Analysis: After mega-LBO boom, a massive private equity cleanup

An exterior shot of the Hilton Midtown in New York June 7, 2013.

Credit: Reuters/Andrew Kelly

By Greg Roumeliotis

NEW YORK | Wed Aug 28, 2013 3:31am EDT

NEW YORK (Reuters) - According to Blackstone Group LP's (BX.N) books, the private equity firm's investment in Hilton Worldwide Inc was worth 50 percent more this year than when it took the international hotel chain private in 2007.

While that might not seem like much compared to private equity's historical record of doubling or tripling its investments, it is a remarkable turnaround for a $26.7 billion deal that has come to epitomize the leveraged buyout boom and bust of the past decade.

Hilton is one of many cleanup acts that have been quietly going on in the world of private equity, as the industry atones for a debt binge in the years before the financial crisis.

Many of the largest buyouts from 2005 to 2008 were based on revenue and profit expectations that proved too optimistic when the recession hit. Companies such as casino operator Caesars Entertainment Corp (CZR.O) and Texas utility Energy Future Holdings were saddled with huge piles of debt and had difficulty meeting interest payments when business declined.

Just months after Blackstone closed the Hilton deal, the financial crisis forced the firm to dock the value of its investment by half, according to fund documents seen by Reuters.

In 2010, Blackstone persuaded Hilton creditors to agree to a restructuring that cut the company's total debt by nearly $4 billion and pushed back debt maturities by two years to 2015. The restructuring was notable for both its scale and impact: Hilton was allowed to keep more of its cash flow, which is projected to be up 58 percent this year compared to 2009.

With the U.S. economy growing again, Blackstone is now looking to refinance another $12 billion of Hilton debt and plans to take the company public next year.

Blackstone's final returns on the deal are not yet known. On paper, the firm valued Hilton at around 1.5 times its investment, a person familiar with the matter said, citing figures as of the end of March. Blackstone declined to comment.

Private equity investment group Hamilton Lane Advisors LLC conducted a study on 19 LBOs between 2005 and 2008, each with an enterprise value (which includes debt) of more than $10 billion. It found that the average deal was up 1.17 times as of the end of December.

A similar investment in MSCI's world equity index .MIWD00000PUS would have been worth just 1.01 times more by the end of December, the study shows.

Yet the returns are subpar by private equity standards. These firms charge hefty fees to manage money for pension funds, endowments and other institutional investors, and typically deliver between two and three times their investment.

The experience has injected a new sense of conservatism in the industry, and put off a whole generation of private equity executives and their investors, said Harvard Business School professor Josh Lerner, whose research focuses on private equity.

"There has been increasing awareness that really big deals done at peak periods have not been a recipe for success, particularly on the limited partner side," Lerner said.

VARIED PERFORMANCE

A Reuters review of the largest deals from the buyout boom shows that private equity firms have been extending and restructuring debt obligations and selling or spinning off assets to boost the value of their investments.

To be sure, the performance of deals varied widely.

For example, hospital operator HCA Holdings Inc (HCA.N), which was taken private by KKR & Co LP (KKR.N) and Bain Capital LLC for $32.2 billion in 2006, has proved extremely profitable. The HCA investment was marked at 4.3 times higher or more as of the end of June, according to people familiar with the matter. But Energy Future, taken private in 2007 for $45 billion by KKR, TPG Capital LP and Goldman Sachs Capital Partners (GS.N), has said it is now preparing for bankruptcy.

HCA, Energy Future Holdings, and the private equity firms involved either declined to comment or did not respond to requests for comment.

Some other mega-LBOs are struggling as debt payments sap cash flow or because profits are not growing.

Computer software maker SunGard Data Systems Inc, which was taken private in 2005 for $11.4 billion and is trying to revive its profit growth, is exploring a sale of its data managing operations that could fetch up to $2 billion, people familiar with the matter told Reuters in June.

As of the end of December, SunGard had barely increased in value for the private equity firms, according to two people familiar with the matter.

In a starker example, First Data Corp, the world's largest payment processing company taken private by KKR for $29 billion in 2007, explored the possibility of selling its financial services business, seeking up to $6 billion, people familiar with the matter told Reuters in April.

The company, which is struggling with a roughly $24 billion debt burden, was worth only 70 percent of KKR's investment as of the end of June, according to people familiar with the matter.

KKR in April appointed former JPMorgan Chase & Co (JPM.N) co-chief operating officer Frank Bisignano as First Data's CEO. Last month Bisignano named JPMorgan's former chief information officer Guy Chiarello as First Data's President.

"Even if they think they have gone through multiple rounds of cost cutting prior to the LBO, they all have the opportunity to shed a few more pounds," said A.T. Kearney partner Robert Haas, who leads the consultancy's private equity practice in the Americas.

First Data, SunGard and the private equity firms involved either declined to comment or did not respond to requests for comment.

BIG TEMPTATION

Because of their size, an IPO is often the only option available for private equity to exit, and that is a gradual process that can take years with uncertain outcomes. (For a graphic on share performance of firms that have already been taken public, click on link.reuters.com/jer32v)

Meanwhile, the temptation to do large, splashy deals remains. Private equity firms are raising multi-billion-dollar funds, creating a challenge for managers to find good investments.

Private equity firms have not led a $10 billion-plus deal since the crisis, but they have participated in two deals worth more than $20 billion each: the proposed buyout of Dell Inc (DELL.O) by Michael Dell and Silver Lake, and the takeover of H.J. Heinz Co by Warren Buffett's Berkshire Hathaway Inc (BRKa.N) and 3G Capital.

Lerner, the Harvard professor, said some private equity executives are constrained by skepticism from their fund investors, as well as little appetite from some banks to underwrite huge deals.

They are also concerned that a rise in interest rates could increase financing costs for buyers of their companies down the road, making exit strategies more difficult, Lerner added.

(Reporting by Greg Roumeliotis in New York; Editing by Paritosh Bansal, Tiffany Wu and Tim Dobbyn)

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Analysis - Argentina plays for time in debt fight, seeks escape

Argentina's President Cristina Fernandez de Kirchner speaks after arriving at the Silvio Pettirossi airport in Asuncion August 14, 2013.

Credit: Reuters/Jorge Adorno

By Guido Nejamkis

BUENOS AIRES | Tue Aug 27, 2013 7:06pm BST

BUENOS AIRES (Reuters) - Argentina's efforts to avoid a debt default could drag on for another year or more as it fights "holdout" bondholders to the bitter end in U.S. courts and simultaneously looks to side-step any final ruling ordering it to pay up.

President Cristina Fernandez is pursuing a raft of new appeals to keep a technical default at bay, even as she readies a voluntary debt swap to take effect when other options run out.

The government last week lost its appeal of a New York court order requiring it to pay $1.33 billion (855.80 million pounds) to hedge funds that refused to restructure bonds after Argentina's record $100 billion default in 2002.

Fernandez insists her government will not pay the holdouts, but defeat in the courts could also block payments to bondholders who took part in the 2005 and 2010 restructurings. That would trigger a technical default on some $28 billion of foreign debt.

Seeking to avoid that, Fernandez is now proposing a new swap of foreign debt for bonds payable in Buenos Aires that would protect bondholders who accept the exchange by moving them beyond the reach of U.S. law.

A senior government source told Reuters the debt swap would only be pursued if Argentina's court appeals are unsuccessful.

Even then, it would only take a handful of bondholders unwilling to accept Argentine capital controls, or unable to invest in assets outside New York, to leave some restructured bonds vulnerable to another default.

That would mean the second debt crisis in a little more than a decade for South America's third biggest economy, which is struggling with high inflation and a poor business climate caused by heavy trade and foreign exchange controls.

Economy Minister Hernan Lorenzino says the government is pursuing three avenues to keep its legal fight alive. These include asking the three-member panel of the 2nd U.S. Circuit Court of Appeals in New York to reconsider its own decision; appealing the ruling to the full 13-judge appeals court; or appealing Friday's decision to the U.S. Supreme Court.

"We are going ahead with all necessary appeals," Lorenzino told local television on Sunday.

Whether or not the appeals are successful, they are also aimed at extending the stay order that protects payments on restructured bonds. Daniel Kerner of the Eurasia Group political risk consulting firm says they could delay resolution of the case for between six and 15 months.

Argentina has already asked the U.S. Supreme Court to review the original decision on which the appeals court based its ruling, and the top court as yet to decide whether or not to hear that case.

But the latest ruling might give Argentina another chance to appeal to the Supreme Court. First, Argentina has nearly three weeks to ask for a rehearing from the same judges who rendered Friday's ruling, as well as a new hearing "en banc" before all 13 judges on the 2nd Circuit Court of Appeals.

Both requests face long odds, but a rejection of Argentina's "en banc" appeal would give the country 90 days to make a second appeal to the Supreme Court. That could push a final decision deep into 2014.

"The Supreme Court will take a month or two to request an opinion from the Solicitor General, which would take two to six months to give one. Then it's usually resolved within 60 days (whether to hear the case)," said attorney Marcelo Etchebarne, a partner with Cabanellas Etchebarne Kelly in New York.

The chances are slim of a hearing before the Supreme Court, which usually hears fewer than 100 of the roughly 10,000 cases in which it is petitioned each year.

JUDGES' RESTRAINT

Argentina has so far avoided a final reckoning thanks to the restraint shown by judges. The appeals court surprised some observers last week with a stay order delaying implementation of its decision pending review by the Supreme Court.

But it is unclear how much longer U.S. courts will tolerate the defiance of the South American nation that 2nd Circuit Judge Barrington Parker called a "uniquely recalcitrant debtor."

"Argentina's officials have publicly and repeatedly announced their intention to defy any rulings of this Court and the district court with which they disagree," Parker wrote in the decision rebuking the country on Friday.

The country's attempt to move its sovereign debt beyond the reach of U.S. law is just the kind of maneuver courts have specifically warned against, lawyers said, raising the risk that judges could reconsider their stay order.

Were the Supreme Court to eventually take up the case, it could demand that Argentina set aside some $1.5 billion in escrow to ensure it obeys an eventual ruling. President Fernandez has so far refused any commitment that could satisfy the demands of the holdout creditors she calls "vulture funds."

If the Supreme Court turns down the case or Argentina refuses its conditions for a hearing, the lower court's decision would oblige the country to pay holdout creditors in full when they make their next bond payment.

The ruling is a vindication for dissident bondholders led by Aurelius Capital Management and NML Capital Ltd, a unit of Paul Singer's Elliott Management Corp, who are demanding full payment. They have argued that Argentina cannot deny them their due while paying investors who agreed to restructurings.

But the 93 percent of bondholders who renegotiated debts after Argentina's 2002 default, accepting less than 30 cents on the dollar, now worry that the refusal to pay holdouts in the face of court orders could freeze payments on restructured bonds as well.

Argentina has promised to keep paying obligations on its restructured debt. Lorenzino said on Sunday that the country would continue paying holders of those bonds "on the same terms, in the same currency, over the same period."

"We're going to keep paying as we have until now, on the same terms," Lorenzino told a state news agency on Saturday, calling the previous day's appeals court ruling "an attempt to bring the country back to 2001."

(Additional reporting by Alejandro Lifschitz; Writing by Hugh Bronstein and Brad Haynes; Editing by Kieran Murray and Andre Grenon)

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Analysis: Spending on cars, homes threatens apparel sales as holidays approach

By Jessica Wohl and Phil Wahba

Mon Aug 26, 2013 7:07am EDT

n">(Reuters) - Even with consumer confidence at a six-year high, retailers ranging from Target Corp (TGT.N) to Macy's Inc (M.N) are competing not only with each other but are also having to adapt to shifting spending patterns.

Many consumers are taking advantage of still-low interest rates, purchasing cars and houses, but at the same time they are holding back on shirts, dresses and shoes, which doesn't bode well for many retailers in the run-up to the year-end holiday season.

"People are putting their money into things that will last," said Jill Puleri, IBM's global industry leader for retail. "If you look at appliances, if you look at jewelry, these are not necessarily small purchases. They're rewarding each other ... They're putting money where things are more stable."

IBM expects U.S. appliance sales to rise 6 percent in the current third quarter, with sales of other home goods up 1.67 percent. For the holiday season, it expects appliance sales to rise 2.13 percent and sales of home goods to rise 1.98 percent, while anticipating the steepest decline, 3.62 percent, in men's apparel.

That's good news for companies such as home improvement chains Home Depot Inc (HD.N) and Lowe's Cos Inc (LOW.N), which reported strong quarterly results and raised their fiscal year forecasts as people spruced up their homes.

In contrast, Macy's, Kohl's Corp (KSS.N), Wal-Mart Stores Inc (WMT.N), Target Corp (TGT.N) and even luxury chains such as Saks Inc (SKS.N) and Nordstrom Inc (JWN.N) posted disappointing second-quarter sales in recent weeks, and many aren't hopeful about the holidays.

"As people are spending more money on their cars and homes, they are cutting back elsewhere, such as their spending on items like clothes and shoes," Sears Holdings Corp (SHLD.O) Chairman and Chief Executive Edward Lampert told Reuters in an interview.

Macy's, which gets about 80 percent of sales from clothing, lowered its sales forecast for the year after it noticed spending shifting away from what department store chains offer.

"The problem now is that there is no fashion, and if there is no newness, clothing becomes a commodity," said Patty Edwards, chief investment officer of Trutina Financial, which sold Nordstrom earlier this year, but owns Michael Kors Holdings Ltd (KORS.N), PVH Corp (PVH.N) and Nike Inc (NKE.N). "Beyond a select few, I'd think twice about getting into apparel and retail stocks."

Some of the biggest hedge funds are shifting out of the sector. An analysis of holdings in the most recent quarter of the top 30 hedge funds by Thomson Reuters shows consumer discretionary stocks suffered the third biggest decline in the period, falling 2.15 percent. Only energy and materials had larger declines, at 5.25 and 11.59, respectively. The research shows that money shifted into healthcare, telecoms and technology stocks.

POTENTIALLY WEAK HOLIDAY SALES

While interest rates have risen sharply in the last few months, they remain low by historical standards, and many consumers are opting to buy now ahead of any potential increase.

"Consumers recognize that financed purchases will be more expensive with rising rates, and thus are prioritizing them in the current economy," said Erich Patten, portfolio manager at Cutler Investment Group LLC in Seattle. "Demand for soft goods will return as interest rates rise and purchasing patterns normalize."

Since early May, mortgage rates for 30-year loans have risen more than a percentage point. U.S. home resales jumped in July to their highest level in over three years, and some of that surge may reflect buyers rushing to lock in rates before they rise further.

Still, data showed that sales of new, single-family homes plunged to their lowest level in nine months last month, casting a shadow over the U.S. housing recovery.

Auto sales to U.S. consumers beat expectations in July and major automakers reported low inventories for many hot-selling models, suggesting sales would strengthen further.

The near-term spending in housing and automotive sectors "is crowding out other spending," Target Corp (TGT.N) Chairman and CEO Gregg Steinhafel said on an August 21 call. He said that his chain sees "a mix of signals in which emerging optimism is balanced with continuing challenges."

Consumers are also feeling the pinch of payroll taxes that are 2 percentage points higher this year, as well as slightly higher gas prices, leading them to cut back on discretionary items.

"You can't get out of paying your taxes and you have to have gas to go to work and school. Those are real numbers that really do impact real Americans, and I think that's where other discretionary spend takes a hit," said Alison Paul, vice chairman and U.S. retail and distribution leader at Deloitte LLP.

According to a poll of 1,100 U.S. consumers by Ipsos for Reuters this month, 26 percent plan to spend less on clothing this holiday season, while only 12 percent say they expect to spend more.

A few retailers, including Ann Inc (ANN.N), posted a rise in quarterly comparable store sales this week.

"We're not saying run away from apparel," said Shawn Kravetz, president of Esplanade Capital. "We're saying you have to make sure it really looks good on you. Investors just have to be choosier than ever because it has gotten very messy and very challenging very quickly."

(Reporting by Jessica Wohl in Chicago and Phil Wahba in New York. Additional reporting by Jason Lange in Washington, Dhanya Skariachan in New York; Editing by Jilian Mincer and Ken Wills)

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Analysis: New Microsoft CEO faces big choices post-Ballmer

Microsoft CEO Steve Ballmer speaks during his keynote address at the Microsoft ''Build'' conference in San Francisco, California June 26, 2013.

Credit: Reuters/Robert Galbraith

By Bill Rigby

SEATTLE | Mon Aug 26, 2013 2:16am EDT

SEATTLE (Reuters) - The next CEO of Microsoft Corp has one big decision to make: press on with retiring chief executive Steve Ballmer's ambitious plan to transform the software giant into a broad-based devices and services company, or jettison that idea and rally resources around its proven strength in business software.

Ballmer's grand design - unveiled just six weeks before Friday's surprise announcement that he would retire within a year - calls for 'One Microsoft' to pull together and forge a future based on hardware and cloud-based services.

But poor sales of the new Surface tablet, on top of Microsoft's years-long failure to make money out of online search or smartphones, have cast doubt on that approach.

For years, investors have called on Microsoft to redirect cash spent on money-losing or peripheral projects to shareholders, while limiting its focus to the vastly profitable Windows, Office and server franchises.

Activist investor ValueAct Capital Management LP, whose recent lobbying of the company may have played a role in Ballmer's decision to retire earlier than he planned, is thought to favor such an approach.

In the last two years alone, Microsoft has lost almost $3 billion on its Bing search engine and other Internet projects, not counting a $6 billion write-off for its failed purchase of online advertising agency aQuantive. It took a $900 million charge for its poor-selling Surface tablet last quarter.

For now at least, Microsoft seems intent on pursuing Ballmer's vision. John Thompson, Microsoft's lead independent director who is also heading the committee to appoint a new CEO, said on Friday the board is "committed" to Ballmer's transformation plan.

The eventual choice of that committee - which has given itself a year to do its work - should provide a clue to how committed the board really is, and how open to outside advice.

"Taking an internal candidate like Satya Nadella - the guy nurturing servers - or some of the other people on the Windows team, that makes sense to keep a steady hand through this reorganization and strategic shift," said Norman Young, an analyst at Morningstar.

"But a strong case could be made that the company needs a breath of fresh air, someone who can execute on the strategy but also bring an outsider perspective," he added.

That could mean selling the Xbox and abandoning Bing, or cutting short efforts to make tablets or other computers.

SHAREHOLDERS CLAMOUR FOR MONEY, BALLMER'S HEAD

Throughout the last decade, as Microsoft's share price has remained flat, shareholders have called for bigger dividends and share buybacks to beef up their returns.

Microsoft obliged with a one-time $3 a share special dividend in 2004 and has trebled its quarterly dividend to 23 cents since then.

But shareholders still want a bigger slice of Microsoft's $77 billion cash hoard, $70 billion of which is held overseas.

Rick Sherlund, an analyst at Nomura, believes that if the retirement of Ballmer means the company is listening to ValueAct and its supporters, then action on the dividend and share buyback could perhaps happen as early as September 19, when Microsoft hosts its annual get-together with analysts and is expected announce its latest dividend.

"The momentum of shareholder activism is well underway and likely to benefit shareholders even though the process of how this unfolds is not certain," said Sherlund.

The lackluster performance of Microsoft's stock has long been the stick that shareholders beat Ballmer with, and it has looked all the worse compared with the staggering gains made by Apple Inc under Steve Jobs.

Yet Ballmer - who owns just under 4 percent of the company - never showed any doubts about his intention to stay in the job. His old friend and ally Bill Gates, who still owns 4.8 percent of the company, never wavered in his public support.

The first public signs of dissent on Microsoft's board came in 2010, when Ballmer's bonus was trimmed explicitly for the flop of the infamous Kin 'social' phone and a failure to match Apple's iPad, according to regulatory filings.

It was around that time, though not necessarily connected, that the board started considering how it would manage a succession, according to a source familiar with the matter. Ballmer and the board began talking to both internal and external candidates.

About 18 months to two years ago, Ballmer started thinking seriously about a succession plan, the internal source said.

The time since was not marked with glory for Ballmer, with a tepid launch of Windows 8, the disappointment of the Surface tablet, and a $731 million fine by European regulators for forgetting to offer a choice of browsers to Windows users.

Two to three months ago, Ballmer started thinking seriously about his retirement and concluded it was the "right time to start the process," the source said. That was shortly after ValueAct took a $2 billion stake in Microsoft.

July's gloomy earnings, which offered no immediate hope of quick improvement, may have sealed the decision. Ballmer said Friday he made the choice in the few days prior, and informed the board on Wednesday. Whether the board urged Ballmer to leave is not known.

The impending exit of Ballmer leaves a difficult and perhaps impossible choice to his successor - pushing a large and insular behemoth through a highly risky transformation to the mobile world, or clinging to an island of profitable but PC-centric businesses.

"I'm not sure there is someone who can do Steve's (Ballmer's) job 'better'. It's an incredibly difficult job, perhaps intractable," said Brad Silverberg, a former senior Windows executive and co-founder of Seattle venture capital firm Ignition Partners. "Perhaps the way the job is defined needs to change, and this is the harbinger of bigger changes to come."

(Additional reporting by Liana Baker in NEW YORK; Editing by Jonathan Weber and Miral Fahmy.)

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Analysis: Spending on cars, homes threatens apparel sales as holidays approach

By Jessica Wohl and Phil Wahba

Mon Aug 26, 2013 7:07am EDT

n">(Reuters) - Even with consumer confidence at a six-year high, retailers ranging from Target Corp (TGT.N) to Macy's Inc (M.N) are competing not only with each other but are also having to adapt to shifting spending patterns.

Many consumers are taking advantage of still-low interest rates, purchasing cars and houses, but at the same time they are holding back on shirts, dresses and shoes, which doesn't bode well for many retailers in the run-up to the year-end holiday season.

"People are putting their money into things that will last," said Jill Puleri, IBM's global industry leader for retail. "If you look at appliances, if you look at jewelry, these are not necessarily small purchases. They're rewarding each other ... They're putting money where things are more stable."

IBM expects U.S. appliance sales to rise 6 percent in the current third quarter, with sales of other home goods up 1.67 percent. For the holiday season, it expects appliance sales to rise 2.13 percent and sales of home goods to rise 1.98 percent, while anticipating the steepest decline, 3.62 percent, in men's apparel.

That's good news for companies such as home improvement chains Home Depot Inc (HD.N) and Lowe's Cos Inc (LOW.N), which reported strong quarterly results and raised their fiscal year forecasts as people spruced up their homes.

In contrast, Macy's, Kohl's Corp (KSS.N), Wal-Mart Stores Inc (WMT.N), Target Corp (TGT.N) and even luxury chains such as Saks Inc (SKS.N) and Nordstrom Inc (JWN.N) posted disappointing second-quarter sales in recent weeks, and many aren't hopeful about the holidays.

"As people are spending more money on their cars and homes, they are cutting back elsewhere, such as their spending on items like clothes and shoes," Sears Holdings Corp (SHLD.O) Chairman and Chief Executive Edward Lampert told Reuters in an interview.

Macy's, which gets about 80 percent of sales from clothing, lowered its sales forecast for the year after it noticed spending shifting away from what department store chains offer.

"The problem now is that there is no fashion, and if there is no newness, clothing becomes a commodity," said Patty Edwards, chief investment officer of Trutina Financial, which sold Nordstrom earlier this year, but owns Michael Kors Holdings Ltd (KORS.N), PVH Corp (PVH.N) and Nike Inc (NKE.N). "Beyond a select few, I'd think twice about getting into apparel and retail stocks."

Some of the biggest hedge funds are shifting out of the sector. An analysis of holdings in the most recent quarter of the top 30 hedge funds by Thomson Reuters shows consumer discretionary stocks suffered the third biggest decline in the period, falling 2.15 percent. Only energy and materials had larger declines, at 5.25 and 11.59, respectively. The research shows that money shifted into healthcare, telecoms and technology stocks.

POTENTIALLY WEAK HOLIDAY SALES

While interest rates have risen sharply in the last few months, they remain low by historical standards, and many consumers are opting to buy now ahead of any potential increase.

"Consumers recognize that financed purchases will be more expensive with rising rates, and thus are prioritizing them in the current economy," said Erich Patten, portfolio manager at Cutler Investment Group LLC in Seattle. "Demand for soft goods will return as interest rates rise and purchasing patterns normalize."

Since early May, mortgage rates for 30-year loans have risen more than a percentage point. U.S. home resales jumped in July to their highest level in over three years, and some of that surge may reflect buyers rushing to lock in rates before they rise further.

Still, data showed that sales of new, single-family homes plunged to their lowest level in nine months last month, casting a shadow over the U.S. housing recovery.

Auto sales to U.S. consumers beat expectations in July and major automakers reported low inventories for many hot-selling models, suggesting sales would strengthen further.

The near-term spending in housing and automotive sectors "is crowding out other spending," Target Corp (TGT.N) Chairman and CEO Gregg Steinhafel said on an August 21 call. He said that his chain sees "a mix of signals in which emerging optimism is balanced with continuing challenges."

Consumers are also feeling the pinch of payroll taxes that are 2 percentage points higher this year, as well as slightly higher gas prices, leading them to cut back on discretionary items.

"You can't get out of paying your taxes and you have to have gas to go to work and school. Those are real numbers that really do impact real Americans, and I think that's where other discretionary spend takes a hit," said Alison Paul, vice chairman and U.S. retail and distribution leader at Deloitte LLP.

According to a poll of 1,100 U.S. consumers by Ipsos for Reuters this month, 26 percent plan to spend less on clothing this holiday season, while only 12 percent say they expect to spend more.

A few retailers, including Ann Inc (ANN.N), posted a rise in quarterly comparable store sales this week.

"We're not saying run away from apparel," said Shawn Kravetz, president of Esplanade Capital. "We're saying you have to make sure it really looks good on you. Investors just have to be choosier than ever because it has gotten very messy and very challenging very quickly."

(Reporting by Jessica Wohl in Chicago and Phil Wahba in New York. Additional reporting by Jason Lange in Washington, Dhanya Skariachan in New York; Editing by Jilian Mincer and Ken Wills)

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Analysis: Obamacare, tepid U.S. growth fuel part-time hiring

A woman stands with her paperwork as she speaks with a recruiter while attending a job fair in New York, June 11, 2013.

Credit: Reuters/Lucas Jackson

By Lucia Mutikani

WASHINGTON | Wed Aug 21, 2013 3:47am EDT

WASHINGTON (Reuters) - U.S. businesses are hiring at a robust rate. The only problem is that three out of four of the nearly 1 million hires this year are part-time and many of the jobs are low-paid.

Faltering economic growth at home and abroad and concern that President Barack Obama's signature health care law will drive up business costs are behind the wariness about taking on full-time staff, executives at staffing and payroll firms say.

Employers say part-timers offer them flexibility. If the economy picks up, they can quickly offer full-time work. If orders dry up, they know costs are under control. It also helps them to curb costs they might face under the Affordable Care Act, also known as Obamacare.

This can all become a less-than-virtuous cycle as new employees, who are mainly in lower wage businesses such as retail and food services, do not have the disposable income to drive demand for goods and services.

Some economists, however, say the surge in reliance on part-time workers will fade as the economy strengthens and businesses gain more certainty over how they will be impacted by Obamacare.

Executives at several staffing firms told Reuters that the law, which requires employers with 50 or more full-time workers to provide healthcare coverage or incur penalties, was a frequently cited factor in requests for part-time workers. A decision to delay the mandate until 2015 has not made much of a difference in hiring decisions, they added.

"Us and other people are hiring part-time because we don't know what the costs are going to be to hire full-time," said Steven Raz, founder of Cornerstone Search Group, a staffing firm in Parsippany, New Jersey. "We are being cautious."

Raz said his company started seeing a rise in part-time positions in late 2012 and the trend gathered steam early this year. He estimates his firm has seen an increase of between 10 percent and 15 percent compared with last year.

Other staffing firms have also noted a shift.

"They have put some of the full-time positions on hold and are hiring part-time employees so they won't have to pay out the benefits," said Client Staffing Solutions' Darin Hovendick. "There is so much uncertainty. It's really tough to design a budget when you don't know the final cost involved."

CAUTIOUS STRATEGY

The delay in the Obamacare employer mandate "confused people even further," said Bill Peppler, managing partner at Kavaliro, a technology staffing firm in Orlando, Florida. "When we talk to customers, I still don't think anyone has a handle on this."

Obamacare appears to be having the most impact on hiring decisions by small- and medium-sized businesses. Although small businesses account for a smaller share of the jobs in the economy, they are an important source of new employment.

Some businesses are holding their headcount below 50 and others are cutting back the work week to under 30 hours to avoid providing health insurance for employees, according to the staffing and payroll executives.

Under Obamacare, any employee working 30 hours or more is considered full-time. An effort to trim hours might have helped push the average work week down to a six-month low in July.

"As organizations and companies reduce the hours of part-time workers, they still have to replace the capacity, so they go out and hire additional part-time workers," said Philip Noftsinger, president of CBIZ Payroll in Roanoke, Virginia, which manages payroll for more than 5,000 small businesses.

Some large companies are also leaning more heavily on part-timers.

Wal-Mart Stores Inc has been hiring more part-time workers, although it says the move is to ensure proper staffing when stores are busiest and is not an effort to cut costs.

Spokesman Kory Lundberg said the world's largest retailer promotes about 75,000 people from part-time to full-time work each year and is on track to do so again in 2013. (here)

Similarly, a memo that leaked out from teen and young adult retailer Forever 21 last week showed it was reducing a number of full-time staff to positions where they will work no more than 29.5 hours a week, just under the Obamacare threshold.

In a statement, the company said the move will affect fewer than 1 percent of its U.S. store employees, and was taken to better align staffing with sales expectations - not to lower costs under the Affordable Care Act.

Some public school boards and local governments, including the city of Long Beach in California, are also cutting hours.

"The difference between 30 and 40 hours can be the difference between being able to make ends meet month-to-month," said Heidi Shierholz, a senior economist at the Economic Policy Institute in Washington.

"That contributes to reduced living standards for American families and translates into having less income to spend on goods and services, which holds back the economy."

WEAK ECONOMY NOT HELPING

Obamacare is only one factor. The surge in part-time employment also reflects an economy that has struggled to maintain decent growth.

That has left business owners such as Jason Holstine, who owns a building supply store in Baltimore, Maryland, reluctant to take on full-time staff.

Holstine said he was more concerned about budget policy in Washington than about Obamacare, given that federal government furloughs tied to across-the-board spending cuts led some of his clients to put home renovations on hold.

"We are still working in an environment that is very hard to forecast the near future and remains very cash-constrained," said Holstine. "We were always nimble, but we had to become more reactive. Using part-timers gives us more flexibility."

In a paper published last month, the San Francisco Federal Reserve Bank said uncertainty over fiscal and regulatory policy had left the U.S. unemployment rate 1.3 percentage points higher at the end of last year than it otherwise would have been. The jobless rate stood at 7.8 percent in December; it has since fallen to 7.4 percent.

"That's about 2 million jobs below where we should have been in 2012 because of policy uncertainty," said Keith Hall, a senior research fellow at George Mason University's Mercatus Center in Arlington, Virginia.

Economists and staffing companies are cautiously optimistic that part-time hiring and the low wages environment will fade away as the economy regains momentum, starting in the second half of this year and through 2014.

But businesses, accustomed to functioning with fewer workers, might not be in a hurry to change course. A study by financial analysis firm Sageworks found that profit per employee at privately held companies jumped to more than $18,000 in 2012 from about $14,000 in 2009.

"Private employers are either able to make more money with fewer employees or have been able to make more money without hiring additional employees," said Sageworks analyst Libby Bierman. "The lesson learned for businesses during the recession was to have lean operations."

(Reporting by Lucia Mutikani; Editing by Tim Ahmann, Martin Howell and Andre Grenon)

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Analysis: Obamacare, tepid U.S. growth fuel part-time hiring

A woman stands with her paperwork as she speaks with a recruiter while attending a job fair in New York, June 11, 2013.

Credit: Reuters/Lucas Jackson

By Lucia Mutikani

WASHINGTON | Wed Aug 21, 2013 3:47am EDT

WASHINGTON (Reuters) - U.S. businesses are hiring at a robust rate. The only problem is that three out of four of the nearly 1 million hires this year are part-time and many of the jobs are low-paid.

Faltering economic growth at home and abroad and concern that President Barack Obama's signature health care law will drive up business costs are behind the wariness about taking on full-time staff, executives at staffing and payroll firms say.

Employers say part-timers offer them flexibility. If the economy picks up, they can quickly offer full-time work. If orders dry up, they know costs are under control. It also helps them to curb costs they might face under the Affordable Care Act, also known as Obamacare.

This can all become a less-than-virtuous cycle as new employees, who are mainly in lower wage businesses such as retail and food services, do not have the disposable income to drive demand for goods and services.

Some economists, however, say the surge in reliance on part-time workers will fade as the economy strengthens and businesses gain more certainty over how they will be impacted by Obamacare.

Executives at several staffing firms told Reuters that the law, which requires employers with 50 or more full-time workers to provide healthcare coverage or incur penalties, was a frequently cited factor in requests for part-time workers. A decision to delay the mandate until 2015 has not made much of a difference in hiring decisions, they added.

"Us and other people are hiring part-time because we don't know what the costs are going to be to hire full-time," said Steven Raz, founder of Cornerstone Search Group, a staffing firm in Parsippany, New Jersey. "We are being cautious."

Raz said his company started seeing a rise in part-time positions in late 2012 and the trend gathered steam early this year. He estimates his firm has seen an increase of between 10 percent and 15 percent compared with last year.

Other staffing firms have also noted a shift.

"They have put some of the full-time positions on hold and are hiring part-time employees so they won't have to pay out the benefits," said Client Staffing Solutions' Darin Hovendick. "There is so much uncertainty. It's really tough to design a budget when you don't know the final cost involved."

CAUTIOUS STRATEGY

The delay in the Obamacare employer mandate "confused people even further," said Bill Peppler, managing partner at Kavaliro, a technology staffing firm in Orlando, Florida. "When we talk to customers, I still don't think anyone has a handle on this."

Obamacare appears to be having the most impact on hiring decisions by small- and medium-sized businesses. Although small businesses account for a smaller share of the jobs in the economy, they are an important source of new employment.

Some businesses are holding their headcount below 50 and others are cutting back the work week to under 30 hours to avoid providing health insurance for employees, according to the staffing and payroll executives.

Under Obamacare, any employee working 30 hours or more is considered full-time. An effort to trim hours might have helped push the average work week down to a six-month low in July.

"As organizations and companies reduce the hours of part-time workers, they still have to replace the capacity, so they go out and hire additional part-time workers," said Philip Noftsinger, president of CBIZ Payroll in Roanoke, Virginia, which manages payroll for more than 5,000 small businesses.

Some large companies are also leaning more heavily on part-timers.

Wal-Mart Stores Inc has been hiring more part-time workers, although it says the move is to ensure proper staffing when stores are busiest and is not an effort to cut costs.

Spokesman Kory Lundberg said the world's largest retailer promotes about 75,000 people from part-time to full-time work each year and is on track to do so again in 2013. (here)

Similarly, a memo that leaked out from teen and young adult retailer Forever 21 last week showed it was reducing a number of full-time staff to positions where they will work no more than 29.5 hours a week, just under the Obamacare threshold.

In a statement, the company said the move will affect fewer than 1 percent of its U.S. store employees, and was taken to better align staffing with sales expectations - not to lower costs under the Affordable Care Act.

Some public school boards and local governments, including the city of Long Beach in California, are also cutting hours.

"The difference between 30 and 40 hours can be the difference between being able to make ends meet month-to-month," said Heidi Shierholz, a senior economist at the Economic Policy Institute in Washington.

"That contributes to reduced living standards for American families and translates into having less income to spend on goods and services, which holds back the economy."

WEAK ECONOMY NOT HELPING

Obamacare is only one factor. The surge in part-time employment also reflects an economy that has struggled to maintain decent growth.

That has left business owners such as Jason Holstine, who owns a building supply store in Baltimore, Maryland, reluctant to take on full-time staff.

Holstine said he was more concerned about budget policy in Washington than about Obamacare, given that federal government furloughs tied to across-the-board spending cuts led some of his clients to put home renovations on hold.

"We are still working in an environment that is very hard to forecast the near future and remains very cash-constrained," said Holstine. "We were always nimble, but we had to become more reactive. Using part-timers gives us more flexibility."

In a paper published last month, the San Francisco Federal Reserve Bank said uncertainty over fiscal and regulatory policy had left the U.S. unemployment rate 1.3 percentage points higher at the end of last year than it otherwise would have been. The jobless rate stood at 7.8 percent in December; it has since fallen to 7.4 percent.

"That's about 2 million jobs below where we should have been in 2012 because of policy uncertainty," said Keith Hall, a senior research fellow at George Mason University's Mercatus Center in Arlington, Virginia.

Economists and staffing companies are cautiously optimistic that part-time hiring and the low wages environment will fade away as the economy regains momentum, starting in the second half of this year and through 2014.

But businesses, accustomed to functioning with fewer workers, might not be in a hurry to change course. A study by financial analysis firm Sageworks found that profit per employee at privately held companies jumped to more than $18,000 in 2012 from about $14,000 in 2009.

"Private employers are either able to make more money with fewer employees or have been able to make more money without hiring additional employees," said Sageworks analyst Libby Bierman. "The lesson learned for businesses during the recession was to have lean operations."

(Reporting by Lucia Mutikani; Editing by Tim Ahmann, Martin Howell and Andre Grenon)

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Analysis: Central Europe sheltered from emerging markets sell-off

The WIG20 index graph is seen on screen at the Warsaw Stock Exchange October 3, 2012.

Credit: Reuters/Kacper Pempel

By Marcin Goettig and Sujata Rao

WARSAW/LONDON | Thu Aug 22, 2013 10:38am EDT

WARSAW/LONDON (Reuters) - The currencies of emerging European countries such as Poland and Hungary have dodged the giant selloffs hitting other emerging markets, and their links to a steadily recovering euro zone are likely to keep them insulated.

For years, Europe's slump and cautious monetary rules have dragged down economic growth in the region, making these countries less exciting for investors than destinations in Asia and Latin America. Now that curse is turning into a blessing.

Former investor darlings such as Brazil and India have seen currencies tumble as investors flee their stocks and bond markets in fear of a sharp growth slowdown. Their peers in central Europe, however, are largely holding steady.

Hit by the U.S. Federal Reserve's plans to reduce the flow of cheap money it pumps into the global economy, currencies such as South Africa's rand, India's rupee and Brazil's real have fallen 15-18 percent against the dollar this year.

By contrast, Poland's zloty has eased 3 percent against the dollar since January, while Hungary's forint, considered the riskiest regional bet because of Prime Minister Victor Orban's unorthodox policies, is down 2 percent

"This is due to a combination of a better outlook for core Europe, where the economy seems to be recovering, and an improvement in the underlying fundamentals of most of these countries," said Thanasis Petronikolos, head of emerging debt at Baring Asset Management in London.

He said his investment portfolio was factoring in that central Europe would perform better than emerging markets in Asia and some in Latin America.

No doubt, there are some clouds on central Europe's horizon - uncertainty about the impact of upcoming Fed measures and political instability ahead of elections next year.

But barring surprises and as long as the euro recovery stays on course, the region could stay stable for currency investors.

"We expect CEE currencies to continue to outperform other emerging markets until the end of next year," says Commerzbank currency strategist Lutz Karpowitz.

EURO ZONE ORBIT

Germany, the powerhouse of the euro zone and the source of most of emerging Europe's investment, posted forecast-beating business sentiment data on Thursday, leading improvements across the single currency bloc.

As the euro zone starts to emerge from recession, that translates into more growth for its central European neighbors, and therefore stable currencies.

Carmaker Daimler's (DAIGn.DE) plant in Hungary, which makes the Mercedes CLA coupe, illustrates the link: it is estimated to account for nearly one percent of Hungary's economic output, and its sales helped pull the country out of recession.

As European Union members, Poland, Hungary and the Czech Republic are bound by the bloc's rules on fiscal consolidation. For the past several years, that has constrained their governments from running big deficits to boost growth.

But it also means countries in the region have small current account deficits, and some, like Hungary, even run a surplus. That spares their currencies the risk of a sharp decline if flows of foreign capital needed to fund a trade imbalance were to dry up.

An example of a currency hit by a current account deficit is the Indian rupee: with a gap equal to almost 5 percent of its economic output, the currency has fallen 15 percent this year, marking successive record lows in the past three months.

By comparison, Poland's current account deficit has shrunk to 1.9 percent of gross domestic product (GDP) from 5 percent in less than three years.

Hungary's current account surplus acts as a counter-weight to the perceived risks of Orban's policies, which include slapping heavy taxes on foreign banks.

"Countries with relatively good growth and few funding issues will do fine," said Carlin Doyle, emerging markets strategist at State Street Global Investments.

"Countries like South Africa and Turkey look a bit vulnerable, but Hungary does not have funding issues."

RISKS

Central Europe is not entirely without risk, however. Economic recovery could be hit if foreign banks, under pressure to fix their balance sheets, keep cutting lending to the region. Many banks in these countries are fully or partly owned by western parents [ID:nL6N0G04NQ].

Poland faces elections in 2015 and opinion polls show Prime Minister Donald Tusk will lose. Investors see him as a guarantor of stability and predictable policies.

And while the zloty and forint have not been as sensitive to the Fed signals so far, they would not withstand a widespread market panic, analysts say, noting that even relatively "safe" assets such as the Mexican peso and Korean won have fallen prey to the storm in recent days.

Poland, with its large and liquid financial markets would be most at risk if redemptions from emerging market funds spiral.

"If the wave spreads, these countries will also get hit," said Societe Generale strategist Guillaume Salomon. "The difference is they will sell off less than other markets."

(Additional reporting by Carolyn Cohn in London)

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Analysis: New Greek rescue promises euro drama, not crisis

A man carries shopping bags on a street with closed shops in Athens August 12, 2013.

Credit: Reuters/Yorgos Karahalis

By Alan Wheatley and Martin Santa

LONDON/BRUSSELS | Thu Aug 22, 2013 9:39am EDT

LONDON/BRUSSELS (Reuters) - The need for a new rescue program for Greece promises a drawn-out drama of late-night negotiations but is unlikely to trigger the sort of crisis that has threatened the breakup of the euro in the recent past.

That the collapse of the single currency is no longer an immediate danger reflects the solidity of the political bargain that saved Greece a year ago.

Then, Germany, the euro zone's paymaster, agreed to keep aiding Greece so it could stay in the euro as long as it continued to tighten its belt and implement reforms to restore competitiveness. Portugal has received a similar assurance.

Yet the fact that Greece's program has veered off course so soon shows that Europe is still muddling through, a long way from defusing the threat to its flagship project from recession-plagued southern governments with excessive debts tied in a doom loop to vulnerable banks.

So although financial markets shrugged off German Finance Minister Wolfgang Schaeuble's surprise public acceptance this week that Greece will need more aid, the potential for turbulence remains, according to Lena Komileva with G+ Economics, a London consultancy.

"Are we looking at a scenario where the euro zone can successfully overcome the crisis and move towards a highly dynamic growth cycle supported by healthier bank balance sheets as in the US? No," she said.

The looming renegotiation of rescue packages for Portugal and Cyprus as well as Greece is one obvious flashpoint.

"None of those countries is anywhere near being able to stand on its own two feet in terms of funding itself in the market," Komileva said.

THE STRAIN BEGINS TO TELL

Creditors' demands have put huge strain on the governments of all three countries. The longer they are in recession and have to take orders from Brussels and Frankfurt, the closer they will come to testing the political limits of austerity.

Nevertheless, Jacob Kirkegaard with the Peterson Institute for International Economics in Washington said both sides had every incentive to persevere with the aid-for-reforms formula.

Abandoning the periphery to its fate would risk contagion that could condemn the euro, while Greece would face incalculable costs if it were to quit the single currency, starting with the collapse of its banks, capital flight and default on private-sector contracts denominated in euros.

"As bad as the Greek economy has turned out in the past four of five years, this would be a cardiac arrest," Kirkegaard said.

The troika of lenders to the periphery - the European Commission, the European Central Bank and the International Monetary Fund - is due to review Greece's program this autumn.

Fabric Montagne, an economist with Barclays in Paris, said he expected the discussions to be "protracted and difficult".

For markets, though, the process is unlikely to be disruptive because the talks will be limited to allocating losses within the public sector, Montagne said in a recent note.

Since Greece's private bond holders were persuaded to write down most of their exposure, more than 80 percent of Greek government debt is now in the hands of official creditors.

What's more, Greece's immediate needs are relatively modest. The IMF puts its uncovered funding needs for 2014-2015 at 10.9 billion euros, a pittance next to the 240 billion euros that Athens has already received in aid.

DECEPTIVE MARKET CALM?

Greece is counting on achieving a primary budget surplus - before interest payments - for 2013, which would entitle it to ask its euro area partners for help in bringing about a "further credible and sustainable reduction" of its debt-to-GDP ratio.

Having already secured a writedown of privately held bonds, the government of Antonis Samaras sees that the best way of following up with official debt relief is to cooperate with the troika, Kirkegaard said.

Investors realize this too. This is another reason why the talks with Greece are unlikely to be too unsettling for markets, which are already reassured by the ECB's as-yet unactivated Outright Monetary Transactions backstop bond-buying program.

"The markets have internalized the lesson learned by all the peripheral countries, namely that in the end the best way to achieve some sort of restructuring of official sector debt is to do their homework first," Kirkegaard said.

How that debt relief is provided - if it is ultimately needed, as the IMF and most economists believe - will be an acid test for Germany and northern creditor countries, for which write-offs are anathema.

Stretching out loans for, say, 50 years at minimal interest rates to respect the taboo against fiscal transfers would be one face-saving option.

An earlier test, with perhaps greater potential to rock the euro, looms in the shape of an asset quality review of euro zone banks ahead of the ECB's planned assumption next year of supervisory powers over the bloc's lenders.

Komileva said bank creditors and shareholders will bear the brunt of any capital shortfalls, which will be difficult to sweep under the carpet.

"This will immediately raise questions about bank recapitalization and the ability of domestic governments to carry a greater burden," she said.

Such questions will be more searching if the euro zone economy fails to build on the promise of Thursday's surveys of purchasing managers.

The euro zone badly needs a revival of strong growth to ease worries about its banks - 11.6 percent of all Spanish loans were non-performing in June - and to give it time to shore up a currency whose problems reach far beyond Greece's agonies.

(Reporting By Alan Wheatley Editing by Jeremy Gaunt.)

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Analysis: Rising returns give U.S. public pension funds chance to reform

By Tim Reid

Thu Aug 22, 2013 8:05am EDT

n">(Reuters) - Many U.S. public pension funds are benefiting from double-digit annual returns in fiscal 2013 that are giving them breathing space to try to implement reforms and fix gaping deficits.

A raft of pension reforms since the financial crisis by many U.S. state and local governments have not repaired their pension debt, a factor in the bankruptcies of Detroit, Michigan, and the California cities of Stockton and San Bernardino.

A 20 percent gain on the U.S. stock market in the twelve months to June is, however, alleviating acute funding gaps in many areas.

"It is a marathon, not a sprint," said Keith Brainard, at the National Association of State Retirement Administrators. "I do not think any one-year returns are likely to affect the thinking about pension reforms but we have seen very strong returns since the low point of the equity market in 2009 and it is encouraging," he said.

Recent reforms by many U.S. cities and states have seen retirement benefits for new hires cut, and their contributions into pension plans raised. It will be several years before these reforms start to have an effect on gaps in pension funding.

As well as stock market gains, pension funds are being helped by relatively low exposure to the struggling bond market.

In the last decade bonds held by public pension funds fell from around one third to around one fourth of assets as yields declined.

According to Wilshire Associate U.S. public pension funds have about 25 percent of assets invested in bonds, compared to an average of 37 percent for corporate funds.

In the longer run, higher yields could even provide a boon for pension funds because of higher returns.

FUNDING GAP COULD SWELL UNDER NEW RULES

Funds will need higher returns as they adapt to new accounting rules set to begin taking effect next year.

Alicia Munnell, at the Center for Retirement Research at Boston College, co-authored a report last month showing U.S. state and local public pensions would have been a paltry 60 percent funded in 2012 if measured by the new rules. That compares with an estimated 72 percent for fiscal 2012 under old rules.

The new rules have been issued by the Governmental Accounting Standards Board (GASB). One key provision is to slash projected rates of return for pension funds' unfunded portions from roughly 7.5 percent to a much lower market level. The move will greatly increase the amounts at which unfunded liabilities are calculated and the money states and cities will have to pay into their funds.

Munnell's study showed that if current projected return rates for public funds are reduced nationwide to five percent, the unfunded figure for America's public pensions jumps from $1 trillion currently to $2.8 trillion.

Still, Munnell is warning against alarmism.

"Public plan sponsors have made numerous changes to reduce their pension costs in the wake of the financial crisis and ensuing recession. The market has performed well in the last few years. Let's give the plans the time and space to work their way back to more comfortable funding limits," Munnell said. The funded ratios of state and local pension funds was at 103 percent in 2000, after a decade-long bull market.

RETURNS COULD MAKE OR BRAKE REFORMS

So far this year, plans such as the California Public Employees' Retirement System, Florida's state fund, Ohio state teachers and Connecticut have reported returns well above 11 percent. Most others are expected to follow suit.

A recent report by Wilshire Associates found that in the 12 months preceding June all public funds had a median return of 12.4 percent, although that declined in the last quarter to just 0.24 percent.

Similar results are reported by Callan Associates, the San Francisco-based investment consulting firm.

A report by the credit rating agency Standard & Poor's said there are signs of stabilization in public pension underfunding.

John A. Sugden, primary analyst on the report, said signs were encouraging but warned against over-optimism.

"Good returns are a positive development," Sugden said. But he said recent reforms, where many states and cities have curbed benefits and increased contributions for new hires, will take a long time to produce results.

Rachel Barkely, a municipal credit analyst at Morningstar, said the new GASB accounting system and the stock market "are the two key factors that will drive the pension conversation for governments over the next few years."

Barkley said stock market returns could change if the Federal Reserve eases off its expansionary policy known as quantitative easing.

"There is a lot of uncertainty on whether and how financial markets will keep delivering good results," Barkley said.

(Editing by Andrew Hay)

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Analysis: Obamacare, tepid U.S. growth fuel part-time hiring

A woman stands with her paperwork as she speaks with a recruiter while attending a job fair in New York, June 11, 2013.

Credit: Reuters/Lucas Jackson

By Lucia Mutikani

WASHINGTON | Wed Aug 21, 2013 3:47am EDT

WASHINGTON (Reuters) - U.S. businesses are hiring at a robust rate. The only problem is that three out of four of the nearly 1 million hires this year are part-time and many of the jobs are low-paid.

Faltering economic growth at home and abroad and concern that President Barack Obama's signature health care law will drive up business costs are behind the wariness about taking on full-time staff, executives at staffing and payroll firms say.

Employers say part-timers offer them flexibility. If the economy picks up, they can quickly offer full-time work. If orders dry up, they know costs are under control. It also helps them to curb costs they might face under the Affordable Care Act, also known as Obamacare.

This can all become a less-than-virtuous cycle as new employees, who are mainly in lower wage businesses such as retail and food services, do not have the disposable income to drive demand for goods and services.

Some economists, however, say the surge in reliance on part-time workers will fade as the economy strengthens and businesses gain more certainty over how they will be impacted by Obamacare.

Executives at several staffing firms told Reuters that the law, which requires employers with 50 or more full-time workers to provide healthcare coverage or incur penalties, was a frequently cited factor in requests for part-time workers. A decision to delay the mandate until 2015 has not made much of a difference in hiring decisions, they added.

"Us and other people are hiring part-time because we don't know what the costs are going to be to hire full-time," said Steven Raz, founder of Cornerstone Search Group, a staffing firm in Parsippany, New Jersey. "We are being cautious."

Raz said his company started seeing a rise in part-time positions in late 2012 and the trend gathered steam early this year. He estimates his firm has seen an increase of between 10 percent and 15 percent compared with last year.

Other staffing firms have also noted a shift.

"They have put some of the full-time positions on hold and are hiring part-time employees so they won't have to pay out the benefits," said Client Staffing Solutions' Darin Hovendick. "There is so much uncertainty. It's really tough to design a budget when you don't know the final cost involved."

CAUTIOUS STRATEGY

The delay in the Obamacare employer mandate "confused people even further," said Bill Peppler, managing partner at Kavaliro, a technology staffing firm in Orlando, Florida. "When we talk to customers, I still don't think anyone has a handle on this."

Obamacare appears to be having the most impact on hiring decisions by small- and medium-sized businesses. Although small businesses account for a smaller share of the jobs in the economy, they are an important source of new employment.

Some businesses are holding their headcount below 50 and others are cutting back the work week to under 30 hours to avoid providing health insurance for employees, according to the staffing and payroll executives.

Under Obamacare, any employee working 30 hours or more is considered full-time. An effort to trim hours might have helped push the average work week down to a six-month low in July.

"As organizations and companies reduce the hours of part-time workers, they still have to replace the capacity, so they go out and hire additional part-time workers," said Philip Noftsinger, president of CBIZ Payroll in Roanoke, Virginia, which manages payroll for more than 5,000 small businesses.

Some large companies are also leaning more heavily on part-timers.

Wal-Mart Stores Inc has been hiring more part-time workers, although it says the move is to ensure proper staffing when stores are busiest and is not an effort to cut costs.

Spokesman Kory Lundberg said the world's largest retailer promotes about 75,000 people from part-time to full-time work each year and is on track to do so again in 2013. (here)

Similarly, a memo that leaked out from teen and young adult retailer Forever 21 last week showed it was reducing a number of full-time staff to positions where they will work no more than 29.5 hours a week, just under the Obamacare threshold.

In a statement, the company said the move will affect fewer than 1 percent of its U.S. store employees, and was taken to better align staffing with sales expectations - not to lower costs under the Affordable Care Act.

Some public school boards and local governments, including the city of Long Beach in California, are also cutting hours.

"The difference between 30 and 40 hours can be the difference between being able to make ends meet month-to-month," said Heidi Shierholz, a senior economist at the Economic Policy Institute in Washington.

"That contributes to reduced living standards for American families and translates into having less income to spend on goods and services, which holds back the economy."

WEAK ECONOMY NOT HELPING

Obamacare is only one factor. The surge in part-time employment also reflects an economy that has struggled to maintain decent growth.

That has left business owners such as Jason Holstine, who owns a building supply store in Baltimore, Maryland, reluctant to take on full-time staff.

Holstine said he was more concerned about budget policy in Washington than about Obamacare, given that federal government furloughs tied to across-the-board spending cuts led some of his clients to put home renovations on hold.

"We are still working in an environment that is very hard to forecast the near future and remains very cash-constrained," said Holstine. "We were always nimble, but we had to become more reactive. Using part-timers gives us more flexibility."

In a paper published last month, the San Francisco Federal Reserve Bank said uncertainty over fiscal and regulatory policy had left the U.S. unemployment rate 1.3 percentage points higher at the end of last year than it otherwise would have been. The jobless rate stood at 7.8 percent in December; it has since fallen to 7.4 percent.

"That's about 2 million jobs below where we should have been in 2012 because of policy uncertainty," said Keith Hall, a senior research fellow at George Mason University's Mercatus Center in Arlington, Virginia.

Economists and staffing companies are cautiously optimistic that part-time hiring and the low wages environment will fade away as the economy regains momentum, starting in the second half of this year and through 2014.

But businesses, accustomed to functioning with fewer workers, might not be in a hurry to change course. A study by financial analysis firm Sageworks found that profit per employee at privately held companies jumped to more than $18,000 in 2012 from about $14,000 in 2009.

"Private employers are either able to make more money with fewer employees or have been able to make more money without hiring additional employees," said Sageworks analyst Libby Bierman. "The lesson learned for businesses during the recession was to have lean operations."

(Reporting by Lucia Mutikani; Editing by Tim Ahmann, Martin Howell and Andre Grenon)

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Analysis: U.S. retailers say uneven recovery keeps consumers cautious

By Phil Wahba and Lisa Baertlein

Fri Aug 16, 2013 1:03am EDT

n">(Reuters) - From Wal-Mart Stores Inc and Gap Inc to Macy's Inc and McDonald's Corp, chains that cater to middle- and lower-income Americans say they are feeling the pinch of an uneven economic recovery.

A host of retailers have reported tepid sales lately, highlighting the stress that consumers are feeling because of higher payroll taxes, expensive gasoline and a slow job market four years after the U.S. economy started to rebound.

"Everyone wants to talk about recovery - it's like the unrecovery," Susquehanna Financial Group analyst Bob Summers said following the Wal-Mart results. "The demographic that they cater to, not only has it not seen improvement, I would argue that things have gotten worse."

Look no further than Macy's for a snapshot of the consumer. For its namesake mid-tier department stores, Macy's reported the first decline in same-store sales in nearly four years this week, and said shoppers had been gravitating to its less expensive items. That's a contrast with Macy's upscale Bloomingdale's, which came in with strong results.

The trend also turns up in results posted on Thursday by Wal-Mart, which emphasizes low pricing. Its U.S. sales at stores open at least a year unexpectedly fell 0.3 percent last quarter, a second decline in a row, prompting the world's largest retailer to lower its sales forecast for the year.

Last week, a group of U.S. retailers including Costco Wholesale Corp and Gap reported modest gains in July same-store sales, thanks largely to bargains.

Adding to the pressure, Macy's said many shoppers are redirecting their spending to their cars, housing and home improvement.

Automakers reported a 14 percent U.S. sales increase in July from a year earlier, industry consultant Autodata Corp said.

Wall Street analysts expect home improvement chain Home Depot to report same-store sales rose 7 percent, the biggest gain of any major retailer Thomson Reuters tracks.

Outside of home improvement and cars, many retailers say economic conditions were less than ideal.

In July, U.S. employers slowed their pace of hiring, with the number of jobs outside of farming increasing less than economists expected.

The average price for a gallon of gasoline in the United States was still high: at the end of July, it was $3.67 compared to $3.51 a year earlier, according to the Lundberg survey.

As of May, 47.6 million Americans, or one in seven, received food aid - highlighting the ongoing strain on Americans struggling to make ends meet. That was 1.1 million more than a year earlier, and 7 million more than in 2010.

Real wages are also stagnating: they fell 0.1 percent between June 2012 and June 2013, according to the U.S. Bureau of Labor Statistics, excluding inflation and civil servants and military personnel.

"The consumer doesn't quite have the discretionary income, or they're hesitant to spend what they do have," Wal-Mart Chief Financial Officer Charles Holley told reporters on a call.

A recent government report showed 5.7 percent of Americans who had jobs in July could not get enough hours to qualify as full-time workers, the same percentage as in June.

While the unemployment rate has fallen steadily over the last year, the share of part-time workers who want more hours has barely dropped, according to BLS statistics.

"Workers are not doing well," said Elizabeth Ashack, an economist at the BLS. "They're losing ground because wages are not growing in real terms."

Teen employment levels are down this summer, and that may be contributing to same-store sales declines at Aeropostale Inc and American Eagle Outfitters.

SPENDING ON ESSENTIALS

The latest batch of retail reports shows the ways in which customers are pulling back again.

Macy's said shoppers at its namesake chain were holding back on anything nonessential, adding it didn't expect to make up the sales shortfall this year and cut its forecasts.

Kohl's said comparable sales had slid for purchases paid for with a credit card, transactions typically made by people on a budget. And both Wal-Mart and Costco said sales of higher-ticket items such as electronics and games have been soft.

Several companies have said shoppers are waiting longer to buy back-to-school items, suggesting they are waiting for deals and that they see no urgency to hit stores.

This week's results may presage more of the same next week, when big chains like Target Corp, J.C. Penney Co Inc and Sears Holdings Corp report earnings.

In May, Target cut its profit forecast after weak sales, and this week Wells Fargo lowered its profit estimates for the discounter saying Target was unlikely to have been spared by the pullback in spending.

The S&P Index retail was down 1.9 percent on Thursday, and many retail experts predicted it will be slow going for the industry for a while.

"The U.S. consumer is weary in this turnaround. It has been quite anemic, relatively speaking. I think many of them just don't see it on Main Street," said Eric Beder at Brean Capital LLC.

(Reporting by Phil Wahba, Atossa Araxia Abrahamian and Dhanya Skariachan in New York, Jason Lange in Washington and Lisa Baertlein in Los Angeles; Editing by Edward Tobin and Lisa Shumaker)

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