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European Central Bank council member Axel Weber said there's no scope for interest-rate cuts and policy makers may need to raise borrowing costs once the economy emerges from its slump.

“Monetary policy at the moment is roughly where it should be and I think the discussion about declining rates in Europe is premature,'' Weber, 51, said in an interview in his office in Frankfurt yesterday. “If the economic outlook brightens somewhat again towards the end of the year and next year, which I still expect, we'll have to see if action is necessary.''

Europe's economy contracted in the second quarter and may not recover in the third, raising the risk of the region's first recession since the euro was introduced in 1999. Weber said the ECB, which increased its benchmark rate by a quarter point to 4.25 percent in July, remains focused on fighting inflation. Bond yields and the euro jumped.

“I don't expect inflation to come down necessarily just with weaker growth,'' Weber said. “Inflation is still the No. 1 worry for central bankers in the euro region.''

“Weber wants to keep the option open to raise rates next year,'' said Holger Schmieding, chief European economist at Bank of America Corp. in London. “He wants to choke any rate-cut debate.''

Rate-Cut Bets

This morning, Eonia forward contracts showed investors had fully priced in a cut in the ECB's benchmark rate to 4 percent by May. The yield on the May contract rose 9 basis points to 4.09 percent after Weber's remarks were published. The euro gained half a cent to $1.4773 and yields on two-year government bonds increased 4 basis points to 4.03 percent.

Weber said while current rates are “roughly adequate'' for “the imminent period of cyclical weakness,'' they are “still more on the accommodative side than being neutral.''

Inflation at 4 percent is running at twice the ECB's definition of price stability of just less than 2 percent.

Inflation will remain in breach of the ECB's price-stability goal next year and “we're not even sure that inflation on average will be below 2 percent in 2010,'' Weber said.

“If inflation risks further materialize and if we come to the conclusion that the inflation outlook has deteriorated, we'll have to re-examine our monetary-policy stance,'' he said. “At the moment, this isn't an issue.''

Recession Concern

Business confidence in Germany plunged to a three-year low this month, heightening concern that Europe's largest economy is slipping into a recession.

While oil prices have receded from a record $147.27 a barrel, they're still up 60 percent over the past year, crimping companies' spending power just as the euro's appreciation and the U.S. housing slump weigh on exports.

In June, ECB staff projected growth would slow to about 1.8 percent this year and 1.5 percent in 2009 from 2.7 percent in 2007. The bank will publish new growth and inflation forecasts on Sept. 4, when it announces its next rate decision.

Weber said he expects “a slight downward correction'' of the growth estimates for this year and next. “The European economy, in my opinion, will be robust once we're through this dry spell,'' he said.

Inflation forecasts may be revised “slightly higher'' from the current 3.4 percent and 2.4 percent for this year and next. The ECB is concerned that long-term inflation expectations are above 2 percent, Weber said.

The long-term inflation expectation, defined as through 2013, rose to 2.03 percent in August, according to the ECB's quarterly survey of forecasters published Aug. 14. That's the highest since the survey started in 1999 and up from 1.95 percent three months ago. Expectations measured by the breakeven rate on French five- year inflation-indexed bonds were at 2.19 percent today.

“We observe with concern that the majority of market watchers don't expect us to meet our stability norm at the 6 to 10-year horizon,'' he said. “For a central bank this puts in question its credibility and this can't be tolerated.''

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Construction spending fell in May, marking three consecutive months of decline, according to a government report released Tuesday.

The 0.4% decline, to a seasonally adjusted annual rate to $1.085 trillion, was better than the 0.6% drop forecast by a consensus of economists surveyed by Briefing.com.

That doesn’t mean builders are out of the woods. Spending has dropped 6% from May of 2007, and for the first five months of 2008, construction spending topped $416.6 billion, down 5.1% from the same period last year.

Spending on private construction fell in May, declining 0.7% to an annual rate of $784.2 billion.

Private residential construction spending declined for the 27th consecutive month in May, droppping 1.6% to a seasonally adjusted annual rate of $378.9 billion. But private nonresidential spending climbed 0.2% to an annual rate of $405.3 billion.

Private nonresidential construction spending has risen every month since February. That uptick may be shortlived, according to Mike Larson, an analyst with Weiss Research. He predicts that the downturn in residential spending will likely spill over to the commercial sector as oil prices continue rising and consumer spending gets further squeezed.

"We’re not going to see a giant pullback on the order of residential spending, but we will see spending in commercial construction slow in the months ahead," Larson said.

In May, public construction spending climbed 0.4% to a $301.1 billion annual rate.

The Commerce Department also reported that construction activity fell by a revised 0.1% in April.

The spending figures for residential and nonresidential spending are used by economists to forecast the investment component of quarterly GDP.  

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Vietnam's inflation rate slowed this month and the government will bring the pace of year-on-year consumer price increases to below 10 percent by 2010 from 25 percent now, Prime Minister Nguyen Tan Dung said.

“Thanks to the strong measures inflation has been reduced,'' Dung, 58, said in an interview from Washington following meetings with President George W. Bush and former U.S. Federal Reserve Chairman Alan Greenspan. The pace “will be brought down to a one-digit figure in 2009 or early 2010.''

Vietnam's central bank increased interest rates three times this year and this month raised the benchmark rate to 14 percent, the highest in Asia, from 12 percent. The State Bank of Vietnam also devalued the dong by 2 percent this month to ease pressure on the currency.

Concern the government's measures to cool price increases have been ineffective roiled the Southeast Asian nation's financial markets, sending the benchmark stock index down 58 percent this year. Morgan Stanley said last month that Vietnam may be headed for a “currency crisis.''

“There have been difficulties in the financial and capital markets,'' said Dung. “The economy also is exposed to the shortcomings and weaknesses'' of the global economy, he added, speaking via a translator.

Dung said the inflation rate for June would be “about 50 percent lower than May's figure.'' Consumer prices increased 3.9 percent in May from the previous month. The General Statistics Office in Hanoi is expected to release figures for June this week.

The VN Index of stocks has rose 8.64, or 2.3 percent, to 392.42 at 9:10 a.m. in Hanoi, extending gains this week to more than 7 percent.

Consumer Prices

Dung, who became prime minister two years ago, said that the country's “top priority'' now is to slow inflation. The government on June 3 cut the economic growth target for this year to 7 percent from 9 percent.

Vietnam's inflation situation “is totally out of control,'' Tom Cooley, Dean of New York University's Stern School of Business, said in an interview from Tokyo. “They are going to face very painful choices as a result of letting it get that far out of control.''

The economy grew 6.7 percent in the first half of the year, Dung said today, after expanding 7.9 percent in the same period last year. Growth for all of 2007 was 8.5 percent, the fastest in more than a decade.

“In 2008, we also face of the problem of the increasing prices of commodities and high inflation in the world,'' Dung said. “That is the reality. The Vietnamese economy is now very closely linked to the world economy.''

World Economy

The U.S. lifted a trade embargo against Vietnam in 1994 and resumed diplomatic relations in 1995, two decades after the end of the war. Vietnam in January 2007 became the 150th member of the World Trade Organization and a year later joined the United Nations Security Council.

Greenspan, who was chairman of the Federal Reserve from 1987 to 2006, “advised Vietnam to get prepared for the further changes and volatility in the world,'' Dung said.

“If the global and U.S. economy continue to slow down and oil prices will continue to increase, Vietnam needs to have a solution to be prepared for that situation,'' Dung said.

“We are starting to see an improvement in inflation, but that's not to say this will be something that will be over and done with in a very short period,'' said Michael Pease, Hanoi- based general director of Ford Motor Co. in Vietnam, which has invested $100 million in a car assembly plant near Hanoi.

In his meeting with Bush, Vietnam agreed to a bilateral investment treaty with the U.S., “which will help promote cross- border investment by significantly strengthening the legal protections'' under a trade agreement signed seven years ago, according to a release yesterday from the Department of State.

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The 15-nation euro area hasn't achieved all its expectations 10 years after its formation and now faces new challenges as commodity prices soar, the European Commission said.

“New and pressing challenges that were not apparent when EMU was devised have emerged,'' the Brussels-based commission said in a quarterly report published today. “Globalization, demographic change, higher energy and food prices and climate change are putting further strains on the growth potential of the euro-area economy and threaten price stability.''

The euro region is heading for its slowest economic expansion in three years as global expansion cools, oil prices soar and the euro's increase against the dollar makes exports less competitive. At the same time, inflation has reached a 16- year high, preventing the European Central Bank from cutting interest rates to bolster growth.

The commission said there have been “substantial and lasting differences'' across member states in terms of inflation and labor costs, while structural reforms have been “less ambitious since the launch of the euro than in the run-up to it.''

At the same time, the euro is “often used as a scapegoat for poor economic performances that in reality result from inappropriate economic policies at the national level,'' according to the commission. “The policy agenda for the next decade will be marked by the emergence of new global challenges which will amplify the weaknesses of EMU.''

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French nurse-trainer France Lio used to peel vegetables over the fliers from Kaufland, a supermarket in nearby Germany. Now, as food costs surge, Kaufland's come-ons are luring her across the border with the promise of much lower prices than at home.

“It's the second time we've come here,'' said the 55-year- old Strasbourg resident, who made the five-minute drive to Kehl, Germany, with her husband. “We found alcohol-free beer that's 2 1/2 times cheaper than in France, fruit juices that cost 90 cents ($1.40); they are more than a euro at home. We'll be back.''

While fierce retail competition limits price increases in Germany, France's heavily regulated market — with rules for everything from store size to allowable price cuts — has resulted in higher costs for customers. French inflation has outpaced Germany's every month so far this year, reaching a 12- year high of 3.7 percent in May.

French President Nicolas Sarkozy is trying to loosen the rules, making it easier to build supermarkets and letting retailers and suppliers negotiate prices more freely. Lawmakers yesterday approved a measure, which must still clear the Senate.

“Prices in supermarkets have increased more in France than in almost all other European countries,'' Sarkozy said in a nationally televised interview in April. “That's not normal.''

Germany is the cheapest country in Europe for international grocery products, according to ACNielsen's 2007 report. The Netherlands is also cheaper than France.

Pepsi and Palmolive

At a Cora supermarket near Strasbourg, a bottle of Palmolive dishwashing liquid costs 1.73 euros, almost double the 95 cents at Kaufland. In Germany, a pack of six Pepsi Max bottles costs 3.54 euros, 28 percent less than in France.

In towns near the border, 65 percent of products were 15 percent to 30 percent cheaper in Germany than in France, according to a study released in May 2007 by Euro-Info- Consommateurs, a Franco-German consumer association. French shoppers account for 50 percent of retailers' sales in Kehl, where the association is based.

In the parking lot of a Lidl outlet, Germany's second- largest discount supermarket chain, nine out of 10 cars were from France. Frederique Mengus, 41, a French secretary, says she shops there, even though the retailer has a store in Strasbourg, because “there is more choice, better quality and the prices seem lower.''

`Obliged to Adjust'

A proliferation of discounters in Germany is helping to limit price increases. “Discounters have played a very important role in Germany for the past 10 to 15 years,'' said Martine Merigeau, the director of Euro-Info-Consommateurs. “Competitors have been obliged to adjust.''

According to a report compiled for the French government, “maxi-discount'' stores have a 30 percent market share of the food-retail sector in Germany, against 13 percent in France, where opening a store larger than 300 square meters requires a local commission's authorization.

Lineaires, a retail trade magazine, found that 59 percent of discounters' requests were approved in 2007, compared with 75 percent for classic supermarkets and 78 percent for so-called “hypermarkets,'' sprawling stores common in French suburbs.

`Green Light'

The country's four biggest retailers share 66 percent of the market, the Finance Ministry says. To spur competition, the government's bill would raise the surface for which a permit is needed to 1,000 square meters.

Carrefour SA's Ed discount chain “will use the green light'' and says it plans to open 50 stores this year. Casino Guichard-Perrachon SA has said it wants to double the number of its LeaderPrice discount stores in five years.

The government's bill “is potentially good, but the current parliament discussion is reducing the scope of the reform,'' said Gilles Moec, an economist at Bank of America in London.

Owners of small neighborhood stores are lobbying lawmakers, concerned that the discounters will take away business. The government has agreed to amendments granting mayors more power, such as the right to preemptively take over retail space in town centers.

The bill also allows for price negotiations between producers and retailers. Currently, manufacturers have to sell their products to all stores at the same price, and retailers are forbidden from selling goods below cost. They make money on rebates from producers for attractive shelf placements or prominent displays in catalogues.

More Competition

“We want to introduce more competition,'' government spokesman Luc Chatel said at a press conference on April 28. The government's plan may cut consumer prices by 1.6 percent within three years, he said.

Meanwhile, French consumers continue to head for the border. “We have to restrain ourselves on even essential things,'' said Marie-Rose Heini, a 63-year-old retiree who shops in Kehl's Edeka supermarket. “We are told to eat five fruits and vegetables a day, but no one can afford that.''

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Billionaire Kirk Kerkorian’s investment company said Tuesday its tender offer for 20 million additional shares of Ford Motor Co. attracted a huge response and will easily enable it to increase its stake in the automaker to about 5.5%.

Tracinda Corp. said in statement its tender offer of $8.50 a share drew offers of more than 1 billion of the company’s shares. It will buy 20 million shares for about $170 million.

Nearly half of Ford’s (F, Fortune 500) 2.17 billion outstanding shares were tendered.

"The response from investors is understandable given that the offer represented a significant premium over Ford’s current share price," said Mark Truby, a Ford spokesman.

"The Ford team remains focused on executing our plan to transform Ford into a lean global enterprise delivering profitable growth for all," Truby said in an e-mail.

Tracinda launched a cash tender offer on May 9 for the additional shares, which was a slight premium to the stock’s May 8 closing price of $8.20.

But Ford shares have since declined more than 20%, and were down 6 cents to $6.30 in premarket trading Tuesday.

The Dearborn, Mich.-based automaker announced last month that it no longer expected to return to profitability by 2009. Ford is cutting production in North America for the rest of this year as high gas prices and a weak economy cut into sales.

Tracinda began accumulating 100 million Ford shares, or 4.7% of the outstanding stock, on April 2 at an average cost of $6.91 per share.

Ford’s board of directors had said it was neutral and would express no opinion about the offer.

The tender offer officially expired at 5 p.m. on Monday. Tracinda had the option not to buy the additional shares under certain circumstances. They included: "any change or prospective change in the affairs" of Ford that has a "materially adverse effect" on the company or any event that "would adversely affect the extension of credit by banks or other financial institutions." 

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Lehman Brothers Holdings Inc. is close to raising more than $5 billion of capital from a group of primarily U.S. investors, The Wall Street Journal reported Sunday.

The investors include the New Jersey Division of Investment, the Journal reported, citing an unnamed person familiar with the matter. This person also said Lehman (LEH, Fortune 500), the nation’s fourth-largest investment bank, is set to report a fiscal second-quarter loss of more than $2 billion. Until recently, reports pegged the loss somewhere between $300 million and $700 million.

The firm was completing final details of the capital infusion Sunday, and the investment, primarily through issuing common shares, could be announced Monday or Tuesday, the Journal reported.

The Associated Press left messages Sunday evening seeking comment from Lehman representatives and a spokesman for the New Jersey Treasury Department.

Lehman shares have fallen more than 50% this year but recovered slightly last week on reports the company may raise capital from an outside investor and allay market fears of a liquidity crisis. Investors regained confidence in Lehman after Standard & Poor’s maintained its rating on the firm, and Merrill Lynch gave it a "buy" rating.

The Financial Times reported Wednesday that Lehman would report it lost between $500 million to $700 million on certain hedging positions during the second quarter. A person familiar with the company’s earnings confirmed those figures to the AP on Wednesday. The person was not authorized to discuss the matter publicly and asked not to be identified.

Other analysts had been predicting a loss of about $300 million.

A Lehman spokesman had declined to comment Wednesday, saying the firm is in a "quiet period" ahead of its earnings, which are expected to be released the week of June 16. 

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Lenovo Group, the world’s No. 4 PC maker, said Thursday that earnings for its latest quarter rose 133% as strong sales in China and Europe offset slower growth in the United States.

Profit totaled $140 million for the three months ending March 31, the Beijing-based company said. Total revenues rose 13.5% to $3.7 billion.

"Lenovo continued to demonstrate strong execution of our strategies in the past quarter, achieving the eighth consecutive quarter of profitable growth," said chairman Yang Yuanqing said in a statement.

Yang said Lenovo will focus on boosting sales in developing countries and expanding its retail business.

Sales in China, which accounts for about one-third of Lenovo revenues, rose 18% to $1.29 billion in the quarter. Sales in Europe, Africa and the Middle East were up 30% at $879 million, the company said.

Sales in the United States and the rest of the Americas rose just 9% to $1 billion, Lenovo said.

For the full fiscal year ending March 31, earnings rose 201% to $484 million, Lenovo said. Full-year sales rose 17% year to $16.4 billion.

Lenovo has reported similar improvements in results in previous quarters, with profit growing faster than revenues, which it says is due to cost-cutting. The company said it boosted its gross profit margin last year from 13.5% to 15%.

Lenovo bought IBM Corp.’s personal computer unit in 2006 and said last year it had completed integrating the acquisition into its own business. Lenovo had the right to use the IBM (IBM, Fortune 500) name on some products but said earlier it plans to discard it this year. 

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Facebook, the world’s second-largest social networking Web site, is adding more than 40 new safeguards to protect young users from sexual predators and cyberbullies, attorneys general from several states said Thursday.

The changes include banning convicted sex offenders from the site, limiting older users’ ability to search online for subscribers under 18 and joining an existing task force seeking ways to better verify users’ ages and identities.

"The agreement marks another watershed step toward social networking safety, protecting kids from online predators and inappropriate content," said Connecticut Attorney General Richard Blumenthal, who announced the agreement Thursday with his counterparts in several other states.

Officials from Washington, D.C., and 49 states have signed on.

Facebook, which has more than 70 million active users worldwide, already has enacted many of the changes and others are in the works, its officials said Thursday.

"Building a safe and trusted online experience has been part of Facebook from its outset," said Chris Kelly, Facebook’s chief privacy officer. "The attorneys general have shown great leadership in helping to address the critical issue of Internet safety, and we commend them for continuing to set high standards for all players in the online arena."

Texas has not endorsed this agreement or a similar one reached in January among the other states, the District of Columbia and News Corp.’s (NWS.A) social network, MySpace. Texas officials have said they want quicker action on verifying users’ ages and identities than the pacts guarantee.

Millions of users: The attorneys general have been negotiating for months with Facebook and MySpace, the world’s largest online social network with 200 million users around the world, for tighter controls.

"Social networks that encourage kids to come to their sites have a responsibility to keep those kids safe," North Carolina Attorney General Roy Cooper said. "We’ve now gotten the two largest social networking sites to agree to take significant steps to protect children from predators and pornography."

MySpace, Facebook and other online networks have created a new venue for sexual predators, who often lie about their age to lure young victims to chat, share images and sometimes meet in person. It also has spawned cyberbullies, who have sent threatening and anonymous messages to classmates, acquaintances and other users.

Among other changes, Facebook has agreed to:

• Ensure companies offering services on its site comply with its safety and privacy guidelines.
• Keep tobacco and alcohol ads from users too young to purchase those products.
• Remove groups whose comments or images suggest they involve incest, pedophilia, bullying or other inappropriate content.
• Send warning messages when a child is in danger of giving personal information to an adult.
• Review users’ profiles when they ask to change their age, ensuring the update is legitimate and not intended to let adults masquerade as children.

The protections included in the MySpace and Facebook pacts could be expanded to smaller services such as Friendster and Bebo, Blumenthal said.

"We’re entering a new era in social networking safety," Blumenthal said. "This agreement is open-ended in envisioning advances in technology that will permit even stronger steps in the future toward protecting kids’ safety." 

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Orders to factories for big-ticket manufactured goods fell for a third straight month in March, the longest string of declines since the 2001 recession.

The Commerce Department said Thursday that demand for durable goods dropped by 0.3% last month, a worse-than-expected performance that underscored the problems manufacturers are facing from a severe economic slowdown. The last time orders fell for three consecutive months was from February to April of 2001, when the country was sliding into the last recession.

President Bush on Tuesday said the economy was not in a recession but a period of slower growth. However, economists who believe the country has fallen into a recession will point to the string of declines in manufacturing orders to support their view.

In other economic news, newly laid-off workers filing claims for unemployment benefits posted a sharp decline last week.

The Labor Department reported Thursday that claims for unemployment benefits fell by 33,000 last week to 342,000. Economists had been expecting that claims would rise by 3,000. The four-week moving average for claims fell by 7,250 to 369,500.

Even with the improvements, analysts are still worried that the weak economy is putting greater pressures on the labor market. The unemployment rate climbed to 5.1% in March as businesses laid off the largest number of workers in five years.

The weakness in manufacturing orders was led by a 4.6% drop in orders for autos, a sector that has been hard hit by soaring gasoline prices and the weakening economy, which have cut sharply into car sales. Orders in the category that includes home appliances fell by 6.6%. This industry has been hurt by the two-year slump in home sales.

Economic growth slowed to a near-standstill at the end of last year as the economy was battered by the prolonged slump in housing and a severe credit crunch that has resulted in billions of dollars of losses at many of the nation’s largest financial institutions and has made it harder for consumers and businesses to get loans.

Consumer sentiment has plunged to recessionary lows as Americans have also watched gasoline prices soar to an average price above $3.50 per gallon nationally.

The 0.3% drop in orders for durable goods, items expected to last at least three years, followed even bigger declines of 0.9% in February and 4.4% in January.

Orders for all transportation products fell by 4.6%, reflecting the big drop in demand for autos. Orders for commercial aircraft actually rose by 5.5% while demand for defense aircraft surged by 29.4%. Many defense industries have seen big increases reflecting the wars in Iraq and Afghanistan.

A key category that is viewed as a proxy for business investment plans showed no increase in March after a big 2% drop in February. Businesses have cut back on their plans to expand and modernize as the economy has softened. 

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