Bank of Japan Eyes Risks on Economy

Bank of Japan governor says focus is on 'extremely watchful of downside risks to the economy'.

Bank of Japan Gov. Masaaki Shirakawa said Monday that the central bank is now focused on threats to Japan's economic health, reaffirming sentiment that the country's low interest rates won't be raised anytime soon.

The Bank of Japan "is in a situation that requires us to be extremely watchful of downside risks to the economy," said Shirakawa, in one of his first speeches since he began his post last month. In its April semiannual outlook report, the Bank of Japan lowered its outlook for growth and retreated from its longtime goal of gradually raising interest rates.

Japan's key interest rate has remained at 0.5 percent since February 2007. Shirakawa reiterated Monday that it wasn't appropriate to predetermine the direction of future monetary policy amid market volatility and a global economic slowdown. Adding to the uncertainty are rising commodity and energy prices, which pushed up Japan's core consumer price index 1.2 percent in March in its biggest jump in ten years, he said.

The central bank said in its report that it expects the world's second largest economy to expand 1.5 percent in the fiscal year through March 2009, down from the 2.1 percent growth it projected in October.

Japan's economy will probably continue to decelerate for the time being but should eventually return to mild growth, at which point the central bank would need to consider tweaking interest rates, said Shirakawa at the Japan National Press Club in Tokyo.

The fundamental goal of monetary policy is to stabilize prices over the medium- and long-term, he said. "This means that the central bank may need to implement policies that may be unpopular in the short term," Shirakawa said.

Weekend's Featured: 2008 Olympics Increases China's Energy Demand

The 2008 Beijing Olympic Games will boost China's rampant demand for energy, threatening to push world oil prices beyond current record heights, according to industry analysts.

Crude prices surged last week to strike a record high above 126 dollars per barrel, boosted by tightening supplies, underinvestment in global production and ongoing unrest in key producer Nigeria. Runaway oil prices were also partly fuelled by "stockpiling in China to prevent shortages ahead of the Olympics," said Lehman Brothers analyst Edward Morse.

Asian economic powerhouse China, the world's second most voracious energy consumer after the United States, stages the Summer Olympics from August 8-24. Industry experts reckon that China, which enjoys record-breaking economic growth, will need even more crude oil to provide the facilities, transportation and energy supplies that are required to power a successful Olympic Games.

"In the lead-up to the Games you are going to see pretty heavy spending in infrastructure -- building roads, residential property, hotels -- and this is typically energy intensive," said BNP Paribas analyst Harry Tchilinguirian.

Demand for kerosene, or jet fuel, was also expected to rocket as spectators and athletes fly in and out of the Chinese capital city along with untold numbers of tourists. "The other aspect is increased demand for transport fuel -- jet fuel for getting people there (to Beijing), not just from the outside but also from within China," Tchilinguirian said.

China, the world's fourth-largest economy, grew at a breakneck pace of 11.9 percent in 2007 and chalked up quarterly growth of 10.6 percent in the first three months of 2008. "China has been spending quite a bit on infrastructure to accompany its record-breaking growth but on top of that, some of this is related to the preparation of the Olympics," Tchilinguirian added.

Philip Andrews-Speed, professor of energy policy at Dundee University, said the Chinese authorities would be desperate to avoid oil shortages during the Games when the world's eyes will be on Beijing.

"They do not want China to be seen to be having shortages of supply of oil products across the country during the Olympics for a matter of image and (this is) tied to social stability because people might get a bit upset.

"They are going to make every effort to make sure that the refineries are operating to the full extent and that there are no blockages to imports," he said. "They will use ... any reasonable tax incentives like removing taxes in oil imports to make sure there is enough oil in the country during the coming months."

According to the International Energy Agency, China is on course to become the world's biggest energy consuming nation shortly after 2010. "China is a driver for world oil demand," said Andrews-Speed, adding that "everything is pointing to more pressure on demand."

Weekend's Featured: Good US Economy News Mask More Weaknesses

Some good economic news is a mirage masking weakness in national economy.

The unemployment rate drops. Productivity grows. The trade deficit shrinks. Sounds great, right? Not so fast. Borrowing radio broadcaster Paul Harvey's signature saying: let's hear the rest of the story. Some seemingly good economic numbers can be something of a mirage masking weaknesses in the national economy.

Let's take the unemployment rate, which dipped to 5 percent in April, from 5.1 percent in March. A closer look reveals that the decline in unemployment is not as good as it looks at first blush. The drop came as the number of people holding part-time jobs for economic reasons swelled to 5.2 million in April, up sharply from 4.4 million a year earlier.

The dip in the unemployment rate also occurred as employers cut jobs for the fourth month in a row, pushing up total losses beyond the quarter-million mark -- to 260,000. Wages barely grew and workers' hours were trimmed. Taken altogether, these things point to a tepid picture of employment conditions nationwide.

Federal Reserve Chairman Ben Bernanke and his colleagues recently used the word "softened" to describe the labor situation. U.S. productivity -- an important ingredient to the country's long-term vitality -- grew solidly in the first three months of this year. That efficiency gain, however, came at the expense of workers.

"Productivity gains were due primarily to declines in hours worked," the Labor Department's Bureau of Labor Statistics explained. Those hours fell at a 1.8 percent pace, the biggest drop in five years. Employers also shed workers in the first quarter. Thus, companies were able to produce more with fewer workers, and that boosted productivity, the amount an employee produces for every hour of work.

"American workers, you just got to love them," said Joel Naroff, president of Naroff Economic Advisers. "They just seem to produce more and more and more. That was the case in the first quarter of the year as fewer workers working fewer hours managed to produce more," he said. Still, healthy efficiency gains are important for the economy because they can blunt inflation; that's good for companies' profits and good for those earning paychecks.

Let's take a closer look at the nation's trade deficit. It shrank to $58.2 billion in March as the United States' appetite for imports fell faster than foreign demand for U.S. exports. A drop in the United States' foreign oil bill -- reflecting less oil being imported -- played an important factor in the decline in imports. However, demand for foreign-made autos, furniture, toys, clothing and other goods also waned, underscoring the strains faced by U.S. consumers.

Consumers have turned cautious, battered by housing and credit problems and high food and energy prices. Many -- watching their single-biggest assets, their home, sink in value are less inclined to spend. High energy and food prices are leaving people with less cash to buy other things. And, harder-to-get credit has made financing big-ticket goods, like cars, appliances and of course, homes, more difficult.

In the first quarter of this year, consumer spending increased at the slowest pace -- a mere 1 percent growth rate -- since the last recession in 2001. Consumer spending accounts for the single-biggest chunk of U.S. economic activity. Thus, how consumers behave shapes whether the country will survive the blows of the housing, credit and financial debacles or fall victim to them as many fear.

U.S. exports, meanwhile, have been helped by the falling value of the U.S. dollar. That makes U.S.-made goods and services less expensive to foreign buyers. But that weaker dollar also makes imported goods more expensive in the United States. That contributes to the surging prices for oil, food and other commodities.

And, while falling interest rates in the United States help ordinary people and businesses, it also contributes to the dollar's decline. Add to that the perception of economic weakness in the United States and the U.S. dollar has fallen to record lows compared with the euro.

Still, export growth played an important role in keeping the economy growing -- albeit slowly -- during the first quarter. "Exports are booming and helped keep GDP in the black," said Commerce Secretary Carlos Gutierrez. Gross domestic product, or GDP, measures the value of all goods and services produced in the United States. It grew by a feeble 0.6 percent growth rate from January through March.

When exports and business' inventories are removed and imports are added in, economic activity actually contracted at a 0.4 percent pace in the first quarter. That figure shows that U.S. consumers have a dwindling appetite to spend.

Many economists -- and members of the public -- believe the economy is in a recession. Bernanke has said a recession is possible, while President Bush acknowledges the country is going through tough times. Both men hope the Fed's seven-month rate-cutting campaign and the government's stimulus package of rebates and tax breaks will lift the country out of its slump later this year.

Meanwhile, the mirage continues. In another anomaly, consumer borrowing rose in March at the fastest clip in four months. It sounded like people were back in a buying groove, with credit card charges especially heavy. But building up the credit charge balances is another form of debt. Economists said people don't have a choice because their paychecks aren't going as far and they can't tap into their homes, as they did during the housing boom, for ready sources of cash.

So some silver linings are not so silver. When you look closely, "you do see some dark economic clouds in the silver linings," said Mark Zandi, chief economist at Moody's Economy.com. "The darkness is much greater than any sunshine."

Citigroup Plans to Sell $500 Billion in Assets

Citigroup plans to shed almost $500 billion in assets, grow revenue as part of new structure.

Citigroup Inc.'s new chief executive, Vikram Pandit, plans to stick with a global banking model after months of intense review -- but only after shrinking the company by about one-fifth first. The three-year game plan, revealed Friday, includes getting rid of more businesses, mortgages, real-estate operations and jobs.

The bank aims to shed between $400 billion and $500 billion of its $2.2 trillion in assets and grow revenue by 9 percent over the next few years as it tries to rebound from massive losses tied to deterioration in the credit markets.

The $500 billion in so-called "legacy assets" the bank intends to sell off or allow to mature include yet-to-be-named noncore businesses, as well as assets in Citigroup's securities and consumer banking segments. That includes mortgages and other real estate-related holdings.

Meanwhile, the anticipated rise in revenue will derive largely from cutting costs -- which Chief Financial Officer Gary Crittenden said will mean more job reductions. Citi has so far lowered its headcount by 13,200 since last summer.

The moves could mean the bank loses its standing as the nation's largest if it doesn't grow other assets simultaneously. According to their most recent regulatory filings, Bank of America Corp. has $1.74 trillion in total assets, while JPMorgan Chase & Co. has $1.64 trillion.

The investor presentation Friday did not come as a huge surprise. Citigroup has already begun its winding-down process by writing down about $38 billion in soured debt since last summer, and setting plans to reduce its residential mortgage assets by $45 billion over the coming year. It has also sold businesses including CitiCapital, CitiStreet and Diners Club.

These moves arrived on top of huge stock sales to outside investors, including government funds in Singapore and the United Arab Emirates. Roger Lister, chief credit officer for U.S. financial institutions at the bond rating company DBRS, said Citi should be able to find buyers for its assets, as most are not particularly risky, and instead are simply low revenue generators for the bank. "The plan makes sense -- in some ways, it's the easy part," Lister said.

While others agreed that Citi had to sell assets, not everyone was certain how easy such a sale would be. "I'm not sure they have half a trillion in good assets that someone wants to buy. But they're doing the obvious -- they have no choice," said R. Christopher Whalen, managing director of consulting firm Institutional Risk Analytics.

Either way, whether Pandit's plan proves successful will determine his legacy as a turnaround specialist for a company that many claim was struggling long before the housing market collapse. Pandit joined Citigroup in July 2007, when it bought his hedge fund Old Lane. The board fast-tracked him to the CEO spot in December, five weeks after former CEO Charles Prince was forced out following the bank's dismal performance during the third quarter.

"This is going to be a difficult environment to judge success," said Lister, who worked at Citigroup during the late 1980s and early 1990s. "He has done what I think one would have expected of a dynamic, experienced business leader ... It's the execution that's going to be the challenge."

Citigroup has been under heavy investor scrutiny over the past year as the value of its stock tumbled. Many Citigroup holders have been angling for a large-scale overhaul of the company's structure. Those shareholders' hopes have dwindled, with executives saying they intend to keep the bank's major parts intact. "We believe the right model is a global universal bank," Pandit said.

But Citigroup executives did point out several shortcomings at the bank that need to be fixed, including organizational redundancies, a fractured corporate culture and waning market share in U.S. retail banking. And the company introduced a new slogan as part of its revamping efforts: "Citi never sleeps."

But the road to recovery is going to be a difficult one. Most analysts believe that while the bulk of the bank's write-downs are through, there are still at least some more to come. In a note Thursday, Deutsche Bank analyst Mike Mayo estimated that Citigroup's $29 billion bucket of mortgage investments and related structured products has the potential to result in another $15 billion write-down.

And given that Citigroup has $63 billion in exposure to home equity loans, $150 billion to mortgages, $21 billion to auto loans, and exposure to other loans such as credit cards, Mayo estimated that the bank will have to build up its reserves by an additional $5 billion as the U.S. consumer credit climate deteriorates.

Oil Reaches $126 Amid Weak Dollar

Oil prices eclipse $126 a barrel before US driving season as investors flee the dollar.

Oil prices surpassed a record $126 per barrel Friday on the eve of the U.S. driving season as a weakening dollar drove investors to snap up commodities. Light, sweet crude for June delivery rose $2.51 to a new record of $126.20 a barrel in electronic trading on the New York Mercantile Exchange by the afternoon in Europe.

On Thursday, the contract rose to a record close of $123.69 a barrel. In London, Brent crude contracts also hit record highs before slipping and traded up $2.98 on the day at $125.82 a barrel on the ICE Futures exchange. Earlier Friday, Brent had reached $125.90 before falling back.

On Friday, The Wall Street Journal published a report that suggested closer ties between Venezuelan President Hugo Chavez and rebels attempting to overthrow Colombia's government, heightening chances that the U.S. could impose sanctions on one of its biggest oil suppliers as a state sponsor of terror.

Chavez has been linked to Colombian rebels previously, but the paper reported it had reviewed computer files indicating concrete offers by Venezuela's leader to arm guerillas. "If we put on sanctions I'm sure Chavez would threaten to cut off our oil supply," said Phil Flynn, an analyst at Alaron Trading Corp. "Obviously that would have a major impact on oil prices."

Even if Chavez cut oil shipments to the U.S., Venezuela would still pump and sell oil, Flynn said. And much of that oil would come to the U.S. via middle men, who would buy it from Venezuela and resell it to the U.S. But that new layer in the supply chain would bump up costs, he said.

The European Central Bank also indicated that it was unlikely to consider interest rate cuts to cool the strong euro against the slumping dollar. By the afternoon in Europe, the euro stood at $1.5444 compared to $1.5404 in late trading Thursday night in New York. The dollar was also weaker Friday against the British pound and the Japanese yen.

Investors view commodities such as oil as a hedge against inflation, and some analysts think the dollar's protracted decline is the main reason behind oil prices doubling from a year ago. Also, a weaker dollar makes oil cheaper to investors overseas.

A prediction by analysts at Goldman Sachs seeing oil rising as high as $150 to $200 a barrel within two years also has boosted prices. Analysts, however, struggled to explain the continued rise of oil futures after a larger-than-expected buildup of crude oil stocks reported Wednesday in the United States.

"Crude oil is currently held up in a tug-of-war between the Goldman reality and the physical reality," said Olivier Jakob of Switzerland's Petromatrix in a research note, adding that the investment bank's prediction made for "a great story to support pension funds piling more into commodities."

Mark Pervan, senior commodity strategist at ANZ Bank in Melbourne, Australia, said it may be a combination of continued wariness over potential supply disruptions as well as prospects for a strengthening in crude demand heading into the U.S. summer driving season.

"U.S. gasoline stocks have certainly dropped quite sharply over the last month," he said. "What'll happen in the near term is that we may likely see an uptick in U.S. refining capacity to rebuild gasoline stocks and we may see a short-term build in crude demand as a result."

Prices may also be getting a boost from comments Thursday by the OPEC secretary general. Abdalla Salem El-Badri on Thursday said again that oil supplies are adequate, and that several member countries are having a hard time finding buyers for their additional supplies.

Oil Executives See Oil Prices Falling

Survey says many oil and gas industry executives forecast falling crude prices by year's end.

However, the oil bull trend is still expected to continue its run and it looks to be targetting $200 per barrel in 1-2 years. Deeper correction is possible though to allow market to take a breath for a while.

Even as oil prices ascended to new highs of more than $124 a barrel this week, many oil and gas industry executives say they expect the price to fall significantly by year's end, a new survey shows.

Fifty-five percent of 372 petroleum industry executives surveyed by KPMG LLP said they think the price of a barrel of crude will drop below $100 by the end of the year. Twenty-one percent of respondents predicted a barrel of oil will end the year between $101 and $110, while 15 percent forecast the year-end price to be between $111 and $120 a barrel.

Nine percent said they expect the price to close the year where it's been this week -- above $120 a barrel. What's more, 44 percent of the executives said their companies plan to increase capital spending on exploration and production by 10 percent during the next year.

The survey was conducted last month and scheduled for release Friday. Participants included executives for major oil companies, independent exploration and production outfits and other energy companies.

"The expectation of increased investment by U.S. energy companies shows oil and gas executives are deeply concerned about energy security," said Bill Kimble, who oversees the global energy institute at KPMG, the audit, tax and advisory firm.

Of late, all eyes have been on crude prices, which have nearly doubled in the past year. The dollar's decline against the euro and other foreign currencies has helped spur the rise, attracting investors looking for a hedge against inflation.

Rising demand for oil from the rapidly developing economies of China and India has played a role too, as have concerns about tighter supplies. Indeed, 63 percent of survey participants said growing demand in emerging markets was the main factor in the historic rise in oil prices.

Widely watched oil price prognosticator Goldman Sachs said this week oil prices could rise to $150 to $200 within two years; others say crude could plummet to as low as $40 or $50 a barrel during the same period.

"To be sure, the future does not unfold neatly in line with any projection, and the time frame of the actual price surge has been remarkably short," Cambridge Energy Research Associates Inc. said in a report this week.

Asked what would most enhance U.S. energy security, participants overwhelmingly said opening up more acreage for domestic drilling was the best option. In particular, 43 percent said the Arctic National Wildlife Refuge should be opened for drilling. Another 28 percent said more investment in renewable energy sources such as biodiesel would enhance U.S. energy security the most.

However, even though many of the executives support further investment in renewable energy sources, the majority still don't view renewables as a serious near-term solution to the energy supply equation.

In last year's survey, 60 percent of 553 petroleum industry executives said large-scale production of renewable fuels was not a near-term possibility, at least not in the next couple of years. In the most-recent survey, 54 percent gave the same response, though 2015 was the target date.

Democrats' Housing Rescue Bill Under Bush's Veto Threat

House passes massive homeowner rescue plan, defying President Bush's veto threat.

Democrats' plans to help hundreds of thousands of homeowners struggling with rising subprime mortgage rates and plummeting house values could be sidetracked by President Bush's threatened veto and the backing of many congressional Republicans.

Opponents of the plan say more prudent homebuyers and renters shouldn't be called upon to bail out borrowers who gambled on ever-rising housing prices and lost. "The American people don't want to make their neighbor's payment when they're having trouble making their own," said Rep. Randy Neugebauer, R-Texas.

The Democratic-controlled House on Thursday passed a homeowner rescue plan that would provide cheaper, government-backed mortgages to half a million debt-ridden borrowers and bolster an economy crippled by the housing crisis. The House approved the measure by a vote of 266-154, with 39 Republicans -- mostly from areas suffering worst from housing woes -- supporting it.

Defying veto threats, the House voted to let the Federal Housing Administration take on up to $300 billion in new mortgages so that financially strapped borrowers facing foreclosure could refinance.

The plan by Rep. Barney Frank, D-Mass., is the centerpiece of a broader package of bills approved Thursday that Democrats say will prevent more foreclosures and help homeowners and communities deal with the fallout from the mortgage crisis.

The measure is targeted at homeowners facing default, including many who owe more than their houses are worth. For instance, a homeowner who owes $290,000 on a house now worth $225,000 could refinance into an FHA-backed loan if the mortgage holder was willing to take a loss of about 36 percent. The borrower's monthly mortgage payments would fall from $2,200 to about $1,200.

Loan holders would have an incentive to participate, proponents believe, since the alternative would be costly foreclosures, which can involve losses of 50 percent or more. Supporters hope the package -- which awaits action in the Senate -- will serve as the basis for a broad bipartisan housing compromise that could satisfy both parties' keen appetite for delivering election-year aid to anxious constituents.

But Bush's veto warnings, backed by staunch GOP opposition, are clouding its prospects. "House Democrats passed bills that they know will never become law. Most Americans understand that we shouldn't create a taxpayer-funded bailout for lenders and speculators," said Tony Fratto, a White House spokesman.

Under Frank's plan, homeowners currently considered too risky to qualify could refinance into FHA-backed loans if their lenders agreed to take substantial losses on the original mortgages. Borrowers would have to show they could afford to make payments on the new loans. They would have to share with FHA at least half of their proceeds if they profited from selling or refinancing again.

The plan is projected to cost $2.7 billion over the next five years. The House on Thursday also passed, 239-188, a bill to send $15 billion to states to buy and fix up foreclosed property. Bush has threatened to veto that measure also, contending it rewards the very lenders who helped caused the housing chaos and could act as an incentive for them to foreclose rather than find ways to help struggling borrowers stay in their homes.

ECB and Bank of England Hold Rates Steady

European, British central banks leave rates steady amid signs of slower economic growth ahead.

The European Central Bank left its interest steady at 4 percent on Thursday, following a similar decision by the British central bank to leave its rate at 5 percent. Analysts had expected Thursday's decision by both banks as evidence mounted that growth in the euro zone and in Britain is likely to slow in coming months.

Higher rates, used to combat inflation, also can strengthen a currency and are considered to be supporting the euro. While the U.S. Federal Reserve has lowered rates seven times in seven months to 2 percent, the ECB has been content to stand pat to try to combat rising inflation in the 15-nation bloc of 317 million people, which accounts for 22 percent of global gross domestic product -- more than Japan and China and below the U.S. at 27 percent.

"While the U.S. economy has succumbed to stagnation and the U.K. economy is decelerating sharply, the euro zone has so far held up fairly well," said Holger Schmieding, Bank of America's chief European economist. "For the time being, that is until the summer break ends in September, the ECB is probably firmly on hold," he said.

ECB president Jean-Claude Trichet will present the bank's rationale for leaving the rate for the euro zone at 4 percent -- where it has stood since last summer -- when he meets with reporters in the Greek capital.

In London, the Bank of England shied away from back-to-back rate cuts despite slowing economic growth. The decision to keep rates on hold was anticipated by most analysts after the bank's monetary policy committee made a quarter of a percentage point cut last month. The Bank of England had to balance its decision with concern about inflation that remains above target levels.

"Current elevated inflation levels and risks deterred the MPC from cutting interest rates for a second successive month in May despite mounting signs that the U.K. economic downturn is deepening and widening amid ongoing tight credit conditions," said Global Insight economist Howard Archer.

Chiara Corsa, a UniCredit economist in Milan, said that the British central bank was "well aware that, against the backdrop of tighter credit conditions, growth momentum will definitely lose steam."

It's a similar quandary for the ECB now that inflation in the euro zone has slipped back to 3.3 percent in April from 3.6 percent in March -- still well above the ECB's own guideline of just under 2 percent. The bank is also pointedly concerned about the fluctuation in exchange rates, including the record setting euro, and what it may portend for future economic stability.

The euro reached a record $1.6018 on April 23 after a pair of ECB governors said that high inflation could cause the bank to raise interest rates. They quickly backed off the assertion and the euro has since slid to around $1.55 this week.

Charlie Munger Advises Investors to Lower Expectations

Berkshire's Munger says investors should lower expectations, warns about derivatives.

Billionaire Charlie Munger said Wednesday investors should lower their expectations because the economic conditions many people used to build wealth over the past three decades aren't likely to be repeated.

Berkshire Hathaway Inc.'s vice chairman also predicted that the derivative contracts companies use to hedge against risk will one day cause widespread problems in financial markets. Munger spoke at the annual meeting of Wesco Financial Corp., a Berkshire subsidiary he runs.

He said investors should expect annual returns of 4-to-5 percent going forward because many stocks are priced high and bonds are offering meager returns. "It's going to be difficult for people to have high real returns," Munger said.

Plus, Munger said he believes "a lot of rot" has gotten into financial markets, and more scandals, like the current subprime mortgage mess, are likely. "There will be a hell of a mess in these derivative books eventually," he said.

Munger said better accounting standards are needed and banks should not be allowed to put money into risky and complicated investments. "These people wouldn't get away with this horrible behavior if the accountants didn't bless it," he said.

Munger said the testosterone-driven, competitive executives heading most investment banks are partly to blame for the current financial problems. "I do not think we'd have this mess if women were running all the financial institutions," he said.

Munger said that in many ways the period between 1981 and today was "hog heaven" for investors who could simply put their money into sensible stocks and other investments and wait for a number of years to become rich. "Such a world is by no means guaranteed," he said.

The Wesco meeting is held each year in Pasadena a few days after thousands of Berkshire shareholders descend upon Omaha, Neb., to hear chairman and CEO Warren Buffett and Munger spend most of a Saturday answering any and all questions. Berkshire owns 80.1 percent of Wesco, but the company has its own publicly traded stock so it is required to hold annual meetings.

Munger is chairman, CEO and president of Wesco, but he consults with Buffett on Wesco's investment decisions and major capital allocations, much like Buffett consults with Munger about Berkshire decisions.

At Berkshire meetings, Buffett does most of the talking while Munger answers most questions, often with a pointed remark that cuts to the heart of what Buffett just spend 10 minutes explaining. But sometimes he offers only "I have nothing more to add" after one of Buffett's more long-winded responses.

Munger didn't envision the Wesco meeting becoming much of an event until some members of the crowd started to look familiar. "These Berkshire groupies started flying in from all over the world," he said. "And you naturally feel an obligation when people fly in from all over the world to give them what they want, which is conversation about the current business scene and investment process and so on and so on."

On Saturday, about 31,000 Berkshire shareholders filled the Qwest Center Omaha for that meeting. About 1,000 people came to Pasadena for the Wesco meeting and a chance to hear Munger alone. "It's really a rare treat hearing a mind like that operate for a number of hours," said investment fund manager Whitney Tilson, who regularly attends both meetings.

Wesco shares gained $5 to close, or 1.2 percent, at $430 Wednesday. Berkshire's Class A shares lost $1,800, or 1.4 percent, to close at $128,400. Wesco includes a reinsurance division, Kansas Bankers Surety Company, which offers specialized insurance to banks; CORT Business Services, which rents furniture to companies; Precision Steel, which buys scrap metal, cuts it to order and resells it.

In 2007, Wesco generated about $109 million profit for Berkshire. Wesco is one of Berkshire's more than 60 subsidiaries that range from insurance to clothing, furniture, and candy companies, restaurants, natural gas and corporate jet firms. Berkshire also has major investments in such companies as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.

Bill Gates Wants Microsoft Pursue Independent Strategy

Bill Gates says Microsoft going 'independent' way after withdrawing from Yahoo bid.

Microsoft Chairman Bill Gates said Wednesday the company isn't pursuing other deals following the withdrawal of its $47.5 billion takeover bid for Yahoo. He said in Tokyo that the company put "a lot of effort" in the talks with Yahoo and has decided the two should pursue "independent paths."

Over the weekend, Microsoft withdrew its 3-month-old unsolicited bid for Yahoo Inc. after seeing the impasse with Yahoo's board over a mutually acceptable sales price. "Now at this point Microsoft is focused on its independent strategy," Gates told reporters at a news conference in Tokyo. Those comments seemed to set a different tone than on Tuesday in South Korea, where he said the company wasn't ruling out alternative partnerships after the failure to buy Yahoo.

Microsoft Chief Executive Steve Ballmer had orally offered to pay $33 per share, or $47.5 billion, for Yahoo, up from an initial bid valued at $44.6 billion, or $31 per share. At the time the negotiations collapsed, the value of Microsoft's original offer had fallen to $42.3 billion, or $29.40 per share, because half the deal was supposed to be financed with Microsoft's declining stock.

Yahoo's board wanted $37 per share -- a price that the company's stock hasn't reached in more than two years. Microsoft trails Google in the online search and advertising markets, and the bid for Yahoo was an attempt at turning that around.

But Gates said that Microsoft was determined to make "advances" in its own search offering and meetings were in the works in Seattle to hammer out more specific plans. "We will make the advances that give people a great choice there," he said.

Microsoft's intense pursuit of Yahoo was widely seen as an acknowledgment of weaknesses in Microsoft's solo Web search and advertising strategy, and the software maker now needs to prove it can innovate without Yahoo as a partner.

Gates makes periodic trips to Asia, and he was in Japan two years ago. He said he met with business partners in Japan, which he sees as an important market. Talks covered digital broadcast software for Windows-based personal computers and giving free downloads of Microsoft software to Japanese students.

Possible partners for Microsoft in the future might include large Internet companies such as Time Warner Inc.'s AOL and News Corp.'s MySpace and promising startups such as Facebook Inc. and LinkedIn Corp. Microsoft already owns a 1.6 percent stake in Facebook, the second-largest social network behind MySpace.

Singapore's DBS Bank Q1 Profit Falls 2% Amid Turmoil

Singapore's DBS bank group says 1Q profit falls 2 pct on trading losses, weak markets.

Singapore lender DBS Group Holdings Ltd. said Wednesday its profit in the first quarter fell 2 percent from a year ago on trading losses amid the global financial market turmoil. Southeast Asia's largest bank by market capitalization reported a net profit of 603 million Singapore dollars (US$443 million; euro286 million) for the three months ending March 31, down from S$617 million in the same period last year.

The trading losses were offset by gains in interest and fee income. "Despite the challenging trading and capital markets environment, we continued to grow our customer franchise and increase business volumes, while remaining prudent and vigilant on costs," said DBS Chairman Koh Boon Hwee, in a statement.

The lender said net interest income rose 9 percent from a year ago to S$1.06 billion (US$777 million; euro503 million). Loans grew 21 percent to S$114.2 billion (US$83.9 billion; euro54.2 billion), largely from corporate borrowing, it said.

Net fee income rose 14 percent to S$353 million (US$260 million; euro167 million) from a year ago largely due to a 55 percent increase in loan syndication fees. Fee income was down 7 percent from the previous quarter on weaker capital market activities such as wealth management, investment banking and stockbroking, it said.

The bank lost S$161 million (US$118 million; euro76 million) in trading in the first quarter, compared to a trading profit of S$171 million a year ago. The losses were blamed on a "weaker credit environment" and a S$86 million (US$63 million; euro41 million) loss related to collateralized debt obligations held by Red Orchid Secured Assets, a conduit which the bank decided to liquidate earlier this year.

DBS' new chief executive, Richard Stanley, said at a press conference that the bank's focus will continue to be on organic growth in key markets. Stanley, who started at DBS Thursday, was formerly Citigroup Inc.'s top China manager.

"Clearly, we have a tremendous opportunity to build on our business in some of the key markets in the region. In Hong Kong, prospects are great; China is important, and so is India, Indonesia and Taiwan," Stanley said.

Oil Rises to New Record Near $121

Oil prices rise to record near $121 a barrel on supply worries and falling dollar.

Oil futures rose to an all-time high near $121 a barrel Tuesday with new concerns about a threat to supply and a weaker dollar. The surge in oil prices was also fueled by hopes that the U.S. economy will be spared a sharp downturn after the release of data Monday showing an unexpected expansion in the U.S. service sector in April, analysts said.

Light, sweet crude for June delivery rose to a record $120.93 a barrel in electronic trading on the New York Mercantile Exchange on Tuesday. The contract later retreated to $119.88 a barrel, down 9 cents from Monday's close. Crude futures settled on Monday at $119.97 a barrel, up $3.65 from Friday's close.

"The bulls are in control of the market," said Victor Shum, an energy analyst with Purvin & Gertz in Singapore. "The economic report out of the U.S. yesterday on the service sector seems to suggest the economic slowdown may not be as deep as initially thought." "The sentiment is that the oil pricing is likely going to stay quite strong, with a lot of volatility," Shum said.

The dollar weakened against the euro on Monday, attracting investors to oil and other commodities viewed as hedges against inflation. Also, a falling dollar makes oil less expensive to investors overseas. A series of U.S. Federal Reserve rate cuts starting last year weakened the dollar considerably against foreign currencies, and analysts blame the dollar's protracted decline for oil's sharp rise this spring.

Supply outages or potential threats to supply emerged in Iran and Nigeria over the weekend and from Iraq on Monday; events in all three nations have caused prices to spike many times in recent months.

In Iraq, Kurdish rebels warned they could launch suicide attacks against American interests to punish the U.S. for sharing intelligence with Turkey after Turkey bombed rebel bases in Iraq on Friday. In Nigeria, a Royal Dutch Shell PLC spokesman said attackers hit an oil facility belonging to Shell's joint venture in southern Nigeria and that some oil production has been shut down. And Iran's Supreme Leader Ayatollah Ali Khamenei said his country will not bend to international pressure and give up its nuclear program.

Energy investors grow concerned any time conflict breaks out or is threatened in the oil-rich Middle East. Years of unrest in Nigeria have cut off nearly a quarter of the major U.S. supplier's oil output. Amid the occasional threats to crude supplies, global demand for oil continues to grow. The Chinese and Indian economies are growing by double digits, boosting global demand for oil.

In the U.S., where demand has been dampened over economic concerns, the prince for "gasoline at the pump is averaging 29.4 percent above last year's pace," noted Stephen Schork of the Schork Report. "Meanwhile, average diesel prices are up by 41.1 percent or $1.079 a gallon (3.8 liters)."

Indonesia May Be Leaving OPEC

Indonesia considers quitting the Organization of Petroleum Exporting Countries.

President Susilo Bambang Yudhoyono said Tuesday that Indonesia was considering quitting the Organization of Petroleum Exporting Countries because it was no longer a net oil exporter. "Our wells are drying," he said in the nationally televised speech, adding that the country needed to concentrate on increasing domestic production, which has dropped to less than a million barrels a day even as consumption rises.

The government opened talks Monday on whether it "should continue to stay with OPEC or withdraw our membership ... until we reach a point where we deserve to rejoin that organization," Yudhoyono told governors and heads of regencies from all over Indonesia.

The country of 235 million people is Southeast Asia's only OPEC member. But it has to import oil because of decades of declining investment in exploration and extraction due to corruption and a weak legal system that makes oil companies wary of doing business here.

Indonesia's oil output has declined steadily from oil production of 1.5 million to 1.6 million barrels a day in the mid-1990s. It produced around 860,000 barrels a day of crude oil last month and recorded a deficit of $794 million in its oil trade accounts. Raising output could take "one to three years," Yudhoyono said.

It is not the first time the country has re-evaluated its OPEC membership, but in past years teams commissioned by the government have recommended staying in the grouping to maintain good relations with other oil producers, especially the heavyweights in the Middle East.

OPEC is an intergovernmental organization made up of 13 oil-producing countries. It was first formed in 1960 by founding members Iran, Iraq, Kuwait, Saudi Arabia and Venezuela. Indonesia, which joined OPEC in 1962, would not pull out until next year if the move was approved, because it has already paid dues thru 2008, according to Minister of Energy and Mineral Resources Purnomo Yusgiantoro.

The government, meanwhile, is also mulling whether to raise domestic fuel prices by up to 30 percent to avoid a budget blowout amid the soaring cost of oil on the global market. Crude oil futures have doubled since early last year and the front-month contract on the New York Mercantile Exchange was holding near $120 a barrel in Asia after topping that level for the first time Monday in the U.S.

Indonesian subsidies have kept gasoline, diesel fuel and kerosene affordable for years to the country's millions of poor, but most analysts agree that current domestic prices are unsustainable. Still, a large hike could trigger nationwide riots and would come at an especially sensitive time, with political parties jockeying ahead of next year's presidential elections.

A big fuel price increase in 1998 triggered rioting that helped topple former dictator Suharto. Rallies also forced former President Megawati Sukarnoputri to scale back a fuel price increase in 2002. Demonstrations were small and scattered, however, when the present government slashed subsidies in 2005.

But in the first sign of unrest, protesters and police hurled rocks at each other on Sulawesi island during a demonstration against the looming price hikes Tuesday, injuring at least four people. Witnesses said the clash occurred when officers tried to prevent the protesters from burning tires and seizing a fuel tanker in the town of Makassar.

Yudhoyono said this week fuel prices could be raised anywhere between 20 percent and 30 percent. "We will decide the magnitude of the increase within two weeks," Minister of National Development Planning Paskah Suzetta told reporters Tuesday, though he did not say when the public would be informed. At present, consumers pay a little less than half a dollar for a liter of gasoline, or about $1.90 a gallon.

Buffett-Munger Speak About Financial Companies Deserving Pain

Berkshire executives say companies that created credit crunch deserve the pain they're feeling.

Billionaires Warren Buffett and Charlie Munger say the pain many financial institutions are feeling because of the credit crunch is well deserved. The chairman and vice chairman of Berkshire Hathaway Inc. said Sunday that the financial companies that engineered subprime mortgages and the investment funds backed by those mortgages don't deserve much sympathy as they record losses now.

Buffett said the current financial crisis is a byproduct of a system that encouraged executives to "paint pretty pictures." Munger said lots of financial institutions acted with stupidity and overreached to improve earnings in recent years. "I think you have to start with the idea that a lot of the current troubles are richly deserved," Munger said.

The complexity of the tactics that financial institutions often employ makes it difficult to determine what those companies are worth -- even for Buffett. "There are some financial institutions I can't value," Buffett said. He said if someone had $1 million to invest in 10 stocks, it would be easier to find good values in the Korean stock market than among U.S. banks because the banks are so complicated.

Buffett said he recently read a 270-page annual report that an investment bank filed with the Securities and Exchange Commission, and he had unanswered questions about 25 pages of the report. "They're cleaning up their act now to some degree because they had to," Buffett said.

Munger said he doesn't think investment banks spend enough time thinking about risk and ways to avoid it like he and Buffett do at Berkshire. "We try to behave as if Berkshire stock was all owned by crippled relatives," Munger said.

Buffett said the pain isn't over yet for financial institutions, but he said nobody can predict how many more times banks will have to write down the value of their assets. The largest U.S. bank, Citigroup Inc., alone has taken more than $45 billion of write-downs and credit losses since June 30.

Buffett and Munger spent nearly three hours answering reporters' questions Sunday at their only planned news conference of the year. It is one of the events surrounding Berkshire's annual shareholders meeting that attracted 31,000 people to Omaha on Saturday.

Buffett reiterated that he believes the U.S. economy is in a recession by his definition, even if it hasn't yet met the commonly used criteria of two quarters of negative growth. He said his definition of a recession is when most people and businesses are not doing as well as they were three, six or nine months ago. "I would say that we're in a recession clearly," Buffett said.

He said the Federal Reserve's bailout of Bear Stearns Cos. likely prevented a crisis among investment banks because Bear Stearns held a large number of derivative contracts with other investment banks. If Bear Stearns went bankrupt, all those derivatives would have to be valued at zero or unloaded quickly.

But he and Munger agreed that not every business or investment bank should be rescued, because failure is an important part of capitalism. "Capitalism without failure is like Christianity without hell," Buffett said.

Lenders and investors who were dumb enough to deal in subprime mortgages should not receive any special help, Buffett said, but if homeowners were deceived about the terms of an adjustable mortgages, they should be helped. "People make mistakes in capitalism," Buffett said. "They shouldn't be penalized for being misled, but they shouldn't be protected from mistakes."

Buffett said the mortgage mess grew partly out of the belief many people had that their homes would always increase in value. And he said many of the mortgages that are in trouble are ones with which owners refinanced and took out more cash than they'd ever paid for the home.

Those homeowners and lenders were all counting on tomorrow's home prices to bail them out of today's decision. "People tend to forget how well the system worked when we had rules that prevented this complexity and aggression," Munger said.

Berkshire owns more than 60 companies including insurance, clothing, furniture, jewelry and candy companies, restaurants, natural gas and corporate jet firms and has major investments in such companies as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.

Wall Street Eyes Earnings and Economic Datas

This week, investors mine earnings reports, economic data to justify new optimistic tone.

Wall Street goes into the new week in an upbeat mood, with investors growing more confident that the economy and the financial markets are heading toward a second-half recovery.

There's been a steady stream lately of decent earnings reports and mostly benign economic data, and there's a sense that the credit crisis that pummeled stocks since last fall is nearing an end. For the first time in weeks, there's optimism that the government might have actually staved off a deep recession.

The U.S. consumer clearly isn't that cheerful, judging from consumer confidence figures released last week, but traders and portfolio managers on Wall Street often get ahead of themselves, looking past any bad news and toward future profits.

Analysts are a little more cautious. "The market has cleared its hurdles, but the race isn't over yet -- we haven't crossed the finish line," said Chris Johnson, president of Johnson Research Group. "You'll now start to see lots of money that will be migrating sector to sector because everyone has been waiting for this momentum."

Johnson has a very bullish stance for stocks in the near term, calling for up to a 10 percent rise within the next four to six weeks. But, he's also realistic -- "markets have a tendency to be overbought really quickly." That was one reason the Dow Jones industrials pared some of its gains Friday, gaining 48 points after being up more than 100 earlier in the day and shooting up 190 in the previous session.

The Dow gained 1.29 percent over the course of the week, the Standard & Poor's 500 index ended up 1.15 percent, and the Nasdaq composite index rose 2.23 percent. Johnson points out there are still some big obstacles that could stand in the way of the market extending its gains. Chief among them is the health of the consumer, whose spending habitaccount for more than two-thirds of the U.S. economy.

That means economic data and upcoming quarterly earnings from retailers will take on even bigger significance than usual. For example, investors are likely to focus on Walt Disney Co.'s earnings report Tuesday to determine the strength of sales at its U.S. amusement parks and of Disney products.

But they'll also be looking at results from Cisco Systems Inc., which makes Internet routers and other wireless devices, when it posts results Tuesday. And they'll be looking for comments Tuesday from global bank UBS AG on the state of the credit markets. Fannie Mae, the government-sponsored mortgage finance company, might give some perspective on the housing market.

The market will also get more economic data. If the numbers are good, the Federal Reserve is more likely to pause in its campaign of lowering rates -- a move that would allow the central bank to combat inflation and boost the anemic dollar.

"We're slow growth, but not imploding," said Steven Goldman, chief market strategist at Weeden & Co. "For the market, just like any patient that is ill, time heals. We're getting some confirmation of this, but we're still not entirely certain -- there's hope and expectations that the worst is over."

Among the reports scheduled this week, the Institute for Supply Management on Monday releases its April reading on the service sector. The index is expected to come in at 49.3, according to economists surveyed by Thomson Financial/IFR. That would indicate a slightly larger contraction in activity than March's reading of 49.6.

The Labor Department on Wednesday reports on first-quarter productivity and labor costs. Productivity is expected to have risen at an annual rate of 1 percent, while labor costs -- one indicator of inflation -- are expected to have increased by 2.5 percent.

Also Wednesday, the National Association of Realtors releases its pending home sales index, which is expected to have fallen to its lowest level ever in March, while the Federal Reserve reports on consumer debt in March.

On Friday, the Commerce Department reports on international trade in March, data that should provide insight into how the weak U.S. dollar has affected the nation's imports and exports. Economists are expecting a decline in the trade gap.

Weekend's Featured: Microsoft Withdraws Its Yahoo Bid

Microsoft abandons Yahoo bid after sides can't agree on acceptable sales price.

Microsoft Corp. has withdrawn its $42.3 billion bid to buy Yahoo Inc., scrapping an attempt to snap up the tarnished Internet icon in hopes of toppling online search and advertising leader Google Inc.

The decision to walk away from the deal came Saturday after last-ditch efforts to negotiate a mutually acceptable sale price proved unsuccessful. Microsoft was willing to pay $47.5 billion, or $33 per share, up from the bid's current value of $29.40 per share, according to a letter from Microsoft Chief Executive Steve Ballmer to Yahoo Chief Executive Jerry Yang.

But Yahoo demanded at least $53 billion, or $37 per share, according to Ballmer. That would have been nearly double Yahoo's stock price of $19.18 at the time Microsoft first made its bid a little over three months ago. "Clearly a deal is not to be," Ballmer wrote.

A spokeswoman for Sunnyvale-based Yahoo didn't immediately return a call seeking comment. The decision to walk away came as a surprise, given that many analysts believed Microsoft wanted to close the deal badly enough to either sweeten the offer or pursue a hostile takeover -- a risky maneuver that would have required an attempt to replace the Yahoo board that spurned rejected the bid.

But Ballmer said he concluded that pursuing a so-called proxy battle was "not sensible." "Our discussions with you have led us to conclude that, in the interim, you would take steps that would make Yahoo undesirable as an acquisition," Ballmer wrote to Yang.

But Yahoo hasn't necessarily faded from Microsoft's crosshairs. The software maker conceivably could renew its bid later this year if Yahoo can't bounce back from more than two years of financial lethargy.

Should Yahoo's turnaround efforts flop, many analysts believe the company's stock would sink into the mid-teens and open the door for another takeover offer that would be more difficult to rebuff. For now, at least, Microsoft appears to believe it has enough internal weapons to chip away at Google's dominance of the booming Internet ad market.

"We have a talented team in place and a compelling plan to grow our business through innovative new services and strategic transactions with other business partners," Ballmer said. "While Yahoo would have accelerated our strategy, I am confident that we can continue to move forward toward our goals."

Weekend's Featured: Berkshire Investors Reassured About Succession After Buffett

Berkshire shareholders get reassurances as they worry about company future after Buffett goes.

Warren Buffett tried to reassure his shareholders Saturday that Berkshire Hathaway will be fine once he is gone, but the 77-year-old billionaire offered few new details of the company's succession plan.

Berkshire vice chairman Charlie Munger may have done more to reassure the roughly 31,000 shareholders at the company's annual meeting. "Well, we still have a rising young man here named Warren Buffett," Munger said. To which Buffett joked that everyone seems young to the 84-year-old Munger. "And I think we want to encourage this rising young man to reach his full potential," Munger said.

However, several shareholders still asked about the succession plan and Berkshire's future. Part of the reason why Michel Paquet and Lorie Armstrong made their second trip to the annual meeting from Calgary, Alberta, is that they're not sure how many more meetings will feature both Buffett and Munger. "I will expect some volatility on the transition, but I'm ready for that," said Paquet, who plans to hold his Berkshire stock for many years to come.

To replace Buffett, Berkshire plans to split his job into three parts -- chief investment officer, chief executive officer and chairman. In his letter to shareholders, Buffett said the company's board has three internal candidates for CEO and four external candidates who could take over managing the company's $75 billion stock portfolio and $35.6 billion cash.

Buffett said any one of the three CEO candidates and any one of the four CIO candidates could step in and do some things better than he does. "There will be no gap after my death in terms of having someone managing the money," he said.

Buffett has refused to publicly identify the candidates, but he has said previously that after he dies his son will take over as chairman to ensure Berkshire's culture is preserved. Howard Buffett already serves on the board.

Buffett plans to visit Europe this month as part of an effort to make sure business owners there know about Berkshire, so they think about calling the American giant when they consider selling their companies. "We want to get on their radar screen," Buffett said.

Buffett told shareholders Saturday that the company's new business insuring municipal bonds generated more than $400 million in premiums during the first quarter. Berkshire Hathaway Assurance was launched to take advantage of credit problems other bond insurers have been having. Buffett said most of the bond insurance policies Berkshire has sold are on bonds that already were insured by other companies, with Berkshire charging a higher fee than the original insurer.

On Friday Berkshire reported first quarter net income of $940 million, or $607 per share, in the quarter ended March 31. That's down significantly from the net income of $2.6 billion Berkshire generated a year ago.

The biggest reason for the drop in net income was an unrealized $1.6 billion pretax loss Berkshire recorded on its derivative contracts. Including the derivative losses, Berkshire's net investment losses in the quarter totaled $991 million. A year ago, the Omaha-based company recorded a $382 million investment gain.

In Berkshire's annual cartoon, part of a humorous movie at the start of the meeting, Buffett and Munger spoofed the presidential campaign. The cartoon depicted Munger running for president as a write-in candidate for a fictional "Financial Independence Party."

At a campaign event, the cartoon Munger delivered real change -- by offering a boy two dimes for a quarter. Munger also had an answer for all the nation's ills, all involving products made by Berkshire subsidiaries: Global warming? Munger recommended eating a Dairy Queen Blizzard a day. Health care? Eat more See's Candy. Economic problems? Munger promised to put Buffett in charge of the Federal Reserve, the Treasury Department and the Commerce Department.

An animated Hillary Clinton laughed at the notion of Munger's candidacy, while Barack Obama lamented that he thought he was the candidate of change. The cartoon of Republican John McCain celebrated Munger's candidacy: "Excellent! A candidate older than I am."

Weekend's Featured: Bush Sees US Economy to Endure

President Bush predicts economy is going to 'come on' as rebate checks come in.

President Bush, buoyed by a batch of economic news that wasn't as bad as expected, predicted Friday that consumers are on their way to better days. "I know it's tough times, and I know you're having to pay more at the fuel pump than you want," Bush said. "But this economy is going to come on. I'm confident it will."

After months of talking of the economy's resilience, Bush was able to pivot his latest pep talk off some encouraging signs -- at least relative to the gloomy indicators of late. Employers cut far fewer jobs in April than they did in March, although it was the fourth straight month of slashed payrolls. The unemployment rate dropped slightly, from 5.1 percent to 5 percent, which was a better-than-expected showing.

Elsewhere in the economy, the dollar gained a bit of strength, and there were even signs that food prices may be easing. Bush, reflecting on the weak and stagnant growth of the economy over the first quarter of the year, said, "That's not good enough for America."

Still, he said, consumers are just now starting to get relief from an economic package approved in February. Rebate checks of up to $600 for individuals and $1,200 for families began heading toward people's mailboxes or directly into their bank accounts this week. Bush called it a "robust attempt to inject life" that hasn't really kicked in yet.

The president's comments, to employees at a technology plant in this St. Louis suburb, were his latest attempt to show he understands the pinch on millions of working families. Democrats, in a deepening rift with Bush over how to help the economy recover, maintain his rhetoric shows he's out of touch. Democratic leaders in Congress want more relief to be provided, including additional unemployment benefits.

"It's time for President Bush to be realistic about the economy and start working with the Congress on a second economic stimulus package that will deliver real relief to Americans now," said Rep. Rahm Emanuel of Illinois, head of the House Democratic Caucus.

Bush has rejected those calls for now, saying the first plan should be given a chance to work. The stimulus package also includes tax breaks to encourage businesses to invest. In Tulsa, Okla., on Friday night, Vice President Dick Cheney also rejected the Democrats' call.

"Right now, with the economy going through a rough patch, some in Washington view it as an excuse to expand the size and scope of the federal government," Cheney said at a fundraiser for the Oklahoma Republican Party. "Republicans believe when Americans are facing tough times, the first thing we should do is let them keep more of their own money."

The climb back to economic health is a steep one. A massive housing slump, a credit crunch and turmoil in the financial markets have combined to sour the economy and the nation's mood. Families are feeling the pinch at the grocery store and the gas pump, and many worry about keeping their jobs or their homes.

Even as consumer confidence slumps, Bush is prodding the nation to keep perspective. "We have been through a recession, we have been through a terrorist attack, we have been at war, we have had corporate scandals, we have had major natural disasters," Bush said. "And yet this economy always recovers."

Addressing soaring gasoline prices, Bush said he understands the "pain" consumers are feeling. He pressed Congress to allow more drilling for oil in areas where it is now prohibited, and to encourage the construction of more oil refineries -- both familiar calls.

Bush, standing in the middle of a stage, touched on a number of topics as he took questions from the audience. He was upbeat all the way. "I've got a lot on my mind, by the way," Bush cautioned the crowd. "I'm getting ready to march down the aisle."

The president's daughter Jenna is getting married next weekend. Asked about his plans after his presidency, Bush said, "I'm headed home" to Texas. He spoke broadly of promoting freedom, a focus of his planned presidential library.

Never a fan of discussing his legacy, Bush did get reflective on his time at the White House. He said after all the good days and the bad days, he remains optimistic. "Interestingly enough, it is a lot harder to have been the son of the president than to be the president," he said. "And so it's been a joyous experience." Bush headed to his ranch in Crawford, Texas, for the weekend after his speech.

US Economy Endures a Bit With Slowing Job Losses and Dollar Strength

Economy shows unexpected bounce: Jobless rate declines, dollar shows a bit of muscle.

The economy showed off unexpected signs of resilience Friday as job losses slowed, the dollar gained a bit of muscle for a change and there were even indications that food prices may be easing. The unemployment rate dipped, though that may not last.

The latest barometers flashed encouraging signs that the economic slowdown may not be as pronounced as some had feared. Still, there's much caution -- about housing, credit and other problems. "Economic or financial conditions could take an unexpected stumble at any time," warned Stephen Stanley, chief economist at RBS Greenwich Capital.

Employers eliminated 20,000 jobs in April -- not nearly as many as the 81,000 in March, and the fewest monthly losses so far this year, the Labor Department reported. The unemployment rate dropped to 5 percent, from 5.1 percent.

Stresses were still evident. It was the fourth straight month that employers cut jobs -- bringing total losses to 260,000. Many analysts were bracing for much more carnage. Yet, the new figures "can't be taken as a signal that the economy is out of the recession woods," said Nigel Gault, of Global Insight.

On Wall Street, investors initially responded enthusiastically to the employment news, with the Dow Jones industrial average rising more than 100 points, but the market gave back part of that gain and closed up 48.20 points. Investors were keeping their euphoria in check, especially since stocks had already shot nearly 190 points higher on Thursday. Still, the tone in the market was clearly more upbeat. Thursday's advance came on a growing sense that the economy isn't as wounded from the credit crisis as many people have feared.

Investors were also reassured by the dollar's show of strength this week. The greenback's latest gains have come on expectations that the Federal Reserve is likely to hold interest rates steady -- a trend that makes U.S. assets more attractive to overseas buyers. The U.S. currency rose this week to a five-week high against the euro.

In turn, the dollar's advance has had an impact in the commodities market. Food prices -- such as for wheat and soybeans -- eased. And while oil did rise Friday, that was because of supply concerns rather than moves in the dollar.

"Things are a little brighter," Ken Mayland, president of ClearView Economics, said of all the developments. "The economy is seen as doing a little bit better" and that's contributing to the stronger dollar and calmer food prices, he said.

Another report out Friday showed orders to U.S. factories rose a bigger-than-expected 1.4 percent in March after two straight months of declines. Higher prices, though, accounted for part of the gain.

Businesses are handing out pink slips as they cope with an economy that is teetering on the edge of a recession, or possibly in one already. A severe housing slump, harder-to-get credit and financial turmoil have forced people and businesses to be more cautious in their spending. And that has hurt the economy.

To help relieve credit problems, the Federal Reserve announced Friday it would boost the availability of short-term loans to commercial banks to $150 billion in May from the $100 billion supplied in April. The goal is to supply a source of cash to squeezed banks so that they'll keep lending.

On the employment front, construction companies, manufacturers, retailers, mortgage brokers and temporary help firms were among those shedding jobs in April. Those losses eclipsed gains elsewhere, including education, health, hotels and motels, bars and restaurants, and the government. All told, there were 7.6 million people unemployed as of April, up from 6.8 million a year earlier.

Voters are keenly worried about the country's economic problems and so are politicians -- in Congress, in the White House and on the campaign trail. President Bush expressed hope Friday that the economic-stimulus rebates beginning to reach taxpayers this week will help lift activity. "This economy is going to come on. I'm confident it will," Bush said.

Workers with jobs saw scant wage gains. Average hourly earnings for jobholders rose to $17.88 in April, a tiny 0.1 percent rise from the previous month. Over the past 12 months, wages have grown by 3.4 percent. If the job market weakens in the months ahead, wage growth probably will slow, too, making people even less inclined to spend. That would spell further trouble for the economy.

The new jobs figures come from two different statistical surveys, which can provide -- as in Friday's case -- a somewhat conflicting picture. The seasonally adjusted overall civilian unemployment rate -- 5 percent in April -- is based on a survey of 60,000 households. It showed that 362,000 people said they found employment last month, outpacing the number of new people who couldn't find work. Economists tend to put more stock, however, in the much broader business survey of 400,000 work sites that was used to calculate the job loss figure.

To help bolster the economy, the Fed lowered interest rates on Wednesday, but signaled that its rate-cutting campaign could be drawing to a close. Fed officials and the Bush administration are hoping that the Fed's aggressive rate cuts since September plus the government's $168 billion stimulus package will lift the country out of its slump in the second half of the year.

Even if that happens, economists predict the unemployment rate will climb higher, hitting 6 percent early next year. Employers often are reluctant to beef up hiring until they feel certain that a recovery has staying power.

The economy advanced at a snail's pace of just 0.6 percent in the first three months of this year as people and businesses clamped down on their spending. That marked the second quarter in a row of such feeble growth.

"I think we are in a recession," said Mark Zandi, chief economist at Moody's Economy.com. Even thought the employment news was "encouraging ... it is much too premature to signal that the economic coast is clear."

Berkshire 1Q Profit Falls 64% Amid Derivative Losses

Unrealized derivative losses send Berkshire's 1Q profit 64 percent lower.

Berkshire Hathaway Inc. said Friday its first-quarter profit fell 64 percent because it recorded an unrealized $1.6 billion pretax loss on its derivative contracts, and its insurance businesses generated lower profits. Berkshire reported net income of $940 million, or $607 per share, in the quarter ended March 31. That's down significantly from the net income of $2.6 billion Berkshire generated a year ago.

Berkshire's chairman and CEO Warren Buffett warned shareholders in his annual letter that the derivatives could make the company's earnings volatile. But he predicted the derivatives will ultimately be profitable.

The four analysts surveyed by Thomson Financial expected earnings per share of $1,476.99 on average. Including the derivative losses, Berkshire's net investment losses in the quarter totaled $991 million. A year ago, the Omaha-based company recorded a $382 million investment gain.

Berkshire's derivatives fit into two major categories. Berkshire will have to pay on some of the contracts if certain U.S. entities default on their credit. Most of the other derivatives will only be paid if the certain stock indices are lower in 15 or 20 years than they were when the contract was written. Berkshire has received $2.9 billion in premiums on the credit-default derivatives and $4.9 billion on the stock index derivatives.

Berkshire said its operating earnings are a better measure of how the company is performing in any given period because those figures exclude derivatives and investment gains or losses. Berkshire reported $1.93 billion in operating earnings during the first quarter, which was down from $2.21 billion in operating earnings a year earlier.

Officials at Berkshire typically do not comment on quarterly earnings reports. The first-quarter report was released on the eve of Berkshire's annual shareholders meeting, which is expected to attract more than 30,000 people Saturday.

Berkshire's insurance group, which includes Geico, reinsurance giant General Re and several other firms, contributed $181 million to net income from underwriting new policies. A year ago, Berkshire's insurance companies generated a $601 million underwriting profit.

Buffett has said he expects insurance profits to fall during 2008 because increased competition has driven premium prices down, and a catastrophic loss could further hurt insurance profits. "Berkshire's property and casualty reinsurance operations have benefited during the past two years from relatively low levels of catastrophic losses, which investors should not assume will recur in 2008," Berkshire's CFO Marc Hamburg wrote in the quarterly report.

Berkshire generated $25.2 billion in revenue during the first quarter, down from the $32.9 billion it generated in 2007's first quarter. Berkshire had $35.6 billion cash on hand at the end of the quarter, which is down from the $44.3 billion the company held at the end of 2007.

The company used some of its cash to complete its $4.5 billion purchase of a 60 percent stake in industrial conglomerate Marmon Holdings Inc. That deal closed March 18. Marmon includes more than 125 manufacturing and service businesses across the transportation, energy and construction markets. Marmon makes products ranging from railroad tank cars to metal fasteners.

Berkshire owns more than 60 subsidiaries that range from insurance to clothing, furniture, and candy companies, restaurants, natural gas and corporate jet firms. Berkshire also has major investments in such companies as Coca-Cola Co., Anheuser-Busch Cos. and Wells Fargo & Co.

Fed to Lend More to Banks, Avoiding Further Interest Rates Cut

Federal Reserve may be showing signs it would prefer not to cut interest rates more.

The Federal Reserve's decision Friday to lend more to banks may be a sign that policy makers want to avoid cutting interest rates any further, as they combat a credit crisis that is far from over.

The Fed cut rates to 2 percent this week from 5.25 percent in September. With the value of the dollar falling against foreign currencies, and rising commodity costs pressuring consumers at the gas pump and the grocery store, the central bank wants to steer clear of actions that will push prices up even more.

By lending directly to banks, the Fed can provide capital that banks need to lend to consumers and businesses without fueling higher prices in industries that don't, said Bill O'Grady, chief investment strategist at Wachovia Securities. "The more they make liquidity available through new channels, the less they need to cut the federal funds rate," O'Grady said.

By relieving the seizure plaguing financial markets, the Fed hopes it can free up the cash many banks are hoarding. This would presumably encourage banks to lend their money out through mortgages or business or car loans.

Recent months have seen surging food and energy costs. Wall Street is concerned that the threat of inflation and the persistent struggles of the housing market would force consumers, who account for about 70 percent of U.S. economic activity, to spend less.

The Fed said Friday it would boost the amount of emergency reserves it supplies to U.S. banks to $150 billion in May, from the $100 billion it supplied in April. The Fed took this action and several other moves to boost credit in coordination with the European Central Bank and the Swiss National Bank.

The Fed has committed about $600 billion in loans to banks, an amount that represents perhaps half of all the distressed debt in the market, said Lehman Brothers credit strategist Amitabh Arora. This helps moderate the risk that a struggling bank might have to auction off its investments to avoid bankruptcy, he said.

The latest moves are part of a series of actions the Fed has taken since the credit crisis struck in August. The market has responded in the past six weeks, showing signs that confidence is creeping back into the system. Stocks are up more than 10 percent and prices for Treasurys and gold -- which typically rise times of distress -- have slipped. While other factors have contributed to the relief rally in the past few weeks, Arora said these actions and the Fed's assistance in bailing out Bear Stearns Cos. have helped.

But even after the Labor Department said the U.S. economy shed 20,000 jobs last month -- fewer than expected -- stocks had a lukewarm response. That suggests that, like the Fed, investors aren't sure the credit crisis has been contained.

The report was a relief to Wall Street, which expected payrolls to fall by 70,000 jobs. The unemployment rate fell to 5 percent from 5.1 percent. It was the fourth straight month of job losses, but the data signaled the economy might be resisting recession.

Dan North, chief economist at Euler Hermes, said he expects the Fed to cut rates one more time next month, by 0.25 percentage points, and then stop. The Fed's statement accompanying its decision this week carried a more hawkish tone on inflation -- suggesting Chairman Ben Bernanke is more worried about swelling prices and thus less inclined to slash rates, he said.

Rather than sustaining banks with badly needed loans, North thinks the Fed is "polluting the world with dollars," meaning making money so easy to obtain that the dollar is losing value. The market is "awash in liquidity," North said. Plenty of companies have plenty of cash to lend or spend, North said.

"The Fed is trying a multitude of things," he said. "They're looking for ways other than lowering interest rates, but what's happening is they're just pumping liquidity into the system and it's not necessarily going to make the banks want to lend more."

Microsoft's Bid for Yahoo Going Hostile

Microsoft may go hostile in its bid for Yahoo, announcement likely Friday.

Microsoft Corp. may go hostile in its bid for Yahoo Inc. as soon as Friday, according to a published report. Citing unnamed people familiar with the matter, the Wall Street Journal reported early Friday that the world's largest software maker may be preparing to go straight to Internet pioneer Yahoo's shareholders.

An announcement was "likely" to come Friday, according to the report, though the newspaper said its sources cautioned that Microsoft may delay. Chief Executive Steve Ballmer told employees in a company assembly Thursday that he knows how much he'd spend to buy Yahoo and accelerate his company's Internet play.

"We're willing to pay for that at some level, and beyond that level we're not willing to pay for it. I know exactly what I think Yahoo is worth to me," the executive said. "I won't go a dime above, and I will go to what I think it's worth if that gets the deal done." But he didn't offer a figure, and he didn't say whether Microsoft is considering raising its unsolicited bid, worth $44.6 billion at the time it was made in early February.

The offer is currently worth about $42.4 billion, or $29.48 per share, based on Microsoft Corp.'s closing stock price Thursday. Yahoo Inc. has rejected the offer, saying it undervalues the company. Microsoft's board has been considering whether to raise the bid to as much as $33 per share, according to The Wall Street Journal.

Ballmer didn't provide any new insight into the company's efforts to buy the Silicon Valley pioneer during the meeting at Microsoft's Redmond, Wash., headquarters, but he did indicate that an end to months of speculation was near. "We ought to announce something in relatively short order," Ballmer told employees.

His comments were first reported by Silicon Alley Insider, an online technology news site, and confirmed by a Microsoft spokesman. Ballmer added that buying Yahoo is just one of many moving parts in the software maker's strategy to compete with Google Inc. in search and Web advertising, and that if neither a friendly nor a hostile deal "look good," he's willing to walk away.

Microsoft's board met Wednesday but reached no decision on a next step, the Journal reported. The software maker had given Yahoo until last weekend to agree to a deal or face the prospect of an ugly proxy fight.

Meanwhile, Yahoo is exploring a possible advertising partnership with Internet search leader Google Inc. or a merger with the online operations of Time Warner Inc.'s AOL as possible defenses if Microsoft tries a hostile takeover.

Impressed by a two-week test completed last month, Yahoo could firm up a long-term deal within a week, according to the Journal. Any alliance between Yahoo and Google would face intense antitrust scrutiny, however, because the two companies control more than 80 percent of the U.S. market for search advertising. Yahoo and Google hope to allay those concerns by structuring their deal so their rivals, including Microsoft, could participate in an auction-based system, the Journal said.

Thailand Initiates Rice-Producing Cartel Ideas

Thailand floats ideas of OPEC-style cartel for rice-producing nations amid rising prices.

Thailand, the world's biggest rice exporter, said Friday that it wants to form an OPEC-style cartel with four of its Southeast Asian neighbors so they have has more control over rice prices, which have tripled this year.

Commerce Minister Mingkwan Saengsuwan plans to talk with his counterparts in Laos, Myanmar, Cambodia and Vietnam about the proposal. The price of rice has reached $1,000 a ton for 100 percent Grade B white rice, the regional benchmark.

"Though we are the food center of the world, we have had little influence on the price," said Thai government spokesman Vichienchot Sukchokrat. "With the oil price rising so much, we import expensive oil but sell rice very cheaply and that's unfair to us and hurts our trade balance."

Vichienchot said Prime Minister Samak Sundaravej brought up the idea during discussions Wednesday with Myanmar's Prime Minister Lt. Gen. Thein Sein in Bangkok. "The idea is that we can work together to improve yields and production and have some influence on setting the prices, making it a little more balanced," Vichienchot said.

Global rice prices have risen sharply this year amid global food inflation, poor weather in some rice-producing nations and growing demand that has outstripped supply. Some Asian countries, including India and Vietnam, have contributed to the problem by curbing rice exports to guarantee their own supplies.

Samak said Myanmar supported the idea, while officials in Vietnam said they are studying it and may support it. Officials in Cambodia and Laos could not be immediately reached for comment. Much like OPEC sets oil prices, the tentatively named Organization of Rice Exporting Countries would help set rice prices to ensure farmers benefit from increasing demand for the staple.

Fed Cuts Rate to 2% As Expected

Fed cuts interest rates to lowest level in 4 years to prop up economy on edge of recession.

Scrambling to shore up the faltering economy, the Federal Reserve cut interest rates to the lowest point in nearly four years Wednesday as the nation teetered on the edge of recession. Wall Street rallied at first but then pulled back, concerned that the reduction might be the last for a while.

In fact, the Fed's trim was smaller than those of recent months amid indications the central bank might pause to see if months of powerful rate-cutting medicine and billions of dollars in stimulus checks will be enough to lift the country out of its slump.

Chairman Ben Bernanke led a divided Fed, in an 8-2 vote, in slicing its key rate by one-quarter percentage point to 2 percent. In turn, the prime lending rate for millions of consumers and businesses fell by a corresponding amount, to 5 percent. The prime rate applies to certain credit cards, home equity lines of credit and other loans. Both rates are the lowest since late 2004.

The Federal Reserve, which has been dropping rates since last September, turned much more forceful early this year when housing, credit and financial problems worsened. Rate reductions in January and March alone marked the most aggressive intervention in a quarter-century in an effort to re-energize consumers and businesses.

"The substantial easing of monetary policy to date ... should help to promote moderate growth over time and to mitigate risks to economic activity," the Fed said, strongly hinting that more cuts may not be needed.

Enthusiastic Wall Street investors drove the Dow Jones industrial average up more than 178 points -- lifting it above 13,000 for the first time since early January -- right after the Fed action. Then traders' caution returned, and the index ended the day 11.81 points below where it started.

Although the Fed didn't take another reduction off the table, a growing number of economists believe the central bank is winding down its rate-cutting campaign. Barring another hit to economic growth, they believe rates probably will stay where they are -- perhaps through the rest of this year -- in part because the Federal Reserve is concerned that further cuts could join with galloping energy and food prices and spread inflation dangerously higher.

By all accounts, the country's economic health is fragile. The economy crawled ahead at a pace of just 0.6 percent from January through March as housing and credit problems forced people and businesses to hunker down, the Commerce Department reported hours before the Fed's action. Growth had been just as feeble in the prior quarter.

Job losses for the first three months of the year neared the staggering quarter-million mark, and a government report on Friday is expected to show that employers shed jobs again in April. The unemployment rate, now at 5.1 percent, also could creep higher in April and hit 6 percent early next year, analysts say.

"Recent information indicates that economic activity remains weak," the Fed said. "Household and business spending has been subdued, and labor markets have softened further. Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters."

Two members -- Charles Plosser, president of the Federal Reserve Bank of Philadelphia, and Richard Fisher, president of the Federal Reserve Bank of Dallas -- opposed cutting rates Wednesday, a crack in the usually unified front the Fed often shows the public.

Both men have a reputation for being especially vigilant about fighting inflation. At the Fed's previous meeting in March, they opposed cutting rates by a whopping three-quarters point and preferred a smaller reduction.

"The Fed didn't completely shut the door on rate cuts but they closed it part way," said Mark Zandi, chief economist at Moody's Economy.com. "I think the overall message was they've done a lot already to help the economy and think this will be enough. But they stand ready to do more if that is needed."

Bernanke's juggling act is getting harder. Fed policymakers are trying to bolster economic growth, and at the same time they are mindful that they can't let inflation get out of hand. The very rate reductions the Fed depends on to energize the economy can also sow the seeds of inflation down the road.

At the same time, many economists believe the economy already is declining. Under one rough rule, if the economy contracts for six straight months it is considered to be in recession. However, that didn't happen in the last recession -- in 2001. A panel of experts at the National Bureau of Economic Research that determines when U.S. recessions begin and end uses a broader definition, taking into account income, employment and other barometers. The bureau's finding is usually made well after the fact.

The Fed's previous rate reductions, which take months to work their way through the economy, should help lift growth in the second half of this year. The government's $168 billion economic-stimulus package -- including tax rebates that started flowing to bank accounts on Monday -- also should help energize activity, the Bush administration, Bernanke and private economists have said.

The biggest weight on the economy is the housing crisis, which has pushed foreclosures to record highs and caused financial institutions to rack up billions of dollars in losses. For mortgage rates, the Fed's latest cut probably won't have much, if any, impact.

Rates on longer-term 30-year and 15-year mortgages, which are linked to the 10-year Treasury notes, actually could see rates rise in the weeks ahead in part because of concerns about higher inflation. Rates on shorter-term mortgages probably won't drop either because investors already had factored in the latest Federal Reserve action.

Still, people with adjustable-rate home loans have been helped by the Fed's series of rate reductions; they would have been socked with much higher rates when their mortgages reset if not for the Federal Reserve cuts, analysts said. "Going forward, if the Fed holds rate steady, resets in the pipeline would benefit in a similar fashion as still-low interest rates would mean very manageable mortgage-rate resets," said Greg McBride, senior financial analyst at Bankrate.com.

US Q1 GDP Grows 0.6%

Economy limps ahead at a 0.6 percent pace in first quarter, better pace than expected.

The bruised economy limped through the first quarter, growing at just a 0.6 percent pace as housing and credit problems forced people and businesses alike to hunker down.

The country's economic growth during January through March was the same as in the final three months of last year, the Commerce Department reported Wednesday. The statistic did not meet what economists consider a definition of a recession -- which is a contraction of the economy. This means that although the economy is stuck in a rut, it is still managing to grow, even if slightly.

Many analysts were predicting the gross domestic product (GDP) would weaken a bit more -- to a pace of just 0.5 percent -- in the first quarter. Earlier this year, some thought the economy would actually lurch into reverse during the opening quarter. Now, they say they believe that will likely happen during the current April-to-June period.

"The economy is weak but not collapsing," said Lynn Reaser, chief economist at Bank of America's Investment Strategies Group. "A recession can't be ruled out, although the stars are not lined up at this point to definitively say one way or the other." On Wall Street, the Dow Jones industrials closed down 11.81 points.

Gross domestic product measures the value of all goods and services produced within the United States and is the best measure of the country's economic health. Voters are keenly worried about the country's economic problems and so are politicians -- in Congress, in the White House and on the campaign trail.

White House press secretary Dana Perino said the administration was disappointed in the figures. "This is nothing to crow about," she said. "It is very slow growth, but it is growth nonetheless."

The housing situation turned more bleak in the first quarter, as record-high foreclosures dumped more unsold homes on the market, adding to builders' headaches. Builders slashed spending on housing projects by a whopping 26.7 percent on an annualized basis. That was the most in 27 years and the biggest drag on the economy.

Consumers -- whose spending is vital to the country's economic health -- turned much more cautious, also restraining overall economic growth in the first quarter. Their spending rose at just a 1 percent pace. That was down from a 2.3 percent growth rate and was the slowest since the second quarter of 2001, when the United States was suffering through its last recession. Shoppers did cut spending on such things as cars, furniture, household appliances, food and clothes.

Soaring energy and food prices are walloping people's pocketbooks, leaving them with less to spend on other things. The credit crunch also has made it harder for people to finance big ticket items, such as cars and homes. And, many homeowners watching their homes slump in value, also are feeling less wealthy and less inclined to spend.

Another report Wednesday, this one from the Labor Department, showed that workers' compensation -- including wages and benefits -- grew 0.7 percent in the first quarter, the slowest pace in two years. Many economists were expecting a 0.8 percent rise. The report suggests the weak labor market is making employers a bit less generous with their compensation.

Businesses, meanwhile, reduced spending on equipment and software at a 0.7 percent pace, the most since the final quarter of 2006. And, they trimmed spending on commercial construction at a 6.2 percent pace, the most since the third quarter of 2005.

However, growth in businesses' inventories of supplies was a big force adding to GDP. That could reflect both stronger foreign demand for U.S merchandise and weaker domestic sales, analysts said. Exports of U.S. goods and services, which increased at a 5.5 percent pace, also helped first-quarter growth. U.S. exports are being helped by the falling value of the U.S. dollar, which makes U.S. made goods and services less expensive to foreign buyers. Spending by the government was another factor helping out GDP in the first quarter. That spending rose at a 2 percent pace for the second quarter in a row.

To bolster the economy, the Federal Reserve lowered a key interest rate by one-quarter percentage point to 2 percent Wednesday. That marked a more moderate-sized rate reduction after a recent string of hefty cuts. Many economists believe the Fed, which started dropping rates last September, may be nearing the end of its rate-cutting campaign because policymakers don't want to aggravate inflation. Those rate reductions, which take months to affect economic activity, can sow the seeds of inflation down the road.

An inflation measure linked to the GDP report showed that prices grew at a rate of 3.5 percent in the first quarter, down from a 3.9 percent pace in the prior quarter. Another gauge showed that the core prices excluding food and energy rose at a rate of 2.2 percent in the first quarter. That was a lower than the 2.5 percent pace registered in the fourth quarter but still outside the Fed's comfort zone. The upper level of the Fed's inflation tolerance is 2 percent.

Gas and food prices, however, have moved higher since the start of the year, adding to inflation pressures. Gasoline prices, which have recently set new record highs, have climbed to $4 a gallon in some parts of the country.

A growing number of economists believe the economy is in a recession and is indeed contracting now. Under one rough rule, if the economy contracts for six straight months it is considered to be in a recession. That didn't happen in the last recession -- in 2001-- though. A panel of experts at the National Bureau of Economic Research that determines when U.S. recessions begin and end uses a broader definition, taking into account income, employment and other barometers. That finding is usually made well after the fact.

During the first three months of this year, job losses neared the staggering quarter-million mark. The unemployment rate has climbed to 5.1 percent and is expected to move higher in the coming months.

Fed Chairman Ben Bernanke, earlier this month, acknowledged for the first time that a recession this year was possible. President Bush on Tuesday said the country was dealing with "difficult times." Bush said he understood Americans' anxiety over soaring gas prices, record-high home foreclosures and other economic woes.

The government's $168 billion economic-stimulus package -- including tax rebates that started flowing to bank accounts on Monday -- should help energize the economy in the second half of this year, the Bush administration and Federal Reserve officials say. Democrats in Congress insist more relief needs to be provided, including additional unemployment benefits to cushion the pain of joblessness. The administration has resisted, saying the rebates and other stimulative efforts should be sufficient once they fully kick in.