History > 2006 > USA > Economy (III)

Hewlett’s Hunt for Leak

Became a Game of Clue

September 29, 2006
The New York Times
By MATT RICHTEL

SAN FRANCISCO, Sept. 28 — They were looking for an academic. The suspect was conversant in computer chip technology. And he would have to be the kind of person who used the word “pooped” to mean tired.

In a case right out of CSI: Corporate America, a team of private investigators spent months obsessively hunting the source of a news leak from inside Hewlett-Packard about the company’s corporate strategy.

By the time they had finished their search, the team had solved the mystery of what eventually became the most notorious investigation in Silicon Valley. And the way they did it seemed to resemble a bureaucratic version of a Dan Brown thriller.

But in building a clue-heavy reconstruction — part dossier, part “Da Vinci Code” — the detectives ended up wreaking the havoc that has forced out Hewlett-Packard’s chairwoman, led to the resignation Thursday of its general counsel and spawned a series of criminal investigations that are far from over.

The Hewlett-Packard scandal turned into a spectacle Thursday as a House committee brought all those involved to a packed hearing room on Capitol Hill so that lawmakers could chastise them before the television cameras for the series of subterfuges used in the company operation that spied on its own directors, journalists and others.

“As I reviewed all of the documents for this hearing today,” said Representative Diana DeGette of Colorado, the ranking Democrat on the House Energy and Commerce Committee, “I felt like I was looking at a proposal for a made-for-TV movie, and maybe this will be a made-for-TV movie. But I think it’s awfully, awfully sad.”

While many of those brought before the committee declined to answer questions, invoking their Fifth Amendment rights against self-incrimination, those who did testify were at pains to distance themselves from the details of the internal investigation.

Mark V. Hurd, the chief executive, apologized for what he termed a “rogue operation.” And he accused the investigators of being “so focused on finding the source of the leaks that they lost sight of the values of this company.”

The company’s sleuths produced an 18-page report, released Thursday by the Congressional committee, that reads at times like a whodunit, at other times like a dissertation. They created a profile of the leaker by studying phone records and e-mail message trails, even delving into physical mannerisms and speech patterns.

In the end, the investigation fingered George A. Keyworth II, who recently resigned as a member of the board.

Mr. Keyworth acknowledged that he talked to a reporter from CNet, an online technology news service, but insisted that nothing he discussed was confidential or damaging to Hewlett-Packard.

Before the investigators even confronted Mr. Keyworth this May, they had gone through more than 10,000 articles about Hewlett-Packard, they said, trying to determine which ones included secret information and whether Mr. Keyworth had spoken to reporters around the time of sensitive articles.

The scrutiny included intricately parsing the language of a Jan. 23 CNet article in which Dawn Kawamoto, a reporter for the service, described a board meeting that month. The article quoted an anonymous source as saying, “By the time the lectures were done at 10 p.m., we were pooped and went to bed.”

Like Kremlinologists (or maybe Encyclopedia Brown), the investigators for Hewlett-Packard drilled in on the use of the word “pooped.”

“This is also an unusual term,” the report reads. “A number of key witnesses interviewed indicated that contrary to a number of members of the board, Keyworth often uses casual, colloquial terms in conversation, so this is a term he may use.”

The investigators also focused — in that same CNet quote — on the use of the word “lectures.”

“This is an academic term, rarely used in the business environment. Keyworth is the only board member with an academic background.”

The level of detailed scrutiny shows the depths to which the investigators inside and outside Hewlett-Packard went to connect the dots and to expose a high-level board member who some at H.P. believed was a highly disruptive force. Not all of the investigation involved wordplay; much of it entailed detailed and highly sophisticated surveillance.

Above all, the corporate sleuths unearthed numerous personal and professional details about Mr. Keyworth, a former White House science adviser to Ronald Reagan who had worked earlier at the Los Alamos National Laboratory in New Mexico.

The report is “both childish and chilling,” said Reginald J. Brown, Mr. Keyworth’s lawyer. The analysis “piles inference on innuendo to reach a predetermined and hopelessly flawed conclusion.”

“It was developed through illegal and invasive means.”

“Dr. Keyworth did not reveal confidential or damaging information about H.P. to CNet, and spoke with the reporter with H.P.’s best interests in mind,” Mr. Brown added. “More importantly, neither Dr. Keyworth and his family, nor any journalist and his or her family, deserved to have their records purloined, homes monitored or trash picked through by private investigators.”

State and federal prosecutors are now trying to determine if the methods used by Hewlett-Packard’s hired guns broke any laws by using pretexting, a technique in which an investigator lies about his own identity to obtain phone calling and other personal records.

The report was prepared by Kevin T. Hunsaker, a senior lawyer and the director of ethics who is leaving the company, and was delivered May 24 to Mr. Hurd; Ann O. Baskins, the general counsel who resigned Thursday; and the company’s board.

The report focuses on the relationship between Mr. Keyworth and Ms. Kawamoto, the CNet reporter; Investigators determined they met at the beginning of 2001. They did so, curiously enough, at the behest of Hewlett-Packard’s chief executive then, Carleton S. Fiorina, whom the report concluded instructed Mr. Keyworth to establish a relationship with Ms. Kawamoto to spread word of the company’s new exploits.

Sarah Cain, a spokeswoman from CNet, said the news organization would not comment on Ms. Kawamoto’s sources, nor discuss whether Mr. Keyworth was a source. Ms. Cain said the organization was distressed over the investigation into the activities and lives of reporters. “We feel it’s a huge violation to our reporters’ personal and profession privacy,” she said.

The team of investigators — which included Mr. Hunsaker, members of the company’s internal global security operation and outside detectives — found that Ms. Kawamoto had written 10 articles since 2002 about the company that cited a confidential source.

“One of the first things the investigation team noted is that Kawamoto always cites just one ‘source’ rather than citing ‘sources’ or ‘people familiar with the situation,’ like other reporters who more frequently cover H.P. do,” the report theorized.

And unlike some other reporters, the investigators noted, Ms. Kawamoto did not contact the company’s media relations department to confirm her articles. Investigators concluded the reporter must have found the source so highly credible and well placed that she did not believe it was necessary to nail down the information.

Then there were the phone conversations. By studying calling records, the investigators determined that on Jan. 18, just before a CNet article was published, a call was made from Ms. Kawamoto’s cellphone to Mr. Keyworth’s home in Piedmont, Calif. The call was placed at 5:25 p.m. and lasted approximately one minute. (In the final report, the notation about the call is in bold type, highlighting significance.)

“It should be noted that the phone is listed in Keyworth’s wife’s name,” the report states. “There is no documented 411 call from Kawamoto’s cellphone prior to the call. This indicates that Kawamoto likely knew the home phone number.”

The sleuths determined that another call, for 10 minutes, was placed on Feb. 3, at 2:21, from Mr. Keyworth’s cellphone to Ms. Kawamoto’s office. Again, the report notes, there was no 411 call, suggesting to the investigators that Mr. Keyworth knew the number.

Meanwhile, the report suggests that the tension was getting to Mr. Keyworth and Thomas J. Perkins, a friend and compatriot on the board. The report says that during a break at a March board meeting — as the scrutiny from the investigation was mounting — Mr. Keyworth and Mr. Perkins were overheard in a heated discussion.

According to the report, “The arguments were mainly one-sided, with Keyworth intently speaking and even pointing his finger at Perkins’ chest several times. At the very end of the second argument/heated discussion, Keyworth was overhead saying: ‘They don’t have enough to go there.’ ”

The investigators also drew a link between Mr. Keyworth and Stephen Shankland, a reporter who collaborated with Ms. Kawamoto on three articles in which a confidential source was used. The report indicates that Mr. Keyworth worked for six years at Los Alamos Labs with Thomas Shankland, Stephen Shankland’s father.

“Stephen and Keyworth’s son, George, who are just two years apart, likely attended the same elementary school,” the report states.

But now that all their work has been exposed to the light of day, the investigators are unlikely to be taken up on the offer they presented in the final sentence of the report. “The investigation team,” they wrote, “would be pleased to participate in any discussions regarding proactive measures designed to reduce the likelihood of similar incidents occurring in the future.”

    Hewlett’s Hunt for Leak Became a Game of Clue, NYT, 29.9.2006, http://www.nytimes.com/2006/09/29/technology/29leak.html?hp&ex=1159588800&en=7b4692ad9b73d50c&ei=5094&partner=homepage

Dow Briefly Passes Its All-Time Closing High

September 28, 2006
The New York Times
By JEREMY W. PETERS

The Dow Jones industrial average today briefly traded above its record closing high, passing a point it has not reached since the frenzy of the technology boom.

Stocks crossed the 11,722.98 mark at 9:41 a.m. this morning but then fell back below that level — a record close that has stood since Jan. 14, 2000. If the average closes above that level when trading ends at 4 p.m. today, it will have established a new record.

On that record-setting day in January 2000, the Dow traded as high as 11,750.28. In this morning’s trading it reached 11,724.86 before falling back.

For a brief period at least, investors appear to have shaken off much of the pessimism that depressed stock prices this summer when worries about heightened inflation and rising interest rates were rampant.

The Dow flirted with the 2000 high-mark early this summer, and many economists and investors expected then that the record would be broken. But a variety of factors, including high energy prices, deflating consumer confidence and concern that the Federal Reserve had set interest rates too high, led to a sharp pull back.

After coming within a few dozen points of the record in May, the Dow, the Standard & Poor’s 500-stock index and the Nasdaq composite all hit low points for the year. Then, gradually, the market began to gain momentum by mid-summer. Much of this sudden investor optimism was a result of the Federal Reserve’s recent policy reversal.

After an uninterrupted two-year streak of raising interest rates, the Fed in August heeded signs of a slowing economy and left the overnight lending rate at 5.25 percent.

Since then, there have been signs that inflation is slowing and the housing market is cooling rapidly. These are both scenarios that Fed policy makers said they were hoping for, giving them the cushion to set a less strict monetary policy.

Last week the central bank decided again to leave rates untouched, and many economists do not expect rates to go up again this year.

    Dow Briefly Passes Its All-Time Closing High, NYT, 28.9.2006, http://www.nytimes.com/2006/09/28/business/29stoxcnd.html?hp&ex=1159502400&en=b2c9aa16f6150073&ei=5094&partner=homepage

Technology for Spying Lures More Than Military

September 25, 2006
The New York Times
By JULIE CRESWELL and RON STODGHILL

In the world of security sleuths and private investigators, it’s billed as one of the biggest events of the year. Some 20,000 experts in the business are gathering this week in San Diego to check out the latest in high-tech surveillance gadgets and sit in on seminars discussing undercover investigations, background checks and interrogation techniques.

One of the keynote speakers is George J. Tenet, the former director of the Central Intelligence Agency.

But many of those attending the ASIS International “Maximum Security” conference will not be there on behalf of the United States government or the military. They work for corporate America, where security is a big and sometimes controversial business, as the executives of Hewlett-Packard have found in the wake of revelations of a covert-operations spying scandal that the company conducted against its own directors and journalists.

There’s no word whether executives from Hewlett-Packard are attending the conference to take in seminars like “Rules of Engagement: The Impact of Security Services Contracts in Future Litigation” or “Trusted Insiders — Preventing Betrayal in High-Risk Times.”

But while H.P. may be in the spotlight for the spying imbroglio in its boardroom, it is far from alone in diving into the murky world of private investigators and secret surveillance.

Companies worldwide spent an estimated $95 billion on security last year, according to the Freedonia Group, a market research firm in Cleveland. While that’s a broad figure that includes spending on emergency planning in case of a terrorist attack and protecting corporate records from hackers, an increasing portion went to high-tech equipment like spyware and specialized data-mining software that was deployed in-house so companies could better see what their own employees were up to.

Outside their offices, corporations are also turning to a vast network of large consulting firms and local ex-cops-turned-detectives that can supply all sorts of personal information and run surveillance on competitors, executives and directors using techniques worthy of the C.I.A.

The problem with all this spying, however, is that technology has far outpaced its users’ knowledge of the laws and ethics regarding privacy, which vary from state to state, say experts.

“In this day and age, it’s not impossible for me to find checks that you wrote and cleared in your bank account yesterday,” said Thomas D. Thacher II, who spent years rooting out fraud in construction projects in New York before forming the investigative firm Thacher Associates. “It is scary the personal information that is available through obviously illegal means.”

In the case of Hewlett-Packard, the company hired private investigators who used “pretexting” — pretending to be someone else — to gather home phone records of directors and journalists it believed were involved with the leaking of secrets from the boardroom. Investigators for H.P. also tried to plant software on a reporter’s computer to track a bogus document it sent to her and considered infiltrating newsrooms with spies masquerading as clerical workers or cleaners.

“The means here did not justify the end,” said George Bradt, chief executive of PrimeGenesis, which coaches chief executives on leadership topics. “They pulled out a Sherman tank to attack a mouse.”

The H.P. episode is not the first time a company has tried to spy on, or to manipulate, journalists. In 1965, General Motors hired private detectives to investigate Ralph Nader after the publication of “Unsafe at Any Speed.” (Mr. Nader later won a court settlement of $284,000 against G.M. for invasion of privacy.) In 1989, American Express admitted to planting defamatory articles about Edmund J. Safra, a former company executive who left to form a competing bank.

Still, corporate security experts say there are plenty of legitimate reasons companies need to be involved in the spy game, or at least to bolster their intelligence-gathering apparatus. Companies frequently tap investigators to unearth compromising data about individuals who have filed lawsuits against them, to scour gray or counterfeit markets for knock-offs of their products or, increasingly, to uncover whether short sellers are working in concert to drive their companies’ stock down.

More remarkably, many defend the practice of pretexting as a useful way for companies to keep track of their competition.

“Pretexting is a valuable investigative tool in its natural form,” said Charles Mittelstadt, a security consultant in Atlanta who has worked with H.P., I.B.M. and Georgia-Pacific in criminal cases. “Company A calls Company B and impersonates a consumer to vendor to obtain vital information about pricing, development plans, etc.,” he said.

But just because a company has the capability to spy, should it? According to some investigators, they, not their clients, are the ones drawing an ethical line in the sand.

“We are frequently asked by clients who watch far too much television whether we can do this or do that. In our engagement letter with them, we make it clear we will not do anything illegal and they should not expect us to,” said Joseph Rosetti, who headed up security at I.B.M. for years before joining Kroll Associates. He now runs his own firm, called SafirRosetti.

“Investigators are going to have problems until they develop a set of national standards to which they must conform,” said Jack Lichtenstein, director of government affairs and public policy for ASIS International (formerly the American Society for Industrial Security), which is host of the San Diego conference.

The biggest challenge companies face when they turn to outside private investigators — and one of the chief appeals of using them — is not knowing and controlling the techniques to be used. That’s because security firms typically farm out parts of the investigation to other firms or local on-the-ground investigators.

“We will pull a number of subcontractors into an investigation. There are firms out there that have strength in the computer-forensic world or S.E.C. matters that can help out,” said Mr. Thacher. “But the further you go down the chain, the more removed the client is from the investigation and their ability to judge or know how the information is being obtained.”

That may have been the case with Hewlett-Packard, experts say.

Hewlett-Packard’s chairwoman, Patricia C. Dunn, has acknowledged that she authorized the investigation, and documents show that its senior counsel and director of ethics, Kevin T. Hunsaker, directed the operation, which involved Hewlett-Packard investigators and several layers of outside detectives and subcontractors.

Already, some companies are trying to cover their tracks in the wake of the Hewlett-Packard spy scandal.

“We just received a retention agreement from a large Wall Street firm in which the specific language was laid out that the consultant agreed not to do things that are illegal,” said Mr. Thacher. “It made us all smile. One would think that goes without saying. But it’s in there now.”

    Technology for Spying Lures More Than Military, NYT, 25.9.2006, http://www.nytimes.com/2006/09/25/technology/25spy.html

Chairwoman Leaves Hewlett in Spying Furor

September 23, 2006
The New York Times
By DAMON DARLIN and MATT RICHTEL

PALO ALTO, Calif., Sept. 22 — The furor over Hewlett-Packard’s spying operation claimed its highest-ranking victim on Friday with the immediate resignation of its chairwoman, Patricia C. Dunn.

The move was announced by Mark V. Hurd, the chief executive, who will now succeed her. But even as he offered an account of an investigation gone awry, and offered apologies to those whose privacy was invaded, he made it clear that many questions had yet to be answered.

His voice shaking, Mr. Hurd said a review of the means used to trace leaks from the company’s board had produced “very disturbing” findings. He also conceded that “I could have, and I should have,” read a report prepared for him while the operation was under way.

The investigators’ zeal led them into a shadowy world of surveillance, and in the end the giant computer company was embarrassed by its own use of technology.

Two executives who supervised the effort were also reported to be leaving.

In addition to direct surveillance, the operation entailed the use of possibly illegal methods to obtain phone records of board members, journalists and others; an attempt to place software on a reporter’s computer to track e-mail; and a study of the use of clerical workers and cleaners to infiltrate two news organizations.

At a news conference at Hewlett-Packard’s headquarters here, Mr. Hurd said it had been proper and necessary for Ms. Dunn to try to stem leaks of confidential information. But he added, “While many of the right processes were in place, they unfortunately broke down, and no one in the management chain, including me, caught them.”

It was the company’s first public discussion of the revelations that have engulfed it for more than two weeks. Mr. Hurd took no questions, with the company saying he did not want to pre-empt his testimony next week to a House subcommittee looking into the Hewlett-Packard affair.

In a statement provided by Hewlett-Packard, Ms. Dunn said she had resigned at the request of the board. But she said that while she had the responsibility to identify the source of leaks, “I did not propose the specific methods,” and those who performed the investigation “let me and the company down.”

According to people briefed on Mr. Hurd’s plans, Kevin T. Hunsaker, its senior counsel and director of ethics, and Anthony R. Gentilucci, its Boston-based manager of global investigations, will leave the company. Mr. Hurd did not speak to this issue, and the company declined to comment.

Some industry analysts had expected Hewlett-Packard to announce more directly who it felt was responsible, inside or outside the company.

“A lot of us thought there was going to be a lot more,” said Jeffrey Sonnenfeld, senior associate dean of the Yale School of Management. But he added that Mr. Hurd apparently felt he needed more time to understand all that occurred.

The initial reaction of investors appeared favorable. In after-hours trading, Hewlett-Packard’s stock was up more than 1 percent.

The effort to find the source of the boardroom leak began in early 2005, around the time of Carleton S. Fiorina’s dismissal as chairwoman and chief executive, and yielded inconclusive results that year. A second phase began in January 2006, as an account of a senior management meeting was being prepared by the online technology news service CNET.

By May, the investigative efforts had identified one board member, George A. Keyworth II, as a source of unauthorized disclosures. He refused an initial request to resign, but another director, Thomas J. Perkins, quit over the investigation. It was Mr. Perkins’s attempt to get the company to acknowledge the reasons for his resignation that brought the entire operation — and deep animosities within the board — into public view early this month.

On Sept. 12, a week after the initial disclosures, Ms. Dunn said she would step down as chairwoman effective in January, to be succeeded by Mr. Hurd. Mr. Keyworth, her antagonist, then agreed to resign.

The moves by Hewlett-Packard on Friday were an attempt to get ahead of the torrent of daily disclosures about the spying operation and an acknowledgment of the irresponsibility, if not illegality, of the methods.

State and federal prosecutors are exploring whether any laws were broken by anyone inside the company or those hired in an investigative chain extending to Boston, Florida and the Midwest. A central element was the use of pretexting, which involved impersonating someone to obtain that person’s calling records from a phone company.

Mr. Hunsaker, the lawyer and ethics officer, directed the 2006 phase of the investigation. Mr. Gentilucci, the Boston-based investigations officer, was involved in both the 2005 and 2006 phases of the investigation.

Mr. Hurd said that on Sept. 8 he retained a law firm, Morgan Lewis, which has concluded that the investigation team led by Mr. Hunsaker provided regular updates to Ms. Dunn, and to a lesser extent to the general counsel, Ann O. Baskins.

“Some of the findings that Morgan Lewis has uncovered are very disturbing to me,” Mr. Hurd said.

Michael J. Holston, a partner in the firm, laid out some evidence to reporters Friday after Mr. Hurd’s comments. While noting that the firm’s review was not complete, he said Ms. Dunn had personally contacted and engaged Security Outsourcing Solutions, a tiny Boston-area investigative firm operated by Ronald R. DeLia, in the 2005 phase.

“For the first month or so of the investigation, Ms. Dunn worked directly with Ron DeLia from S.O.S.,” Mr. Holston said, and it was only two months later that the company’s own detectives were brought in.

In an interview two weeks ago, Ms. Dunn said she had turned to the head of security to handle that investigation. Ms. Dunn’s lawyer, James J. Brosnahan, reiterated that claim Friday. “She went to the right people, and she was assured that what they were doing was legal,” he said.

Mr. Hurd was briefed on the first phase of the investigation, called Kona I, on July 22, 2005, Mr. Holston said. But he said Mr. Hurd attended only a portion of that meeting, which included Ms. Dunn, Ms. Baskins, Mr. DeLia, Mr. Gentilucci and Jim Fairbaugh, the head of global security. The participants were told the investigation was inconclusive, and by late summer it was inactive.

Kona II, the phase that began in January of this year, was far more energetic. “Over the next three months, regular updates were provided by members of the investigation team to Ms. Dunn and, to a lesser extent, to Ms. Baskins,” Mr. Holston said.

A crucial document was a March 2006 report prepared by the company’s investigators and Mr. DeLia under the supervision of Mr. Hunsaker, a senior company lawyer. Mr. Hurd was given a copy of that report, but he said he did not read it. “I could have, and I should have,” he said.

The report identified the source of the leaks and outlined techniques used to get that information, including pretexting. It was also sent to the company’s outside counsel, the powerful Silicon Valley firm of Wilson Sonsini Goodrich & Rosati, for review and comment, Mr. Holston said.

Mr. Holston noted that the Kona II report claimed that the techniques were legal. But as e-mail messages disclosed this week have shown, Mr. Hunsaker suspected early this year that the techniques might not be above-board. When he asked Mr. Gentilucci about the legality, he was told that it was “on the edge,” and Mr. Hunsaker replied: “I shouldn’t have asked.”

Despite those assurances, Mr. Hunsaker never obtained a written legal opinion, according to people briefed on the company’s review of its investigation.

Mr. Holston also discussed other aspects of the operation, including the use of surveillance software surreptitiously sent to the computer of a CNET reporter.

Mr. Holston said the program had been designed to determine whether the reporter would forward a misleading e-mail message, purporting to offer inside information about the company, to her source on the Hewlett-Packard board for confirmation.

The scheme did not work, Mr. Holston said, noting that the investigation team never received an indication that the misleading message had been forwarded.

Mr. Hurd affirmed that he had been informed of the plan to send a bogus message and had approved of the “naming convention” that was used. But he said he did not recall knowing or approving of the tracking technology. Neither Mr. Hurd nor Mr. Holston indicated why the chief executive did not raise questions about the way the scheme was to be carried out.

Damon Darlin reported from Palo Alto, Calif., and Matt Richtel from San Francisco. Miguel Helft contributed reporting from Palo Alto.

    Chairwoman Leaves Hewlett in Spying Furor, NYT, 23.9.2006, http://www.nytimes.com/2006/09/23/technology/23hewlett.html?hp&ex=1159070400&en=07ffb87e63254076&ei=5094&partner=homepage

Number of older workers at record high in U.S.: study

Wed Sep 20, 2006 1:27 PM ET
Reuters



NEW YORK (Reuters) - The number of older workers in the United States is growing faster than any other age group, making it harder for younger job seekers, a study reported on Wednesday.

U.S. workers over age 55 now number 24.6 million, a record high, according to the study of U.S. government labor data by Challenger, Gray & Christmas Inc., an outplacement consultancy. About a quarter of those are 65 or older.

"Employers are learning through experience that most if not all of the long-held common perceptions about older workers simply are not true," Chief Executive John Challenger said in a statement, adding that older workers' health, productivity and ability to learn are as good as their younger counterparts.

Between 2003 and 2005, employment in the 65-plus age group grew by more than 10 percent, double the rate among 45- to 55-year-olds, Challenger reported, as more people choose to stay at work or find new jobs in retirement.

Older workers are taking less time to find jobs and fewer of them are filing age-discrimination lawsuits. The trend may mean that soon more than one in four U.S. retirees will be working, a level not seen since 1951, Challenger said.

"The biggest obstacle to the current pace of job growth will not be age bias, but competition from other older job seekers," Challenger said.

    Number of older workers at record high in U.S.: study, R, 20.9.2006, http://today.reuters.com/news/articlenews.aspx?type=domesticNews&storyID=2006-09-20T172710Z_01_N20199015_RTRUKOC_0_US-ECONOMY-EMPLOYMENT-BOOMERS.xml&WTmodLoc=Home-C5-domesticNews-3

U.S. and China Plan Economic Talks

September 20, 2006
The New York Times
By STEVEN R. WEISMAN

BEIJING, Sept. 20 — The United States and China, struggling to overcome the discord in their economic relations, today established high-level teams from different Cabinet agencies on both sides to conduct a "strategic economic dialogue."

But the announcement of the agreement, which kicked off Treasury Secretary Henry Paulson's first trip to China since taking office in July, meant that his visit was unlikely to include progress on the pressing Chinese-American dispute over currency and trade issues.

The pact reached in Beijing appeared to fall short of demands by some members of Congress for China to continue weakening its currency, which they argue is held artificially high to the detriment of U.S. exports.

Senators Charles Schumer, Democrat of New York, and Lindsey Graham, Republican of South Carolina, have repeatedly sounded the alarm on the Chinese currency. They are seeking to force China to let the yuan rise by pushing a bill that would impose nearly 30 percent tariffs on Chinese exports.

The measure could pass the Senate next week, but it is unlikely to live long, because it lacks support in the House of Representatives.

The American trade deficit with China has ballooned in the last few years to about $200 billion annually.

Administration officials acknowledged today that the pact would probably not satisfy critics in Congress. But they asserted that the new group — to be led by Mr. Paulson on the American side — will accelerate resolution of the trade and currency issues over the long term.

The Treasury Department said the dialogue would be "the first of its kind," because of the high-level attention it is getting on both sides. In effect, officials said, Mr. Paulson has won President Bush's support to take control of Chinese economic issues by running an inter-agency group with officials from the departments of trade, commerce, energy and other agencies.

Mr. Paulson's counterpart in China is to be vice premier Wu Yu, described by administration officials as a star of President Hu Jintao's cabinet. Mr. Wu has been in charge of international economic relations and is now to be chair of a group including the commerce, agriculture, economic and information ministries.

    U.S. and China Plan Economic Talks, NYT, 20.9.2006, http://www.nytimes.com/2006/09/20/business/worldbusiness/20cnd-paulson.html?hp&ex=1158811200&en=779f6e01b67da21c&ei=5094&partner=homepage

A Reversal of Fortune at Chrysler, Too

September 20, 2006
The New York Times
By MICHELINE MAYNARD

DETROIT, Sept. 19 — Maybe Chrysler is not so different after all.

After Daimler-Benz merged with Chrysler in 1998, Chrysler vowed to break away from its troubled Detroit brethren and join ranks with the Japanese automakers. It designed innovative vehicles like the gutsy 300C sedan and the spunky PT Cruiser, gambling that an emphasis on bold design, better quality and German engineering would set it apart from the Big Two.

“There were a lot of people that thought Chrysler was really home free,” said David E. Cole, chairman of the Center for Automotive Research in Ann Arbor, Mich.

But in recent days, a series of stunning announcements have signaled that Chrysler, despite all those efforts, has not been able to escape many of the same problems bedeviling General Motors and the Ford Motor Company.

On Tuesday, Chrysler said it would cut its production schedule for the rest of the year by 16 percent because of slumping sales as a result of high gas prices. That comes on the heels of similar cuts at G.M. and Ford, which are both trying to restructure after billions of dollars in losses in the last year.

Chrysler, which lately has ranked fourth behind G.M., Ford and Toyota Motor in American sales, reiterated that it expected a $1.26 billion loss this year, when it had planned to break even.

As a result, Chrysler said it would embark on what was likely to be its second major revamping since 2000, and acknowledged that its market share could shrink further, potentially dropping it to fifth place behind Honda in the United States.

Chrysler workers, whose profit-sharing checks the last few years were proof that they worked for Detroit’s most successful company, now find themselves vulnerable like their counterparts at G.M. and Ford.

Analysts have said all year that Chrysler, the only Detroit automaker to gain market share last year, was faltering. But Chrysler executives maintained that a strong second half, when it is introducing a volley of new vehicles, would lift its fortunes.

That has not proved to be the case. During a briefing Tuesday with industry analysts, Chrysler said it would cut third-quarter production by 90,000 vehicles, double its original plan.

Chrysler, which depends more heavily on sport utility vehicles, pickup trucks and minivans than any other Detroit carmaker, said it would also cut another 45,000 vehicles from its production plans in the fourth quarter.

Over all, Chrysler said it planned to build 705,000 cars and trucks during the second half of the year, or 16 percent fewer than its original second-half projection.

“We have to clearly dig deeper into the top of Chrysler to make sure we further can accelerate the process of increased competitiveness,” said Dieter Zetsche, chief executive of DaimlerChrysler, who ran Chrysler from 2000 until last year.

His replacement at Chrysler, Thomas W. LaSorda, signaled that the automaker would embark on its second reorganization in six years, vowing to “turn over all the rocks” at Chrysler to determine the right cost structure for the auto company.

Mr. LaSorda, speaking in a conference call with analysts and journalists, said that it was premature to discuss plant closings and that Chrysler needed to keep open “the majority” of its plants.

But he said the company was facing sharply higher costs for raw materials and parts, up as much as 60 percent this year in some cases. He said Chrysler needed to act as soon as possible.

In the presentation to analysts, Chrysler forecast that its share of the American car market would be 10.6 percent in the third quarter, down from its original plan to hold 11.2 percent. That puts it in fourth place, behind G.M., Ford and Toyota and just slightly ahead of Honda.

But in July, Honda outsold Chrysler, bumping it down to fifth place in the American market. Honda recently announced plans to build a new factory in Indiana, raising the likelihood that it could overtake Chrysler permanently.

Unlike its major Japanese rivals and G.M., Chrysler had no subcompact cars in its lineup when gas prices hit $3 a gallon, even though DaimlerChrysler sells them overseas.

Despite its vow that it would build only vehicles that customers wanted, it allowed unsold sport utility vehicles to pile up on vacant lots all over metropolitan Detroit.

Even though its cordial relationship with the United Automobile Workers union allowed Chrysler to set the industry pattern for contract talks, it has not been able to reach a deal to cut health care costs like the ones G.M. and Ford worked out with the U.A.W.

The reversal of fortunes at Chrysler was a disappointment to many in the auto industry who thought Chrysler might have hit on a magic formula that other Detroit companies could follow.

“Up until a few months ago I would have said Chrysler was the best-performing domestic automaker,” said Jesse Toprak, director of market analysis at Edmunds.com, a Web site that provides car-buying advice.

On Tuesday, analysts asked whether the German parent of Chrysler was in some way to blame for the predicament, by forcing Chrysler to keep churning out big vehicles like sport utility vehicles that were hugely profitable, but increasingly out of favor with consumers.

Mr. Zetsche said management on both sides of the Atlantic was equally to blame, while Mr. LaSorda said the responsibility “sits right on my lap.”

Eager to persuade Wall Street and the financial press to look beyond the current problems, Mr. LaSorda and Mr. Zetsche played up the eight new vehicles that Chrysler is introducing before the end of the year, including new Jeeps, another sport utility vehicle for the Dodge brand and the latest version of the Chrysler Sebring sedan.

They said that the freshness of the vehicles would mean an automatic jump in sales.

But even that is not assured: both the Commander and the newest version of the Ford Explorer, once the country’s most popular sport utility vehicle, failed to take off last year, because of the rise in gas prices after Hurricane Katrina.

Still, Mr. LaSorda noted, the new lineup includes more fuel-efficient cars and crossover vehicles, like the new Dodge Caliber compact and two Jeeps — the Patriot and Compass — that are built on the Caliber’s underpinnings.

He acknowledged, however, that those vehicles did not deliver the profits of its big sport utility vehicles, which earned Chrysler the highest profit-per-vehicle of the Big Three last decade.

In any case, Americans will not get to build the smallest models. Mr. Zetsche said last week that DaimlerChrysler was likely to build a subcompact car in China or elsewhere in Asia for export to the United States, because it could not afford to build them here.

One reason is Chrysler’s labor costs, which now stand higher than those at Ford and G.M. because it has not reached a deal to reduce its medical costs. On Tuesday, both Mr. Zetsche and Mr. LaSorda said that Chrysler would keep trying to reach an agreement with the U.A.W., whose president, Ron Gettelfinger, said earlier this month that a deal would not come about because Chrysler was not in dire financial straits.

That was before Chrysler disclosed a raft of bad news. It announced last week that it expected to lose $1.5 billion this quarter, up from a previous estimate that it would lose $600 million. It was another surprise for Wall Street, given Chrysler’s earlier predictions that it would break even this year.

The agreement Chrysler was seeking with the union would save the automaker about $340 million annually, or about $600 per vehicle, Mr. Cole said.

“When you’re dealing with unions, you have to have a crisis to get people to move,” Mr. Cole said.

Mr. Zetsche said he was “extremely dissatisfied” with the union’s stand.

“It is a very strange position that we should have to lose $10 billion before we can have the same as at G.M. and Ford,” he said, referring to G.M.’s $10.6 billion loss last year.

The U.A.W. had no comment. But even without a deal on health care, Dale Hunt, president of U.A.W. Local 7 in Detroit, said he was confident that Chrysler could pull out of its slump as soon as its new models reached showrooms.

Mr. Hunt’s factory, called Jefferson North, began a four-week shutdown Monday to help clear inventories of the Jeep Grand Cherokee produced there.

Despite the layoffs at his plant, “I do believe that we’ll have the hottest products on the market,” Mr. Hunt said.

Nick Bunkley contributed reporting.

    A Reversal of Fortune at Chrysler, Too, NYT, 20.9.2006, http://www.nytimes.com/2006/09/20/automobiles/20chrysler.html

Detroit Flails in Latest Effort to Reinvent Itself        NYT

16.9.2006
http://www.nytimes.com/2006/09/16/business/16auto.html

Detroit Flails

in Latest Effort to Reinvent Itself

September 16, 2006
The New York Times
By MICHELINE MAYNARD

DETROIT, Sept. 15 — Detroit is running low on optimism.

Despite insisting all this year that they had solutions to their financial struggles well in hand, both the Ford Motor Company and the Chrysler Group conceded Friday that the steps they had taken were not working and that more bad news was coming in one of the deepest auto industry crises in Detroit’s history.

Ford, which has held second place behind G.M. for 70 years, admitted for the first time that it would inevitably be ceding that spot to Toyota because of slumping sales and its decision Friday to close more factories and cut thousands of additional jobs. It also said it did not expect to make a profit in North America until 2009.

At the same time, the Chrysler Group, also pummeled by the decline in sales of big sport utility vehicles and pickup trucks, said it would report a loss for this summer of $1.5 billion, more than double what it had originally anticipated.

Its parent, DaimlerChrysler, also signaled that it did not see how to build a subcompact car profitably in North America, forcing it to turn to China or another Asian carmaker to help build one overseas. [Page B4.]

For its part, G.M., which is cutting 30,000 jobs and closing nearly a dozen plants, is set to decide within a month whether it wanted to link with a Japanese and a French auto company, a prospect that has rattled union members as well as state officials where G.M. employees live and work.

With all of the auto companies here putting themselves on the chopping block, the upheaval shows that Detroit’s basic business strategy — built on the assumption that what has long been thought of as the Big Three would make money simply by dominating the mass market with a full range of vehicles — is irrevocably broken, said James P. Womack, who has written extensively about the auto industry.

“All the old rules of the game are gone,” said Mr. Womack, co-founder of the Lean Enterprise Institute. And, he said, the challenge is now to play by the new rules, as dictated by foreign competitors. “We’re now in the reinvention phase,” he added.

That includes more cuts that will continue at least through the end of the decade. Detroit companies will be focused on closing plants, eliminating blue- and white-collar jobs, and cutting more deeply into their operations to reduce costs. Moreover, the automakers remain liable for billions of dollars in health care costs, both for their active and retired workers.

At G.M., those costs add up to $5.2 billion a year, or the equivalent of $1,440 a car. But for all their efforts to lose excess weight, the biggest challenge facing Detroit’s car companies is convincing skeptical American buyers that their vehicles, developed amid this chaos, are as attractive as those from their aggressive rivals. Thus far, they have been failing, reflected in their falling market share in recent years.

Adding to Detroit’s woes, its Asian competitors are investing billions of dollars more in American factories and hiring thousands more American workers.

Within six years, it is likely that Asian auto companies, led by Toyota, will outsell their Detroit rivals in the United States, according to a forecast by Edmunds.com, a Web site that offers car-buying advice.

The industry has already gotten a look at the lineup of the future. This July, the best-selling companies were G.M., Toyota, Ford, Honda and Chrysler. And what seemed to be a temporary aberration is about to become the norm, said Jesse Toprak, a senior analyst at Edmunds. “It was a sneak peek of what’s likely to happen going forward,” Mr. Toprak said.

That was not what Ford’s chairman, William Clay Ford Jr., was envisioning in January, when Ford unveiled the first phase of a restructuring plan that it calls the Way Forward.

Amid an announcement that it would cut 34,000 jobs and close 14 plants, Mr. Ford vowed that the 103-year-old company, founded by his great-grandfather, Henry Ford, would regain its supremacy in the American market.

“With it, we will retake the American road,” Mr. Ford said at the time.

But Friday, Mr. Ford signaled that his company was allowing Toyota to pass it. At the end of the news release that announced new cuts, including the elimination of 10,000 more salaried jobs, Ford said it expected its share of the market to drop to 14 to 15 percent after this year, 10 points lower than Ford was at the beginning of the decade.

At that time, bets were placed across Detroit whether Ford could surpass G.M.; now, the safe bet is that Toyota will pass Ford to become No. 2 behind G.M., something Mr. Toprak expects to happen for good next year.

“Frankly, our ranking doesn’t matter,’’ Mr. Ford now says. “You’ve seen, over the years, chasing market share with sometimes disastrous results.”

But given the unpredictability of gasoline prices, to have any kind of security in the American market, both Ford and Chrysler will have to reduce their dependence on sport utilities and pickups, which make up two-thirds of Ford’s lineup and three-quarters of the vehicles sold by Chrysler. Both vow they will do that by selling more cars and crossover vehicles.

Those will take time to reach showrooms. Although both have new crossovers on the way, the small car that Ford promises to sell in the United States will not reach the market until 2009 — three years behind compacts introduced this year by Toyota, Honda, Nissan and G.M., which has just introduced a refreshed version of the Chevrolet Aveo, built for it by its South Korean partner, Daewoo.

True, the new Dodge Caliber, introduced this spring, is selling well for Chrysler. Yet both Chrysler and Ford have to hope that gasoline prices stay down from their peaks above $3 a gallon this summer, and that they can keep rebates and other deals to a minimum while they sort out their new status.

One unknown in their predicament is the role of the United Automobile Workers, the union that serves as both their partner and adversary. It has granted some concessions on health care coverage to G.M. and Ford, but said last week that it would not cut a deal with Chrysler, because it was not in such bad financial shape. (Chrysler’s latest news could change the union’s mind.)

Beyond that, the union has demonstrated that its priority right now is to take care of the members who will be losing their jobs.

On Thursday, Ford and the U.A.W. reached agreement on buyout packages worth up to $140,000 apiece for 75,000 Ford workers, similar to the deals that were offered to G.M.’s 113,000 hourly workers.

The deals, which have not yet been matched by Chrysler, are a clear signal from the union that workers would be well off to get out now before 2007 contract talks, when some of the protection that the U.A.W. has offered generations of workers may diminish.

Once it gets through its current round of job cuts, Ford is expected to have fewer workers at its American plants than Toyota — a prospect that was hard to imagine in 1986, when Toyota opened its first free-standing plant in the United States.

On Friday, that factory, in Georgetown, Ky., built the five-millionth Toyota Camry sedan. It has been the best-selling car in the United States for nearly a decade, a title once held by the Ford Taurus.

Mr. Womack, whose book “The Machine That Changed the World” studied Japanese automakers’ American plants, calls the Georgetown factory, which now employs 7,000 workers, “the torpedo that came in when no one was looking.”

Reeling from the continuing ripple effects of that explosion, Ford, Chrysler and G.M. need to figure out how to maintain their foothold in a market that they once had practically to themselves. They might take some counsel from the original Mr. Ford.

In his 1930 book, “Moving Forward,” Henry Ford wrote that companies were often bedeviled by “the little things that are hard to see — the awkward little methods that have grown up and which no one notices.”

Eliminating those tiny wasteful practices, he wrote, could make a big difference between success and failure.

Toyota, at least, was listening. While Ford Motor’s “Way Forward’’ clearly suggests it faces a struggle ahead, the tagline of Toyota’s new advertising campaign is a much more positive “Moving Forward,’’ a direct homage to the path that its Detroit rivals may have no choice but to follow.

Nick Bunkley contributed reporting from Detroit.

    Detroit Flails in Latest Effort to Reinvent Itself, NYT, 16.9.2006,
    http://www.nytimes.com/2006/09/16/business/16auto.html

Daimler Looking Outside U.S.

for Source of Subcompacts

September 16, 2006
The New York Times
By KEITH BRADSHER

BEIJING, Sept. 15 — DaimlerChrysler is in talks with companies in China and elsewhere for the export of subcompact cars to North America, the company’s chairman said here on Friday in comments that could renew anxieties in Detroit about competition from China.

Dieter Zetsche, the chairman, said that the company had concluded it could not competitively make its own subcompact cars for its Dodge brand in North America and would need to import them.

“We are aware we do not have a system which could produce a vehicle at an economically viable level,” Mr. Zetsche said, adding that while negotiations have not yet produced an agreement, “We are very much progressing.”

During a news conference and in conversations with reporters immediately afterward, Mr. Zetsche carefully avoided saying whether any of these negotiations were with companies in China. But during a very brief interview an hour later when he walked out a back door of the factory here with two aides, he said it would be fair to describe the talks as being conducted with companies in China and elsewhere.

No multinational company has begun sustained car exports from China to the United States or announced concrete plans to do so. Honda is shipping Jazz hatchbacks to Belgium from Guangzhou in southeastern China, however, and several Chinese automakers have announced plans to export to the United States, notably Geely, Chery and Lifan.

DaimlerChrysler’s interest in importing a subcompact to the United States is not new. Rüdiger Grube, executive vice president and management board member of DaimlerChrysler responsible for China and corporate development, made the biggest news of the Shanghai auto show in April 2005 when he told a small group of reporters that the company was in talks with one of its Chinese partners to create a joint venture for the export of subcompacts to the United States.

But Mr. Grube’s remarks upset the United Automobile Workers union, and DaimlerChrysler quickly backpedaled, refusing even to confirm to other reporters that Mr. Grube had made the remarks at the Shanghai show. During a tour of a new factory here before Mr. Zetsche’s news conference, two DaimlerChrysler spokesmen said in separate conversations that they were not aware of any move by the company to pursue the export of subcompacts from China to the United States.

Mr. Grube also attended the news conference with Mr. Zetsche. In an interview afterward, he said that DaimlerChrysler was reviewing “common interests and capabilities” with potential suppliers of subcompacts to the American market but declined to say whether any of these potential suppliers were in China.

Like Mr. Zetsche, he also declined to identify any companies involved in the negotiations.

Mr. Zetsche and Mr. Grube spoke after attending the opening ceremony for the first factory in China by DaimlerChrysler’s Mercedes unit, part of a broad effort by Daimler to catch up in China. It has had a slow start here, which has left it last in market share among the main multinational auto groups, with three-tenths of 1 percent of the market in July, the most recent month available, or 1.4 percent if Daimler’s stake in Mitsubishi is included.

By contrast, Volkswagen had 16 percent; G.M., 11 percent; Honda, 7.2 percent; Toyota, 6.2 percent; Nissan, 4.9 percent; and Ford, 2.9 percent, according to figures compiled by Automotive Resources Asia, a consulting firm that was acquired on Tuesday by J. D. Power & Associates.

DaimlerChrysler relied for years on the production of Jeeps here at an aging factory in Beijing that was one of the first automotive joint ventures. Chinese officials were still wearing Mao suits when the venture was set up in 1983 while executives from American Motors, later purchased by Chrysler, were wearing suits and ties.

That inner-city factory closed early this year and has since been demolished by the Beijing municipal government as part of preparations for the 2008 Olympics. Jeep sales have plummeted because of competition from cheap Chinese sport utility vehicles, and production has been transferred to a factory near Beijing that is owned by the Beijing Automotive Industry Holding Company.

The factory that officially opened on Friday on the outskirts of Beijing has two assembly lines, one with the capacity to produce 25,000 E-Class and C-Class Mercedeses a year and the other with the capacity to make 80,000 Chrysler 300C large sedans and Mitsubishi Outlander crossover utility vehicles each year, all for the Chinese market.

The star-crossed operation has had a series of difficulties, like finding local suppliers that meet Mercedes standards and discovering more than two dozen tombs on the site that have been preliminarily assessed as dating to the Han dynasty, about 2,000 years ago.

Government archaeologists are still examining the tombs; under Chinese law, DaimlerChrysler has to pay for the government’s excavation of the site. DaimlerChrysler planned to put the factory’s employee activities center where the tombs are and still hopes to do so once the archaeological work has been completed, said Günter Butschek, the president and chief executive of the joint venture that runs the factory.

    Daimler Looking Outside U.S. for Source of Subcompacts, NYT, 16.9.2006, http://www.nytimes.com/2006/09/16/business/16daimler.html

Intel to Cut Work Force by 10,500

September 6, 2006
The New York Times
By JOHN MARKOFF and LAURIE J. FLYNN

SAN FRANCISCO, Sept. 5 — Intel, the world’s largest chip maker, moved Tuesday to revamp its business as it seeks to reverse a slide in its market share and its profit. The two-year effort will reduce its work force by 10 percent and cut $5 billion in costs.

Intel insisted that the spending reductions would not affect major projects now planned to build next-generation factories. “These actions, while difficult, are essential to Intel becoming a more agile and efficient company, not just for this year or the next, but for years to come,” Paul S. Otellini, Intel’s president and chief executive, said in a statement.

Analysts see Intel’s measures as essential to regaining market share from its main rival, Advanced Micro Devices. As a leaner organization, they say, Intel can react more quickly to a changing market.

But its shares declined in extended trading as Wall Street digested the news that the job reductions were not as large as many had expected. Intel said it would cut 10,500 jobs through attrition, the sale of businesses and layoffs.

Some analysts had expected twice that number and perhaps the sale of some less-profitable business, like flash memory, said Cody Acree, an analyst with Stifel Nicolaus.

Intel, which until recently employed 102,500 workers, finds itself in the predicament of having to shed workers and sharply cut capital spending during a relative boom time for chip demand.

According to iSuppli, a market research firm in El Segundo, Calif., Intel’s share of the worldwide chip market shrank to 11.4 percent in the second quarter, from 13.2 percent in the first quarter. It was Intel’s smallest market share in four years.

In particular, Intel has continued to lose share to A.M.D. in the market for the microprocessors used in consumer and corporate computing markets.

In the second quarter of this year, A.M.D.’s share rose to 22 percent, from 16 percent a year earlier, according to Mercury Research, a technology market research company in Scottsdale, Ariz., while Intel declined to 73 percent, from 82 percent.

A turnaround at Intel is likely to take at least another year, Mr. Acree said. “What we haven’t seen is traction from Intel’s new products,” he said. “That’s going to take time. But we expect Intel will gain back market share.”

The company said Tuesday that its plan would save $2 billion in costs and operating expenses in 2007 and $3 billion the following year. It also said it would aim to avoid $1 billion in capital expenditures by more efficient use of its plants. The reduction of 10,500 jobs is to be achieved by mid-2007.

In regular trading, before the layoffs were announced, shares of Intel rose 11 cents, to $19.99, but they fell after hours to $19.73.

Intel’s profit in the second quarter fell 57 percent, to $885 million, or 15 cents a share. Last quarter’s sales also continued to disappoint Wall Street, falling 13 percent, to $8.01 billion.

Profits at both Intel and A.M.D. also suffered from fierce price competition between the companies. An inventory glut at Intel grew in the second quarter in part because the price war caused customers to wait for even further price cuts.

Intel’s stumble at a time when an ever larger portion of the world’s economy is driven by the microprocessor stems largely from a series of strategic missteps over the last decade, analysts say.

One crucial error was made more than a decade ago. It was rooted in Intel’s attempt to divide the computing industry into two markets, one for x86 chips, where it faced fierce price competition, and one for a new processor design known as the Itanium that it created in conjunction with Hewlett-Packard. The company thought it could dominate the desktop and portable PC industry by outmanufacturing its processor chip rivals, while creating a high-end corporate computing market that it could rule with the Itanium.

The strategy failed in part because of the rise of Internet-style computing, which has led to an explosion of cheap server computers that run e-mail and Web sites and are based largely on x86 chips, and because of Microsoft’s decision to make the x86 standard the focus of its new operating system, Vista.

“This is the ultimate repercussion of Intel’s customers not buying the Itanium,” said Mark Stahlman, a technology strategist at Gartner Invest, a Wall Street-oriented computer industry research service.

Further compounding Intel’s woes have been other disappointing initiatives in markets for communications and consumer-oriented computing. This year it sold its communications processor group to Marvell, and its Viiv consumer microprocessor strategy, introduced with fanfare at this year’s Consumer Electronics Show, has not yet shown great promise.

    Intel to Cut Work Force by 10,500, NYT, 6.9.2006, http://www.nytimes.com/2006/09/06/technology/06intel.html

Experts Say Economy Is Slowing Down

September 5, 2006
By THE ASSOCIATED PRESS
Filed at 2:58 a.m. ET
The New York Times

WASHINGTON (AP) -- The economy has slowed down. Gasoline prices hit new highs in early August. And the once-soaring housing sector is rapidly losing altitude, raising concerns it could drag the whole country into a recession.

Just where is the economy headed? Here are some answers to frequently asked questions.

Q: The economy looked so good at the start of the year. What happened?

A: Energy prices climbed above $3 per gallon, leaving consumers with less to spend on other items. At the same time, the Federal Reserve was raising borrowing costs for millions of Americans. The Reserve pushed interest rates up to slow the economy and keep inflation under control.

The combination of higher energy costs and interest rates put a severe squeeze on consumer spending, which accounts for two-thirds of overall economic growth. The Fed's campaign has been especially hard on areas of the economy that depend on borrowing. Those include housing; sales have been plunging in recent months.

Q: So is this a good time or a bad time to buy a house?

A: After a five-year housing boom that had sellers firmly in control, buyers are starting to have more power. But real estate experts caution that it may take a few more months before stubborn sellers start cutting their asking prices.

New-home prices also have not come down much from where they were a year ago, but builders -- facing a record glut of unsold homes -- are starting to throw in attractive incentives such as free appliance upgrades.

Q: If I bought a house in the last few years using an adjustable rate mortgage at a time when mortgage rates were at four-decade lows, what do I do now if that mortgage is about to get reset to a much higher monthly payment?

A: Experts say now would be a very good time to move from an adjustable rate mortgage to a fixed-rate mortgage. That is because fixed-rate mortgages have been dropping in recent weeks. After hitting a four-year high of 6.8 percent in mid-July, the 30-year mortgage has now dropped to a nationwide average of 6.44 percent, according to Freddie Mac's weekly survey.

Homeowners who got an adjustable rate mortgage in 2003 and 2004 at around 4 percent could be facing a jump to 7.5 percent to 8 percent under the terms of their ARM. The new mortgage rate is determined by the index the ARM is tied to, such as one-year Treasury bills, plus any margin the lender is allowed to add. In the current rate environment, borrowers could be facing an increase in their monthly mortgage payment of around $400 on a $200,000 mortgage.

That pain could be reduced if the homeowner refinances to a fixed rate now, when those rates are falling.

Q: What about buying a car?

A: Automakers, who have seen sales slump as gasoline prices have soared, have brought back attractive incentive deals such as zero-percent financing. Deals on year-end models of big sport utility vehicles and other gas guzzlers have been especially attractive.

Q: What are gasoline prices going to do for the rest of year?

A: They may have peaked. Prices have come down about 19 cents per gallon in the past three weeks to around $2.85 after hitting records above $3 per gallon. Labor Day marks the end of the summer driving season, meaning that higher supplies in coming months should keep gasoline prices going down. However, that forecast is based on a benign environment with no serious supply interruptions, either from turmoil in the Middle East or hurricanes shutting down refineries along the Texas Gulf Coast.

Q: Since interest rates rose this year, does that mean my certificate of deposit is earning me more money?

A: Yes. Greg McBride of Bankrate.com said now would be a good time to lock in those higher rates. According to the firm's Web site, www.Bankrate.com, banks are offering five-year certificates of deposit with rates as high as 5.75 percent. But rates may not stay at those levels if financial markets become convinced the Fed is through raising interest rates.

Q: What about the overall economy and my prospects for finding a job?

A: Job growth has slowed this year, causing the unemployment rate to rise to a five-month high of 4.8 percent in July. But the government reported Friday a slightly better picture with the jobless rate falling to 4.7 percent and 128,000 new jobs created.

Analysts believe job growth will remain around that level in coming months, down from the 176,000 jobs created on average each month when the economy was growing more strongly last winter. But job growth at the August level should keep the unemployment rate stable and reduce fears there will be a recession.

''The economy is still in a slowdown, but the good news is that a recession doesn't seem to be in the cards,'' said Nariman Behravesh, chief economist at Global Insight.

    Experts Say Economy Is Slowing Down, NYT, 5.9.2006, http://www.nytimes.com/aponline/us/AP-Economys-Prospects.html