Business Blog Posts

The National Association of Realtors' Pending Home Sales Index, based on contracts signed in December, rose 2 percent to 93.7, above economists' expectations for a 1.0 percent gain. The increase pointed to another rise in sales of previously owned homes.

A separate report from the Commerce Department on Thursday showed orders for a range of domestically manufactured goods increased 0.5 percent last month. But a nearly 100 percent drop in civilian aircraft pulled overall orders down 2.5 percent.

Economists -- who had expected orders to rise 1.5 percent -- were puzzled by the drop, given that Boeing reported an increase in aircraft bookings from November.

"This doesn't change our estimate that fourth-quarter GDP increased by 4.0 percent," said Paul Ashworth, chief U.S. economist at Capital Economics in Toronto.

Supporting views of a pick-up in the growth pace, a proxy for business spending increased 1.4 percent, though smaller than the 3.1 percent increase in November.

But the outlook was clouded somewhat by a spike last week in applications for state unemployment benefits, which the government blamed on snow storms in some parts of the country that kept workers at home and delayed the processing of claims.

The blizzards occurred the prior week, when claims posted their biggest drop in nearly a year. Another snow storm this week could affect claims data in the coming weeks.

Initial claims jumped 51,000 to a seasonally adjusted 454,000, the highest since late October, the Labor Department said on Thursday. That was the largest weekly increase since September 2005. The rise exceeded economists' expectations for a slight gain to 405,000.

A Labor Department official said four states had reported an increase in claims that was due to snow. In addition, he said, seasonal volatility also affected the data.

Still, the four-week moving average of unemployment claims -- a better measure of underlying trends, rose 15,750 to 428,750 last week, implying a gradual labor market recovery.

"At first glance, it's certainly disheartening coming a day after the Fed meeting, at which the Fed maintained its asset purchase plan," said Joe Manimbo, a currency trader at Travelex Global Business Payments in Washington.

The Fed on Wednesday repeated its plan to purchase $600 billion in longer-term Treasury debt by the middle of this year to keep interest rates low and support the economy.

Labor market recovery remains painfully slow, despite signs elsewhere of a pick-up in economic activity, keeping the unemployment rate at an elevated 9.4 percent.

Fed officials acknowledged the improvement in the economic picture, but said the pace of the recovery remained "insufficient to bring about a significant improvement in labor market conditions."

The number of people still receiving benefits under regular state programs after an initial week of aid increased 94,000 to 3.99 million in the week ended Jan 15. The numbers were above market expectations for a dip to 3.85 million and included the week for the household survey from which the unemployment rate is derived.

It reduced the rating by one notch to AA minus, three levels below the highest possible rating and providing a sharp reminder to other developed nations, such as those in Europe and the United States, of the growing concerns about the debt built up during the global financial crisis.

Politicians and credit ratings agencies have been warning for years that Japan needs to lower its public debt pile, by far the worst among rich nations at double the size of its $5 trillion economy, but progress has proved elusive.

Julian Jessop, chief international economist at Capital Economics in London, warned of the consequences if Tokyo failed to get its fiscal house in order.

"If it looks like making a mess of this, further downgrades will surely follow. Given the size of Japan's economy and the current sensitivity of global financial markets to sovereign debt concerns, the impact would be felt worldwide."

The yen fell broadly and credit default swaps on Japan widened after the announcement, but markets in the past have not worried too much about the country's high debt because, for now, it is well serviced by ample domestic savings and few foreign investors hold Japanese government bonds (JGBs).

However, Japan's society is aging quickly, so social welfare costs will take up an increasing proportion of the budget in the absence of reforms, which S&P said reduces Japan's already weak fiscal flexibility.

S&P's downgrade leaves its credit rating on Japan one notch below both Fitch and Moody's.

"The downgrade reflects our appraisal that Japan's government debt ratios -- already among the highest for rated sovereigns -- will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s," S&P said in a statement.

"In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country's debt dynamics, in part due to the coalition having lost its majority in the upper house of parliament last summer."

Japan's government is well aware of its debt problem but, like governments before it, has struggled to tackle it head on. Just this month, Economics Minister Kaoru Yosano warned that the country faced a fiscal dead end. He said on Thursday the S&P move was regrettable.

DIVIDED PARLIAMENT

Prime Minister Naoto Kan is pushing for a debate on increasing the national sales tax, which at 5 percent is among the lowest among major economies, that he says is vital to pay for huge welfare costs.

Kan's key economic ministers have promised to impose fiscal discipline, something Finance Minister Yoshihiko Noda reiterated in reaction to the S&P downgrade.

Still, the government is pressing ahead with a proposed budget from April with record spending of 92.4 trillion yen ($1 trillion) and new debt issuance that will exceed tax revenues for a second year in a row.

The world's largest software maker, which powers more than 90 percent of the world's computers, is still a money-making machine, but its fortunes are tied to vulnerable PC sales and investors have doubts it can replicate its dominance in the fast-growing mobile and tablet markets.

Its stock is down 2.4 percent in the last 12 months, compared with a 24 percent rise in the tech-heavy Nasdaq.

"Microsoft is still a juggernaut in the PC business, Windows-based machines are still selling over 300 million a year," Tim Bajarin, president of tech research firm Creative Strategies, said earlier this week.

"But they missed the smartphone revolution, and even though they were the first to really push the tablet, Apple basically redesigned it and left Microsoft in the dust."

Sales of Windows 7 are still going strong, but likely won't match the year-ago figure, which was boosted by a one-time deferral of revenue from pre-sales of the operating system, which was launched in October 2009.

Microsoft is expected to report second-quarter profit of 68 cents per share, according to Thomson Reuters I/B/E/S, lower than the 74 cents it reported a year ago.

Overall sales are expected to inch up to $19.15 billion from $19 billion a year ago, helped by the unexpectedly strong sales of the Kinect hands-free gaming system, which sold 8 million units over the holiday shopping season, above Microsoft's own target of 5 million.

PC sales, the surest guide to Microsoft's overall health, rose only 3.1 percent in the last three months of last year, according to research firm Gartner, well below earlier estimates.

The good news for Microsoft is that business customers -- the core market for its software -- are buying new computers more readily than cash-strapped consumers, who are holding off on purchases or buying iPads instead.

That resilience of business customers helped tech bellwethers IBM and Intel Corp post positive results and outlooks over the past two weeks, helping their stocks higher.

(For a comparison of estimates and valuations with other technology companies, click: link.reuters.com/sys67r)

APPLE CRUISING PAST

One uncomfortable fact for Microsoft: unless it posts blowout numbers, it will have a lower quarterly profit than Apple for the first time in recent memory. The last time Apple produced more profit in a year than Microsoft was 1990.

Last week, Apple announced a record $6 billion quarterly profit on strong-selling iPhones and iPads over the holiday shopping season.