Clinton, Facing Obama Phenomenon, Failed With Bush's 2000 Model

The Democrats

Obama's victory

Barack Obama claims the Democratic nomination, but Hillary Clinton has not yet conceded

IN THE “Friday the 13th” franchise of horror movies the killer returns again and again after seemingly being finished off. Barack Obama’s presidential campaign might have felt that life was imitating art during the course of the long, drawn out, presidential nominating contest. He pulled ahead of his rival, Hillary Clinton, in February, but she just would not quit. She won just enough big primary victories along the way to give her reason to go on.

Finally, on the night of Tuesday June 3rd, after the last primaries in South Dakota and Montana, their struggle is over. Mr Obama has secured enough additional delegates—from the two primaries, and from unelected “superdelegates”—to be sure of the Democratic nomination for the presidential race.

Strangely, Mrs Clinton said she would make no decision on Tuesday. It is anyway out of her hands. As the polls closed in the two western states, superdelegates announced their support for Mr Obama in droves, giving him well over a majority of all delegates. But her support may still matter. She did well among working-class whites, older voters and women. As she praised Mr Obama but declined to concede in a speech in New York on Tuesday night, her supporters sporadically chanted “Denver”. That is the city where the Democrats will hold their nominating convention late in the summer. Some die-hard supporters think she should somehow continue a quixotic fight until then.

What does she really want? Lanny Davis, one of Mrs Clinton's most determined advisers and campaigners, was surprisingly mild-mannered talking about the race just before Mrs Clinton spoke. He may have reflected the view of many—but not all—in her camp that Mr Obama should offer her the vice-presidential slot. Mr Davis says she truly enjoys the Senate, and could be a powerful figure when she returns to her work there. But she may want the respect of having been offered the vice-presidential nomination.

And yet, Mr Obama will not want to make the offer if there is a chance that she will actually accept. Expect a complicated dance between the two in coming days. She probably would not bring to his ticket what it needs. He campaigned on “change”, whereas she lived in the White House for eight years in the 1990s. He rose to prominence partly for his early and clear opposition to the war in Iraq, which she voted for. And there is the delicate but unavoidable fact that Americans may be skittish about breaking both the colour and sex barrier at the same time.

Mr Obama will need someone with strong national-security credentials to hold down some of the eastern swing states, especially Florida, Pennsylvania and Ohio. Mr Obama cannot afford to lose all three to Mr McCain, who has made a calling-card of his toughness on Iraq, Iran and the like. But his populist pitch on the economy may help him, especially in Ohio and Pennsylvania.

Intriguingly, the electoral map may be shaken up quite a bit this year. Much attention will fall on the three states that switched sides between the 2000 and 2004 election. But this year Mr Obama thinks Latinos and young voters may help him make inroads into the interior West, perhaps snatching Colorado and New Mexico from the Republicans. Back east, support from affluent and youngish voters may help him to grab Virginia. He may even have a distant chance in Georgia and North Carolina. On the other hand, Mr McCain hopes to flip states such as New Hampshire, Minnesota, Washington and Oregon the Republicans’ way. New Hampshire is a particularly ripe target.

Although the electoral maths looks tight, Mr Obama will get a boost when his party eventually unifies and Mrs Clinton begins campaigning for him. He is also a prodigious fundraiser, who can repeatedly ask his army of small donors to put up a few more dollars each. Mr McCain’s Republican party is split and dispirited. Support for the incumbent, George Bush, is at miserable lows. Mr Obama has much to be happy about.

Obama Must Heal Party Rift, Reconcile With Clinton (Update2)

June 4 (Bloomberg) -- Barack Obama, who clinched the Democratic presidential nomination after a historic insurgent campaign, faces a new challenge: uniting the party and responding to growing pressure to choose rival Hillary Clinton as his running mate.

Obama, 46, last night passed the threshold of 2,118 delegates needed for the nomination to become the first black candidate to head a major-party ticket in U.S. history. Throughout a five-month campaign spanning 54 contests, he shattered fundraising records, out-organized Clinton and galvanized millions of new voters.

Still, Clinton, 60, didn't concede and has put out the word that she is open to a vice presidential nomination. Her support among older women and working-class voters and victories in nine of the last 16 contests have given her leverage as Obama heads into the general election against Republican John McCain.

Obama and Clinton spoke briefly by phone last night and plan to meet in coming days, his spokesman Robert Gibbs said.

``He's ready and willing to meet on her timetable,'' Gibbs said this morning on NBC's ``Today'' show. Obama and Clinton are in Washington to speak to the American Israel Public Affairs Committee.

Bush's Congratulations

President George W. Bush relayed his congratulations to Obama today through White House spokeswoman Dana Perino. Obama's ``historic achievement reflects the fact that our country has come a long way,'' she told reporters. She said Bush has no plans to call Obama.

Although there are indications that Obama isn't enthusiastic about choosing Clinton as his running mate, the Illinois senator reached out to her and her supporters in his victory speech.

``Because of this primary, there are millions of Americans who have cast their ballot for the very first time,'' he said at a rally in St. Paul, Minnesota. ``Let us unite in a common effort to chart a new course for America.''

Today, Obama turned to another influential political group, telling the nation's largest pro-Israel lobby that he has an ``unshakeable commitment'' to Israel's security. ``Our alliance is based on shared interests and shared values,'' he said in a speech in Washington to the American Israel Public Affairs Committee.

Obama, who raised a record $256 million and drew passionate support from blacks, young people and better-educated voters, sealed his victory yesterday with commitments from party leaders and pledged delegates in South Dakota and Montana.

Superdelegate Endorsements

A wave of endorsements from superdelegates -- party leaders and elected officials whose votes aren't bound by primary results -- included Representative John Spratt of South Carolina, the head of the House Budget Committee, Debbie Dingell of Michigan, the wife of the veteran chairman of the House Energy and Commerce Committee, and Maxine Waters, a California representative and longtime Clinton backer.

Party leaders, including Senate Majority Leader Harry Reid and House Speaker Nancy Pelosi, today issued a statement urging the remaining superdelegates to declare their support ``so that our party can stand united.''

Clinton, a New York senator, included a conciliatory note in her election-night speech while stopping short of the unofficial concession that some expected.

``This has been a long campaign, and I will be making no decisions tonight,'' she said to the roar of the crowd.

Bill and Hillary

If she were considered as vice president, her husband, former President Bill Clinton, might have to release all records of contributions to his foundation and presidential library and agree not to give paid speeches, according to a person close to the Obama campaign.

That could prove a major impediment to her being selected. Bill Clinton, who has made some $52 million from giving speeches over the past seven years, has said he won't disclose details on past contributions, only those going forward.

Obama has his own vulnerabilities, which he may have to consider when choosing a running mate. Losses in Pennsylvania, West Virginia and Kentucky reveal his weaknesses in attracting the type of voters who increasingly flocked to Clinton, said Stuart Rothenberg, editor of the non-partisan Rothenberg Political Report in Washington.

``His problems over the last six weeks or so have demonstrated his difficulty with these kind of Reagan Democrats - - older, working-class, downscale Democratic voters,'' Rothenberg said. ``It gives Republicans an opportunity.''

Maintaining Momentum

The defeats have also slowed Obama's momentum going into the general election, though history suggests he can recover.

In 1976, Jimmy Carter lost in three primaries to California Governor Jerry Brown and four to Idaho Senator Frank Church in May and June before winning the nomination.

Carter in 1980, after having the nomination wrapped up, fought back a late challenge from Massachusetts Senator Edward Kennedy, who won several primary victories in June and took his fight to the convention. In that same year, Ronald Reagan, who clinched the Republican nomination early, lost subsequent primaries in Pennsylvania and Michigan to George H.W. Bush.

Obama has already made his mark on history by emerging as the most effective orator since Reagan. Still, he faces the task of pitting his message of change in Washington against the Republican McCain's decades of experience in government, a history that includes going against his own party ranks on issues ranging from campaign finance to climate change.

`Relative Inexperience'

``McCain will go after Obama for his relative inexperience,'' said David Primo, a political science professor at the University of Rochester in New York. ``Obama's challenge is to be disciplined as a campaigner, to develop a set of clear messages that he sticks to and to emphasize his campaign theme of being a different sort of politician.''

The fact that McCain, 71, an Arizona senator, is likely to attract independent voters means Hillary Clinton's full support will be all the more crucial for Obama.

``The closer the embrace'' by Clinton, ``the easier it will be for some of her supporters to overcome their bitterness,'' said Rothenberg.

That bitterness stems from one of the biggest political upsets in modern American politics.

Clinton began her quest for the White House so confident that her campaign didn't budget beyond Feb. 5, or Super Tuesday, when 22 states voted. Yet Obama's popularity, especially among young people and other first-time voters, trumped the appeal of Bill Clinton and drowned out the former first lady's message that experience in the Senate and White House made her best qualified to be commander-in-chief.

Some Stumbles

Clinton's claim that Obama's words lack substance because of scant political experience was given credence with some of his stumbles, such as his comment before the Pennsylvania primary suggesting that economically struggling working-class voters ``cling to guns and religion.''

Last week, Obama quit his Afrocentric church in Chicago of more than 20 years because of a national controversy prompted by inflammatory remarks made by his former pastor, the Reverend Jeremiah Wright Jr.

``Something we've seen over the past couple of months is that, from time to time, Obama will display a lack of experience in comments he's made,'' Primo said.

Clinton, Facing Obama Phenomenon, Failed With Bush's 2000 Model

Clinton, Facing Obama Phenomenon, Failed With Bush's 2000 Model

June 4 (Bloomberg) -- The failure of Hillary Clinton's campaign may be due as much to George W. Bush as Barack Obama.

Clinton's bid for the White House started as an echo of the 2000 race won by the current president, a Republican who's also her favorite target. Like Bush, Clinton created a tightly controlled campaign backed by her party's establishment and based on the idea that she was the inevitable Democratic nominee.

While Bush dispatched his toughest rival, John McCain, within five weeks in 2000, Clinton encountered something different in Obama, a phenomenon she took too long to grasp. Clinton's campaign apparatus and top strategists -- her husband, Bill, among them -- suddenly became a liability.

``In retrospect, the Clinton campaign approached the race with too much of a sense of entitlement,'' said Jennifer Palmieri, who worked in Bill Clinton's White House and later served as an adviser to former presidential candidate John Edwards. ``The day Obama got in the race is the day it should have been clear that the Bush '99 strategy would not work.''

In a year when the electorate was clamoring for change, Clinton, 60, chose as her chief strategist Mark Penn, a Washington insider whose company was profiting from lobbying and public relations work for a host of interests that conflicted with her own. Penn, 54, also embraced the Iraq War, even as most voters now oppose it.

Underestimating Obama

She underestimated Obama's political prowess as well as his ability to raise millions of dollars. Obama raised $256 million for the primaries, more than any candidate in history.

Clinton also made faulty assumptions. She and her campaign largely ignored small caucus states where Obama ran up the score in delegates. And she and her husband wrongly expected much of the black vote to fall in line for her. Obama got 81 percent of the black vote in South Carolina and 90 percent or more in states such as Indiana, North Carolina and Mississippi, according to exit polls.

Perhaps most damaging was her failure to settle on a single message that worked. As she cycled through slogans, she also seemed to reinvent her persona, eventually toning down a concerted effort to appear as a tough, commander-in-chief and more often showing a funny, warm side.

Clinton and her team had long planned for a victory that would be secured on Feb. 5, or Super Tuesday, when 22 states voted. The path grew dimmer when Obama, 46, won the first contest in Iowa, on Jan. 3. It was then that Clinton showed the first in a series of shifts in her public face.

`It's Not Easy'

As the polls were predicting a big win for Obama in New Hampshire that would sweep him to the nomination, the steely Clinton became emotional at a Jan. 7 campaign event when asked by a voter how she kept going.

``It's not easy, it's not easy,'' the New York senator replied slowly. ``I just don't want to see us fall backwards,'' she said as her eyes welled up. ``This is very personal to me, it's not just political.''

The moment struck a chord with voters, especially women, and Clinton scored a victory in New Hampshire and in Nevada 11 days later. Obama, an Illinois senator, came back with a 29-point win in South Carolina on Jan. 26, and the two essentially battled to a draw on Feb. 5.

After Super Tuesday, the weakness in Clinton's game plan became obvious as Obama, who had set up operations in a wide variety of states far ahead of time, ran up 11 straight wins.

Not Fast Enough

The Clinton team -- staffed by stalwart supporters like Patti Solis Doyle and high-priced consultants such as Penn and Mandy Grunwald -- didn't move fast enough to address Obama's promise of ``change'' and ``hope'' and bickered among themselves. While Clinton tinkered with her message every few weeks, she stuck with a steady drumbeat of facts about her level of experience.

``The campaign seemed to miss that very deep vein of voters who really wanted change in Washington and wanted to see a different kind of effort to unify the country,'' said Leon Panetta, who served as Bill Clinton's budget chief and supported his wife's candidacy, in a March interview. ``People want to vote their hopes, not their fears.''

Panetta also bemoaned the campaign's neglect of smaller states holding caucuses that provided Obama with delegates and momentum. He compared Penn to Bush's top former strategist Karl Rove and said the targeting of certain populations didn't work. ``The country has moved on beyond Karl Rove,'' Panetta said.

Lobbying for Colombia

Then there were the staff shakeups.

Penn, 54, was forced to give up his post as Clinton's chief strategist in April after meeting with Colombian officials as part of his day job as chief executive of the public relations firm Burson-Marsteller. The firm was lobbying on behalf of a trade deal that Clinton opposes, raising questions about conflicts of interest.

Penn's old consulting firm, Penn, Schoen & Berland Associates, is now part of the larger New York-based company, and has benefited from Clinton's largesse.

In January alone, Penn Schoen raked in $3.8 million from Clinton's campaign. That's as Clinton struggled with a dwindling war chest, eventually deciding to loan her campaign $5 million. She later put in another $6.4 million.

In February, Clinton replaced campaign manager Doyle -- an aide from her days as first lady -- with another close adviser, Maggie Williams. Deputy campaign manager Mike Henry stepped down two days later. Clinton's staffing choices laid the groundwork for trouble early on, said Steffen Schmidt, a political science professor at Iowa State University.

Too Close

``Why hire a bunch of `friends' and `confidants' as campaign staff?'' Schmidt said. ``They may be too close to you to see flaws.''

Meanwhile, another establishment asset -- her husband -- became at times a liability. After predicting he could boost his wife's tally among black voters, he ended up alienating many by comparing Obama's success in South Carolina to the campaign of an earlier unsuccessful African-American candidate, Jesse Jackson.

While Clinton came back with big victories in states including Ohio and Pennsylvania, the lack of forward planning and a neglect of caucus states left her too far behind.

By most calculations, Obama delegate-victory margin was achieved in the caucus states, where he out-organized Clinton.

For example, on Feb. 5, Super Tuesday, when 23 contests were held, Obama's victories in Colorado, Kansas, North Dakota, Alaska and Utah gave him 46 net delegates, wiping out Clinton's win in the biggest prize of the primary season, California, where she won 38 more delegates than Obama.

Better in Texas

In Texas, Obama bested Clinton even though she won the primary popular vote 51 percent to 47 percent. He piled up votes in delegate-rich districts and in the caucuses that immediately followed, getting 98 delegates to her 95 in the state.

Reinventions of Clinton's message and her public persona -- at one point she drank beer and downed a shot with patrons at a Pennsylvania bar -- weren't enough; Obama's margin in delegates became insurmountable.

To be sure, Clinton emerges from the drawn-out battle with millions of die-hard supporters. Throughout the campaign, people attending her rallies would say how impressed they were by her warmth, her intelligence and her fighting spirit.

Young girls at rallies would scream when they saw her; women saw the best chance for a female president in their lifetimes. And even some hardened politicians spoke with awe about her determination.

`Made of Steel'

``She is a woman who, in my judgment, is made of steel, and she's a leader in this country not because of her husband but because of what she has done,'' John Edwards, the Democrats' 2004 vice presidential nominee, said as he endorsed Obama on May 14. ``We are a stronger party because Hillary Clinton is a Democrat.''

To some, though, her tenacity bespoke a willingness to do anything to win, an image reinforced by her consistently negative ratings in the polls. Her support for a gas-tax holiday that was roundly criticized by economists served as an example to naysayers who insisted she was only hurting Obama by staying in the race.

A Bloomberg/Los Angeles Times poll in January showed that Obama topped Clinton on honesty and integrity by 13 points among voters.

To others, her biggest problem was simply Obama and his message of change.

Clinton ``just ran up against a team that got hot at the right time,'' said Chris Lehane, a Democratic consultant who worked on former Vice President Al Gore's 2000 presidential campaign and backed Clinton in this race. ``People do not only want to turn the page and close the book on the last generation of politics -- they want to throw the book out the window.''

Bernanke Throws Fed's Weight Behind Paulson's Dollar Policy

June 4 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke threw the weight of the central bank behind Treasury Secretary Henry Paulson's efforts to strengthen the dollar after its 10 percent drop over the past year.

Bernanke said in a speech yesterday the Fed is ``attentive'' to the currency and will guard against a jump in inflation expectations. Paulson a day before reiterated that he ``very strongly'' favors a ``strong'' dollar.

The Fed chief's signal that he's done for now with lowering interest rates may help stabilize the dollar after 3.25 percentage points of rate cuts since September reduced returns on U.S. investments and demand for the currency. Paulson began strengthening the U.S. stance in November by stating the dollar would reflect solid long-term economic fundamentals.

``The Fed cannot ease further if the dollar is now a concern,'' said Stephen Jen, chief currency economist at Morgan Stanley in London, who used to work at the Fed and the International Monetary Fund. ``This shift in rhetoric is one more reason to believe that the dollar has bottomed.''

A measure of the dollar against the currencies of major U.S. trading partners has fallen in five of the past six years, reaching a record low of 69.26 in March. The Fed's trade- weighted major currency dollar index traded at 70.78 late yesterday.

Bernanke yesterday omitted previous comments on how the dollar helps U.S. exports and stressed instead that it contributes to an ``unwelcome rise'' in inflation. Speaking to a conference in Barcelona, he said Fed and Treasury officials are collaborating to ``carefully monitor'' exchange rates.

No `Further'

``He's telling us that the Fed would not like to see any further decline in the dollar relative to the major currencies of the world,'' said former Fed Governor Lyle Gramley, who is now a senior economic adviser at Stanford Group Co. in Washington.

During the dollar's decline over the past six years, Fed officials sometimes indicated an acceptance of receding foreign appetite for U.S. assets. Bernanke's predecessor, Alan Greenspan, told a European audience on Nov. 19, 2004, that ``given the size of the U.S. current account deficit, a diminished appetite for adding to dollar balances must occur at some point.''

Paulson fortified his predecessors' language favoring a ``strong'' dollar by stating, as on Nov. 15, that ``the U.S. economy is going to continue to grow and its fundamental long- term strength is going to be reflected in our currency.''

G-7 Message

The Treasury chief then helped engineer a change in the Group of Seven's language in April. Finance ministers and central bankers for the group of major industrial nations said April 11 that ``sharp fluctuations'' in exchange rates had ``implications for economic and financial stability.''

Even as Paulson and the G-7 tweaked their language, interest-rate reductions by the Fed undermined the U.S. currency. The Fed's main rate, at 2 percent, compares with the European Central Bank's 4 percent benchmark and the Bank of England's 5 percent.

Now, investors are betting the next rate change in the U.S. will be an increase rather than a cut, after Bernanke and other Fed officials indicated they're ready for a halt. Futures prices show a 98 percent chance the central bank will keep the target rate for overnight loans between banks at 2 percent at the June 24-25 meeting.

One option policy makers have yet to mention is intervention in the foreign-exchange market. The last time the U.S. bought dollars to influence its value was 13 years ago. In 2000, the Group of Seven nations bought euros for the first time to stem that currency's slide.

Higher `Threshold'

``If we had another big dollar leg down, I think it would raise the possibility of intervention,'' said Jens Nordvig, a Goldman Sachs Group Inc. currency strategist in New York. The ``more immediate implication'' of Bernanke's speech is that ``the threshold for Fed easing is higher than might otherwise be the case'' should the economy weaken later in the year, he said.

European officials have expressed concern at the euro's climb versus the dollar. The currency shared by 15 European Union members reached a record of $1.6019 on April 22. It dropped 0.6 percent yesterday after Bernanke's comments, to $1.5445.

European Central Bank board member Christian Noyer said ``one can hope'' the gap between the euro and the dollar may narrow, in an interview published yesterday in Forces, a Canadian magazine. ``Markets often push currencies beyond the ranges in which we'd like to see them,'' Forces quoted him as saying.

`Ups and Downs'

Paulson this week rejected speculation that the dollar's drop was responsible for the surge in oil prices. ``Every economy is going to have its ups and downs, and the U.S. is going through a tough period. I believe the long-term economic fundamentals will be reflected in our currency,'' he said after a speech in Abu Dhabi, United Arab Emirates.

Five consecutive Treasury secretaries in the Bill Clinton and George W. Bush administrations have maintained the so-called strong-dollar policy since 1995.

Bernanke's and Paulson's remarks this week ``are consistent in that they are advocating policies that will strengthen the U.S. economy and ultimately ensure ongoing financial stability within the global markets,'' David McCormick, Treasury undersecretary for international affairs, said in an interview with Bloomberg Television.

U.S. Stocks Advance on Growth in Service Industries, Jobs

June 4 (Bloomberg) -- U.S. stocks rose for the first time in three days after stronger-than-forecast growth in service industries and an unexpected increase in jobs overshadowed concern credit losses will force banks to raise more capital.

Intel Corp., the biggest semiconductor company, Hewlett- Packard Co., the largest maker of personal computers, and EBay Inc., the biggest online auction site, advanced as the Institute for Supply Management's service index expanded more than projected. American Express Co., the biggest U.S. credit-card lender, rallied the most in a month after predicting profit that topped forecasts. Bank of America Corp. dropped to the lowest since 2002, limiting the market's advance, after Merrill Lynch & Co. reduced earnings forecasts through 2010.

The Standard & Poor's 500 Index gained 5.36 points, or 0.4 percent, to 1,383.01 at 10:52 a.m. in New York. The Dow Jones Industrial Average climbed 53.09, or 0.4 percent, to 12,455.94. The Nasdaq Composite Index increased 20.08, or 0.8 percent, to 2,500.56. Ten stocks advanced for every nine that fell on the New York Stock Exchange.

``The economic numbers are OK, it looks like we may if we're lucky avoid a recession,'' said Michael Mullaney, who helps oversee about $10 billion at Fiduciary Trust Co. in Boston. ``But it's going to be at best a sluggish economy for several quarters.''

ISM, ADP Reports

Eight of 10 industries in the S&P 500 advanced after the ISM said its index of non-manufacturing businesses was 51.7 in May, higher than the 51 reading projected by economists in a Bloomberg survey. A separate report from ADP Employer Services showed U.S. companies added 40,000 jobs in May, compared with 13,000 job increases the prior month.

The S&P 500 swung between gains and losses at least 19 times in the first hour of trading as declines in banks were offset by American Express' rally.

American Express climbed $1.97, or 4.5 percent, to $46.28 for the top gain in the Dow average. The credit-card company affirmed that profit from continuing operations this year will be $3.51 to $3.61 a share, higher than some analysts expected.

Intel added 48 cents to $23.42. HP increased 32 cents to $46.56. EBay advanced 72 cents to $30.

Procter & Gamble Co. gained 60 cents to $66.01. J.M. Smucker Co., the maker of Smucker's jams and Jif peanut butter, said it will purchase P&G's Folgers coffee unit for $3 billion to expand its portfolio of food brands in the U.S.

Bank of America dropped 31 cents to $32.36. Merrill analyst Edward Najarian said credit losses will reduce earnings at the Charlotte, North Carolina-based lender over the next three years. Najarian cut his 12-month share-price forecast for Bank of America by 3.4 percent to $28.

U.S. Services Expanded at Faster Pace Than Forecast (Update2)

June 4 (Bloomberg) -- U.S. service industries expanded at a faster pace than forecast in May, signaling the economy is weathering the effects of the housing slump and record gasoline prices.

The Institute for Supply Management's index of non- manufacturing businesses, which make up almost 90 percent of the economy, decreased to 51.7 from 52 in April, the Tempe, Arizona- based ISM said. A reading of 50 is the dividing line between growth and contraction.

The report, combined with the group's manufacturing survey earlier this week, indicates the worst real estate slump in a quarter century hasn't caused the economy to weaken further. Federal Reserve Chairman Ben S. Bernanke yesterday signaled the central bank was done cutting rates for now, saying borrowing costs were ``well positioned'' to promote growth.

``This report is consistent with very sluggish overall growth, but not anything resembling a free fall,'' said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm. `The economy will basically bumble along for the foreseeable future, growing by little, but also avoiding collapse.''

Economists surveyed by Bloomberg News forecast the index would fall to 51, according to the median of 73 forecasts. Estimates ranged from 48.5 to 53.

Payroll Projection

A report from ADP Employer Services earlier today showed U.S. companies added 40,000 jobs in May, compared with 13,000 job increases the prior month. Government reports show companies and government agencies sacked 260,000 workers in the first four months of the year, the biggest losses since 2003.

The ISM group's index of new orders for non-manufacturing industries rose to 53.6, the highest this year, from 50.1 the prior month. Its gauge of general activity increased to 53.6 from 50.9.

The group's employment measure dropped to 48.7 from 50.8, signaling companies may be trying to focus on limiting payrolls and boosting productivity to try to offset the jump in fuel costs. A measure of prices paid jumped to 77, the highest since September 2005.

A report from the supply managers' group earlier this week showed manufacturing contracted in May at a slower pace than projected, indicating sales to overseas buyers may be helping factories weather the slump in domestic demand.

Less Spending

Retail sales fell in April for the second time in three months. The outlook for May hasn't improved. Cars and light trucks sold at a 14.3 million annual pace last month, the fewest since July 1998, according to industry data yesterday.

While manufacturers and builders are responsible for the bulk of job cuts this year, service providers have slowed the pace of hiring. Employment at service industries grew by 98,000 workers in the first four months, down from a half million added in the same time last year, according to Labor Department figures.

Smaller wage gains and surging fuel and food costs have Americans reeling. Regular unleaded gasoline rose to a record $3.98 a gallon yesterday, according to AAA.

Confidence among U.S. consumers fell in May to the lowest level in 28 years, according to the Reuters/University of Michigan final index of consumer sentiment released last week.

Consumer `Headwinds'

``Households continue to face significant headwinds,'' Fed Chairman Bernanke told the International Monetary Conference in Barcelona yesterday. ``Businesses are also facing challenges, including rapidly escalating costs of raw materials and weaker domestic demand.''

Airlines in particular are suffering. AMR Corp.'s American Airlines, the world's largest carrier, said last month it will cut ``thousands'' of jobs as it slashes U.S. capacity and retires as many as 85 jets to blunt surging fuel prices and slowing demand.

This is a ``very perilous time'' for U.S. carriers, retiring Southwest Airlines Co. Chairman Herb Kelleher said May 21 at the company's annual meeting in Dallas.

``As you have a contraction of service and higher fares, you may see a lot less air service across the U.S.,'' Kelleher said. ``Fuel prices are just beyond belief.''

The economy grew at a 0.9 percent annual rate in the first quarter, capping the weakest six months of growth in five years, the Commerce Department said May 29. Consumer spending rose at a 1 percent rate, the smallest gain since the 2001 recession.

Housing-related companies are also feeling the brunt of the slowdown. Toll Brothers Inc., the largest U.S. luxury-home builder, this week reported its third straight quarterly loss.

``Demand continues to be weak in most markets as our clients worry about selling their existing homes or entering the market before prices stabilize,'' Chief Executive Officer Robert Toll said in a statement.