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The federal government is on pace to run a deficit below $1 trillion for the first time in four years, modest progress in the face of intense debate in Washington over spending.

The Treasury Department said Monday that the deficit was $137 billion in October. That brings the total for the first two months of the budget year to $236 billion _ $55 billion less than the same two months last year.

Still, part of the reason for the lower deficit is an accounting quirk.

And the government is on pace to end the year $973 billion in the red, according to the Congressional Budget Office. While that’s lower than last year’s $1.3 trillion imbalance, it would still be higher than any previous deficit before fiscal year 2009.

The government ran an all-time record deficit of $1.41 trillion in 2009, and a $1.29 trillion imbalance in 2010.

The CBO estimate does not include an extension of the Social Security tax cut and emergency unemployment benefits. Congress is likely to extend both before they expire at the end of the year. That could push the deficit back above $1 trillion if those programs aren’t offset. The two programs are estimated to cost around $200 billion.

A big reason the first two months are lower than last year is an accounting shift. Roughly $31 billion in benefit payments for October went out in late September. Federal benefits are paid on the first day of the month. But because Oct. 1 fell on a Saturday, the payments went out a day earlier and were accounted for in last year’s deficit.

Through, the first two months of this budget year, government spending totals $551.2 billion. That’s down 5.8 percent from a year ago, by mostly reflects the benefit shift.

Government revenues total $315.5 billion. That’s up 4.7 percent from a year ago.

Net interest payments on the government debt continued to be one of the fastest rising categories of government spending. They totaled $44 billion in October and November, up 19.5 percent from the same period a year ago.

A decade ago, the government was running surpluses and trillion-dollar deficits seemed unimaginable. Now, the nation’s public debt is $15 trillion and rising and polls show growing voter anger with the inability of both parties to reach solutions to the country’s budget problems.

A special 12-member committee was unable to reach agreement on at least $1.2 trillion in deficit reduction by a November deadline. That means automatic cuts of that amount will begin on Jan. 1, 2013.

Republicans want to modify the timetable for the automatic cuts, largely because it includes steep cuts to the defense budget.

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Premier Mario Monti has called a Cabinet meeting in Rome on Sunday to approve emergency austerity and growth measures aimed at saving the euro currency from collapse, his office said in a statement.

The premier, an economist who once was an EU commissioner, is under extreme pressure to come up with speedy and credible measures that will persuade markets to stop betting against the common currency.

The meeting was originally scheduled for Monday, when Monti is also expected to outline the measures to both houses of Parliament on Monday.

The premier has been briefing political parties, unions, business groups and consumer lobbies on his plans over the weekend.

Monti hasn’t disclosed details of his rescue plan, but has said it includes both austerity cuts and measures to boost growth in Italy’s anemic economy. He has promised it would be socially equitable, and that it would go after those who hadn’t paid their share of taxes before

Italian borrowing costs have spiked, which could spell disaster if Italy is unable to keep up on payments to service its enormous debt of euro1.9 trillion ($2.57 trillion), or 120 percent of its GDP.

Unlike Greece, Portugal and Ireland, which got bailouts after their borrowing rates skyrocketed, the eurozone’s third-largest economy is considered to be too big to bail out. An Italian default would be disastrous for the 17-member eurozone and reverberate throughout the global economy.

The head of Italy’s industrial lobby said Sunday that the survival of the common euro currency depends on Italy’s coming up with very strong austerity and growth measures _ followed by a concerted effort at the European level so that Italian sacrifices are not in vain.

The various parties briefed have said the package likely includes reinstating an unpopular home property tax abolished by Berlusconi, raising the sales tax and the income tax at the highest brackets by a few percentage points, and requiring Italians to work more than the 40 years now needed to receive a pension.

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Pope Benedict XVI has had his first meeting with Italy’s new leader on the tarmac of Rome’s airport just before taking off for a trip to Africa.

Premier Mario Monti greeted the pope Friday morning as Benedict descended from the helicopter that brought him from the Vatican to Rome’s Leonardo da Vinci airport. They chatted as they walked slowly across the tarmac to the pope’s waiting plane.

Monti later Friday faces the second of two confidence votes for his government in parliament cash advance flexible payments. The Senate on Thursday easily approved his government, formed of bankers, professors and CEOS aimed at saving Italy from its debt crisis.

Benedict then took off for the west African nation of Benin for a three-day visit where he will speak of the role of the church in Africa.

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Chrysler is counting on a new Jeep sport utility vehicle and its strong brand name to help withstand uncertainty in the European auto market and expand into new markets in China and Russia, the automaker’s chief executive said Wednesday.

The company announced plans to spend $500 million at its Ohio assembly complex that will make the new model and add 1,100 jobs by late 2013. The expansion is part of a $1.7 billion investment to build the new Jeep.

Chrysler CEO Sergio Marchionne said Jeep is becoming the star of its European market and that sales have been doubling.

“It’s the best brand Chrysler owns by a long margin,” he said. “It’s got a glorious history.”

Italian automaker Fiat SpA, which now controls Chrysler, has been hit hard this year by slumping overall sales in Europe. It has been turning more toward business in the United States and Brazil, said Marchionne, who is CEO of both companies.

He said next year will be even worse in Europe. “The majority of the growth and expectations around Fiat are unfortunately outside the European context,” he said

Marchionne said that he’s confident the leaders forming the Italy’s new government can help it avoid financial disaster, but he added that instability there could influence where it locates its new headquarters when Fiat combines with Chrysler.

He is working toward bringing the two automakers together and faces the thorny political issue of where to base the company. The instability in Italy can’t be overlooked, he said Wednesday.

“I would be lying to you if I told you it didn’t,” he said. “It’s one of the things we’ll look at. That’s not to say the current situation would force us to move away from Italy. We’re committed to the industrial back bone of the country.”

Premier Mario Monti formed a new Italian government on Wednesday puts bankers, diplomats and business executives in charge instead of politicians. The former European Union competition commissioner said economic growth is a top priority and will put out an emergency plan Thursday

“Monti has all of the qualities to get this done,” Marchionne said. “It’s in the interest of every Italian to get behind him.”

Whether the country can recover soon depends on its political forces, he said. “If they do, it can be done relatively quickly,” he said. “The execution may take longer, but the plan can be put in place.” `

Sales of the stylish Fiat 500 mini car have been far below expectations in the United States since its debut in March, Marchionne said. It’s Fiat’s first vehicle in the U.S. since it pulled out of the market in 1983.

He blamed the low sales on a lack of dealerships selling the Fiat and said more are coming on line.

While Fiat is struggling, Chrysler is moving toward its first annual profit since 2005 behind strong third quarter sales of its new or revamped Chrysler, Dodge, Jeep and Ram cars and trucks.

Marchionne thinks the Jeep brand can continue to grow worldwide behind its unique history. Originally made for the military, workers in Toledo have been producing Jeeps since 1941.

“The horrible thing about Jeep is it hasn’t been exploited internationally,” he said. “It’s off-road capabilities are unique in the marketplace and we need to preserve that going forward.”

No decision has been made on what the new model will be called. Marchionne said it will be more technologically advanced than the Jeep Grand Cherokee.

The assembly plant in Ohio that now has 1,800 workers makes the Jeep Wrangler and Liberty along with the Dodge Nitro and will be central to the company’s future and its SUV exports, Marchionne said.

It’s likely the plant will build more vehicles in the coming years, he said. He also didn’t rule out expanding Wrangler production at the plant if sales take off outside the U.S.

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The Obama administration has decided to upgrade Taiwan’s existing fleet of F-16 fighter jets but not sell it the new planes it also wants, congressional staff said.

The administration gave a briefing on Capitol Hill on its decision Friday, but has yet to issue a formal notification of the intended deal. An announcement is expected by the end of this month.

Two congressional aides confirmed the decision to The Associated Press on condition of anonymity as they were not authorized to make it public.

The decision represents a compromise aimed at improving Taiwan’s ability to defend itself, while assuaging China’s concern over the arms sales. However, Beijing is still expected to react angrily. It regards the self-governing island as part of its territory.

There will also be criticism from Republicans and some Democrats in Congress who have strongly backed the sales of 66 F-16 C/D fighters that Taiwan wants, in addition to the upgrades of the 145 F-16 A/Bs that the U.S. sold it in the 1990s.

There were no immediate details on the package of upgrades the U.S. is providing for the A/Bs. But even if it includes sophisticated radar, avionics and missile systems, Taiwan’s air force will still lag far behind its Chinese counterpart, which is equipped with state-of-the-art jet fighters.

A Pentagon report issued last year painted a grim picture of Taiwan’s air defense capabilities, saying many of the island’s 400 combat aircraft would not be available to help withstand an attack from the mainland.

Wang Kao-cheng, a military expert at Taipei’s Tamkang University, said Taiwan’s air defenses could get some lift from the upgrade, but the island is still at a profound disadvantage with Beijing in the number of third-generation warplanes it has at its disposal.

“Taiwan has fallen behind in air superiority as of now, not to mention the fact that China is developing the fourth-generation stealth fighters, which could be very powerful,” Wang said. “The upgrade program will not fill the vacuum left over by the absence of the C/Ds.”

On Friday, Republican Sen. John Cornyn of Texas, where the Lockheed Martin plant that would build the F-16s is located, said the decision would be a slap in the face to strong ally Taiwan.

Howard Berman, the ranking Democrat on the House of Representatives Foreign Affairs Committee, called it a “half-measure.” He said Taiwan needed more advanced fighter aircraft to defend itself against increasing Chinese military threat.

China and Taiwan split amid civil war in 1949. While Taiwan’s relations with the mainland have greatly improved in the past three years and tensions across the Taiwan Strait are their lowest in six decades, China’s military buildup has carried on apace.

The United States is legally obligated to sell weapons to Taiwan for its self-defense. The last major arms sale announced in early 2010 prompted China to cut military ties with the U.S. for several months.

Taiwan’s Defense Ministry said it had no immediate comment on the U.S. F-16 decision.

China’s Defense Ministry and Ministry of Foreign Affairs did not respond immediately to faxes asking for comment, and calls to the Taiwan Affairs Office rang unanswered Monday.

The official China Daily newspaper had a front-page article Monday warning that an arms sale would “spark strong reaction.”

It quoted Tao Wenzhao, a senior researcher at Tsinghua University in Beijing, as saying “the (arms sale) hurts China’s core interests. And to keep on doing the wrong thing for 30 years just doesn’t make it right.”

China temporarily suspended military exchanges with the U.S. last year after the Obama administration notified Congress it was making $6.4 billion in weapons available to Taiwan, including missiles, Black Hawk helicopters, information distribution systems and two Osprey Class Mine Hunting Ships.

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Nearly a decade after Illinois’ residential electric market was opened to competition, consumers are finally getting the chance to shop for electricity the same way they compare phone or Internet services payday loan online.

In the Chicago area, tens of thousands of consumers have already defected from the state’s largest electric utility, ComEd

The fear that has gripped Europe’s sovereign debt market for months took root in its stock markets as investors increasingly worried on Tuesday about uncertain growth prospects for some of the continent’s biggest companies.

Spain and Italy watched their borrowing costs drop further in signs of success for a massive central bank move to quell Europe debt’s crisis, but stock markets were in turmoil as stronger economies showed worrying signs of slowing.

Germany’s stock market was down for the 10th consecutive day and new data from Europe’s growth engine showed that export growth _ a closely watched economic indicator _ is slowing down.

The Federal Statistical Office said exports in June were up by 3.1 percent to euro88.3 billion ($126 billion) on the year, the smallest increase in 16 months.

“In June we got to feel the first indications of the decreasing global economic dynamism,” said Anton Boerner, the head of Germany’s exporters’ association.

The impact of the slowing U.S. economy “will be felt in the coming months,” he added.

Germany has sailed through the debt crisis relatively unscathed. Despite much grumbling over the big contributions to the rescue packages to Greece, Ireland and Portugal, the eurozone’s largest economy enjoyed stellar growth last year and early this year, big companies like BMW and Volkswagen reported bumper profits and unemployment is lower than in has been in years.

But if the current stock market sell-off continues, this may soon change. Since July 22, the day after eurozone leaders decided to give their bailout fund new powers but refused to expand its size, Germany’s main stock index, the DAX has lost more than 20 percent. That’s more than the 15 percent drop seen on the FTSE 100 in the U.K., or the 17 percent dive on the French CAC-40.

Closely watched German indicators of consumer confidence and business confidence also declined more than expected last month.

German output grew by 3.6 percent last year, and the government in Europe’s biggest economy hopes growth this year will again top 3 percent.

But in France _ Germany’s biggest trading partner _ growth is likely to only be 0.2 percent in the third quarter, the central bank said this week.

Though France remains one of Europe’s strongest economies, there have been some signs recently that the country may become the next triple A country to be downgraded, especially as the government is unlikely to implement austerity measures ahead of spring elections at a time when the economy is slowing. One indicator of this possible concern has been the recent rise in the spread between German and French yields to 15-year highs.

“With yields now above those of the Netherlands, Finland and Austria, France seems in danger of slipping out of the ‘core’ to become more closely associated with the eurozone’s periphery,” said Jennifer McKeown, senior European economist at Capital Economics.

Though McKeown noted that France’s growth prospects are considerably better than the likes of Italy and Spain, she said no other eurozone economy with a triple A rating has a higher debt than France’s, which stands at around 85 percent of national income.

In addition, McKeown cautioned that France’s contribution to Europe’s bailouts are already boosting public debt at a time when French banks are already heavily exposed to the government debt of countries like Greece.

The Bank of France’ s monthly industrial survey showed both corporate order books and factory utilization rates falling for the second month in a row in July.

The benchmark in France recovered from earlier losses and was slightly up in early afternoon trading, but the DAX was 1.4 percent lower, echoing Monday’s plunge on Wall Street, where the Dow Jones fell a dizzying 634 points, one of the worst days since 2008.

The negative sentiment on stock markets contrasted with somewhat declining tensions in Spanish and Italian bond markets, where intervention from the European Central Bank was starting to take its effect.

The yield, or interest rate, on Spanish 10-year bonds was at 5.03 percent, after approaching 6.5 percent just a week ago. The yield on Italian equivalents was at 5.14 percent, also about 1 percentage point below where it was Monday morning before the ECB intervention.

“It is the worst crisis since World War II and it could have been the worst crisis since World War I if leaders hadn’t taken the important decisions,” ECB President Jean-Claude Trichet said with French radio station Europe 1, defending the bank’s decision to further intervene on bond markets.

Trichet didn’t directly confirm that the ECB has been buying up the bonds of Italy and Spain, saying only that his banks “is in the secondary market” for eurozone bonds and that it would release the amounts invested on Monday, as it does every week.

The ECB head also indicated that his bank still sees the main responsibility for fighting the debt crisis with eurozone governments and not the central bank.

“I won’t say” how long the ECB will buy bonds on the secondary market, Trichet said. “What we expect is that the governments do what we consider to be their job.”

Despite the ECB’s reluctance to take a central role in fighting the debt crisis, analysts have warned that it may not be easy for the bank to halt its bond-buying program once the eurozone bailout fund has been equipped with its new powers.

They caution that the euro440 billion European Financial Stability Facility does not have enough money to intervene effectively on secondary markets to help large countries like Italy and Spain, and that divisions among countries, which all have to sign off on intervention, could delay any necessary action.

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Baetz reported from Berlin. Melissa Eddy in Berlin, Greg Keller, Angela Charlton in Paris and Pan Pylas in London contributed to this story.

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The lowering of America’s sterling credit rating was the punctuation mark on a tumultuous week in financial markets.

Standard & Poor’s, the credit rating agency, said Friday it was dissatisfied with the plan Congress came up with earlier in the week to reduce the country’s debt.

This is the first time the nation’s credit rating has fallen below the highest level, AAA. The U.S. had held that rating since 1917. The move came just days after a gridlocked Congress finally agreed to spending cuts that would reduce the debt by more than $2 trillion.

The drop in the rating by one notch to AA-plus was telegraphed as a possibility back in April. The three main credit agencies, which also include Moody’s Investor Service and Fitch, had warned during the budget fight that if Congress did not cut spending far enough, the country faced a downgrade. Moody’s said it was keeping its AAA rating on the nation’s debt, but that it might still lower it.

One of the biggest questions after the downgrade was what impact it would have on already nervous investors. While the downgrade was not a surprise, some selling is expected when stock trading resumes Monday morning. The Dow Jones industrial average fell 699 points this week, the biggest weekly point drop since October 2008. The weak economy was the primary catalyst behind that plunge, but the debt debate and the threat of a downgrade were also factors.

“I think we will have a knee-jerk reaction on Monday,” said Jack Ablin, chief investment officer at Harris Private Bank.

But any losses might be short-lived.

“The market’s already been shaken out,” said Harvey Neiman, a portfolio manager of the Neiman Large Cap Value Fund. “It knew it was coming.”

One fear in the market has been that a downgrade would scare buyers away from U.S. debt. If that were to happen, the interest rate paid on U.S. bonds, notes and bills would have to rise to attract buyers. And that could lead to higher borrowing rates for consumers, since the rates on mortgages and other loans are pegged to the yield on Treasury securities.

However, even without an AAA rating from S&P, U.S. debt is seen as one of the safest investments in the world. And investors clearly weren’t scared away this week. While stocks were plunging, investors were buying Treasurys and driving up their prices. The yield on the 10-year Treasury note, which falls when the price rises, fell to a low of 2.39 percent on Thursday from 2.75 percent Monday.

A study by JPMorgan Chase found that there has been a slight rise in rates when countries lost an AAA rating. In 1998, S&P lowered ratings for Belgium, Italy and Spain. A week later, their 10-year rates had barely moved.

The government fought the downgrade. Administration sources familiar with the discussions said the S&P analysis was fundamentally flawed. They spoke on condition of anonymity because they weren’t authorized to discuss the matter publicly. S&P had sent the administration a draft document in the early afternoon Friday and the administration, after examining the numbers, challenged the analysis.

S&P said that in addition to the downgrade, it is issuing a negative outlook, meaning that there was a chance it will lower the rating further within the next two years. It said such a downgrade, to AA, would occur if the agency sees smaller reductions in spending than Congress and the administration have agreed to make, higher interest rates or new fiscal pressures during this period.

In its statement, S&P said that it had changed its view “of the difficulties of bridging the gulf between the political parties” over a credible deficit reduction plan.

S&P said it was now “pessimistic about the capacity of Congress and the administration to be able to leverage their agreement this week into a broader fiscal consolidation plan that stabilizes the government’s debt dynamics anytime soon.”

One analyst suggested the downgrade might move Congress to take concrete steps to fix the nation’s budget problems.

“It’s a downgrade and it’s bad, but if it spurs more conversation about bringing down spending and maybe more intelligent tax policy, it could be a good thing in the long run,” said Frank Barbera, a portfolio manager of the Sierra Core Retirement Fund.

The Federal Reserve and other U.S. regulators said in a joint statement that S&P’s action should not have any impact on how banks and other financial institutions assess the riskiness of Treasurys or other securities guaranteed by the U.S. government. The statement was issued to make sure banks did not feel that the downgrade would affect the amount of capital that regulators require the banks to hold against possible losses.

Before leaving for a weekend at Camp David, President Barack Obama met with Treasury Secretary Timothy Geithner in the Oval Office late Friday afternoon.

The downgrade is likely to have little to no impact on how the United States finances its borrowing, through the sale of Treasury bonds, bills and notes. This week’s buying proves that.

“Investors have voted and are saying the U.S. is going to pay them,” said Mark Zandi, chief economist of Moody’s Analytics. “U.S. Treasurys are still the gold standard.” He noted that neither his parent organization, Moody’s, nor Fitch, the other of the three major rating agencies, have downgraded U.S. debt.

The ratings agencies were sharply criticized after the financial crisis in 2008 for not warning investors about the risks of subprime mortgages. Those mortgages were packaged as securities and sold to investors who lost billions of dollars when the loans went bad.

Japan had its ratings cut a decade ago to AA, and it didn’t have much lasting impact. The credit ratings of both Canada and Australia have also been downgraded over time, without much lasting damage.

“I don’t think it’s going to amount to a lot,” said Peter Morici, a University of Maryland business economist.

Still, he said, “The United States deserves to have this happen,” because of its clumsy handling of fiscal policy.

In reacting to the downgrade, Democrats and Republicans continued to blame each other and pledged to hold firm to their principles.

Republican presidential candidates criticized the White House. Rep. Michele Bachmann, R-Minn., called on Obama to fire Treasury Secretary Timothy Geithner and submit a plan to balance the budget and not just reduce future deficits. Republican candidate Mitt Romney, former governor of Massachusetts, said the credit downgrade was the “latest casualty” in Obama’s failed economic leadership.

House Democratic Leader Nancy Pelosi said the American people will be closely watching the work of the 12-member joint committee that has been created to produce more than $1 trillion in additional savings over the next decade.

“The work of this committee will affect all Americans, and its deliberations should be open to the press, to the public and webcast,” she said.

Senate Democratic Leader Harry Reid said the downgrade underscored the need for a “balanced approach to deficit reduction that combines spending cuts with revenue-raising measures” such as doing away with tax breaks for the wealthy and oil companies.

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AP reporters Tom Raum, David Espo and Julie Pace in Washington and Business Writers Chip Cutter and Pallavi Gogoi in New York contributed to this report.

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Cigarette maker Reynolds American says its second-quarter profit fell more than 10 percent on charges related to a legal case and costs related to plant closings.

Excluding those charges, the nation’s second-biggest tobacco company said its profit rose 2 percent as higher prices and smokeless tobacco gains offset cigarette volume declines.

The maker of Camel, Pall Mall and Natural American Spirit brand cigarettes says its net income fell to $304 million, or 52 cents per share, for the period ended June 30. That’s down from $341 million, or 58 cents per share, a year ago.

Adjusted earnings were 67 cents per share. Analysts expected 71 cents per share.

Revenue excluding excise taxes rose less than 1 percent to $2.27 billion, beating analyst estimates for the Winston-Salem, N.C., company.

Its shares slipped 38 cents to $38.13 in premarket trading.

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