulte Homes Inc.

“Inventory is being cleared and that is starting to benefit the new-home market,” said Julia Coronado, a senior U.S. economist at BNP Paribas in New York. “With a few months’ lag, that will lead to a turnaround in construction activity.”

Stocks dropped around the world as investors speculated the recent rally in riskier assets had outpaced prospects for economic growth. The Standard & Poor’s 500 index fell 2.3 percent to 981.05 at 1:41 p.m. in New York. The S&P builder supercomposite was down 3.3 percent.

Matches Forecast

The index was forecast to increase to 18 this month from 17 in July, according to the median estimate of 37 economists surveyed by Bloomberg News. Projections ranged from 17 to 21.

The gauge reached a record low of 8 in January and averaged 16 in 2008. It was first published in January 1985.

The confidence survey asks builders to characterize current sales as “good,” “fair” or “poor” and to gauge prospective buyers’ traffic. It also asks participants to assess the outlook for the next six months.

Last month’s gain was led by an increase in sales expectations over the next six months, which reached the highest level since April 2008. The measure of buyer traffic also improved, while a gauge that tracks current sales was little changed.

The increase in expectations “reflects anticipated sales stemming from the tax credit as well as recent signs that an economic recovery has begun,” David Crowe, chief economist of the builders’ group, said in a statement. “There is definitely a sense of hope among builders that the worst of the downturn is over and that a turning point is near at hand payday loan.”

Buyer Credit

In a bid to boost the housing market, the Obama administration’s stimulus measures included an $8,000 tax credit for first-time home buyers for purchases completed by Dec. 1.

Confidence increased in three of four regions, led by a jump in the Northeast. The South was the only area where confidence fell.

Builders probably broke ground on more houses in July for a third month, economists surveyed by Bloomberg forecast the Commerce Department will report tomorrow. Starts probably rose to a 598,000 annual pace from 582,000 in June, according to the survey median. Starts are down 74 percent from their January 2006 peak.

Other housing data in recent months have also signaled the market has bottomed. Combined sales of both new and existing homes have risen for four out of five months since January. That helped push the total number of houses on the market in June down to 4.1 million, a million less than the peak in July 2007.

Prices Stabilizing

Home price declines are also slowing. The S&P/Case-Shiller index of home prices in the 20 largest cities fell 17.1 percent in May from a year earlier, the smallest 12-month drop in nine months. The index rose 0.5 percent from the prior month, the first such gain since July 2006.

While the overall economy is showing signs of emerging from the worst recession since the 1930s, any recovery will be slow to develop. Economists surveyed earlier this month forecast unemployment will reach 10 percent by 2010 and gains in consumer spending will be smaller than the average over the last decade as Americans rebuild savings.

Homebuilders are still racking up losses. Forth Worth, Texas-based D.R. Horton and Pulte Homes, based in Bloomfield Hills, Michigan, on Aug. 4 reported quarterly losses and said the outlook for the housing market remains difficult. The companies are the first- and second-largest U.S. homebuilders.

“Market conditions in the homebuilding industry are still challenging, characterized by rising foreclosures, high inventory levels of available homes, increasing unemployment, tight credit for homebuyers and weak consumer confidence,” Chairman Donald Horton said in a statement.

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Latvia’s government will today defend slashing the budget by 10 percent after surviving local and European Parliament elections, allowing lawmakers to focus on meeting the terms of an international bailout.

The cuts “are very serious button tightening,” said Lars Christensen, head of emerging markets at Danske Bank in Copenhagen. “The prospect for getting International Monetary Fund money looks better today than it did on Friday.”

The ruling coalition of Prime Minister Valdis Dombrovskis, 37, plans to reduce spending by 500 million lati ($983 million) in a bid to comply with the terms of a 7.5 billion euro ($10.4 billion) loan from the IMF and European Commission. The government hopes to pass the budget cuts on June 17.

“Now that the local elections are out of the way, there is a good chance that we will see quick progress on agreeing a modified budget deficit for this year and passing spending cuts,” said Aidan Manktelow, an analyst at the Economist Intelligence Unit.

Latvia’s economy contracted 18 percent in the first quarter, marking the deepest recession in the European Union and impeding government efforts to rein in the deficit. The IMF and the Commission withheld a 200 million-euro payment in March after lawmakers failed to commit to spending cuts on concern voters would reject them in local elections. Dombrovskis has said the nation will go bankrupt if bailout money dries up.

‘Long Way’

“There will still be an awfully long way to go to stabilize the economy,” Manktelow said. “A further round of budget cuts is likely to be needed later in 2009, not to mention 2010.”

The Swedish krona snapped two days of declines against the euro today and traded at 10.897 at 8:26 a.m. in Stockholm, from 10.9159 yesterday. The lats strengthened 0.71 percent today to 0.7005 lati per euro as of 9:18 a.m. today, after strengthening 0.53 percent yesterday. The lats trades 1 percent around a midpoint against the euro in a quasi-currency board system that backs lati in circulation with foreign currency.

Central bank purchases of lati have paved the way for the currency to appreciate because traders who bet on a decline now face pressure to find lati to close contracts, according to Parex Banka AS.

Reserve Rise?

The central bank has bought about 644 million lati ($1.26 billion) of lati this year to keep the currency in its trading band against the euro. The lats strengthened 0.6 percent against the euro yesterday, the biggest gain since June 2006 saving account payday loan.

“The central bank may even increase its foreign reserves” this week, since they may be the only source for lati, said Kaspars Jansons, head of treasury at Parex.

The country pegs its currency, the lats, to the euro, obliging it to use wage and price cuts to sustain exports. The IMF and the Commission originally stipulated Latvia must keep the deficit within 5 percent of gross domestic product. The government is waiting for approval for a 7 percent gap, while the coalition last week proposed a 9.2 percent deficit in a first parliamentary reading.

European Union officials are in “permanent contact” with Latvian authorities, EU Monetary Affairs Commissioner Joaquin Almunia said yesterday. “We are helping the Latvian economy through our balance-of-payments facility, but the next installment depends on the agreement that I very much hope will take place.”

Quell Speculation

Policy makers have struggled to quell speculation the country may be forced to devalue the lats, sparking a decline in Sweden’s krona because the Nordic nation’s banks are the biggest in the Baltic states of Latvia, Lithuania and Estonia.

Latvia’s economic fate may determine the pace of recovery in the largest Nordic economy. It is “obvious” that Latvia’s crisis will have an effect on Sweden’s economic development, Finance Minister Anders Borg said on June 5.

Swedbank AB, the largest bank in the Baltics, and SEB AB, the second-largest, have together lent more than 366 billion kronor ($46.6 billion) in Estonia, Latvia and Lithuania.

Sweden’s government can handle a possible bank collapse, or nationalization, sparked by the economic collapse in the Baltic states, Borg said on June 4.

“There is clear concern over contagion risks within the region,” Ashley Davies, a currency strategist at UBS AG in Singapore, wrote in a research report yesterday. “The krona will remain under pressure due to their banks’ loan exposures to the Baltic region.”

Latvians gave six of eight seats in the European Parliament to parties mostly out of power during the economic boom between 2005 and 2007, when the economy expanded about 10 percent a year. In the Riga municipal elections, voters choose three parties that were largely in opposition during the boom years, and one party that was in government during the period.

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