DealBook: K.K.R. Profit More Than Doubled in Fourth Quarter

Samsung Electronics Fourth Quarter Profit Sags

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U.S. Economy Grew 1.7% During the 2nd Quarter, Topping Forecasts

The mixed picture facing the country was evident on Wednesday, as the Commerce Department reported that the economy, adjusted for inflation, expanded at a better-than-expected annual rate of 1.7 percent in the April-June quarter, even as inflation-adjusted growth in the first part of the year now appears slower than first thought. In a separate statement after a two-day meeting of policy makers at the Federal Reserve, the central bank said the economy was on a “modest” trajectory but gave no clue as to when it might start tapering back its huge stimulus efforts.

Like economists and traders, as well as the 12 million unemployed Americans looking for work, the Fed is struggling to gauge whether better growth does indeed lie ahead.

Optimists point to improved levels of job creation in recent months, a more robust housing sector and a surging stock market that has lifted the value of investment and retirement accounts for millions of consumers. Pessimists focus on the fact that the estimated economic growth rate of about 1.4 percent so far in 2013 is well below last year’s levels of 2.8 percent, even as automatic cuts in federal spending and higher taxes continue to bite.

There were pockets of strength in Wednesday’s data from the Bureau of Economic Analysis, all of which will be subject to further revision as the Commerce Department gathers more information about the economy. For example, residential fixed investment increased by 13.4 percent, a sign that housing continues to rebound. Personal consumption rose 1.8 percent, as consumers showed some resiliency, especially given the increase in payroll taxes at the beginning of 2013.

Additionally, government experts have introduced the first comprehensive change in four years in how the economy is measured. They revised figures all the way back to 1929, while also restating more recent data to show that the 2007-9 recession was slightly milder than originally estimated and growth in 2012 was a bit better.

Still, economists emphasized that although the economy’s performance in the second quarter was significantly stronger than had been feared — Wall Street experts forecast growth would come in at just under 1 percent — big challenges remain.

“The basic story of a deep recession followed by a lackluster recovery is essentially unchanged,” said Nariman Behravesh, chief economist at IHS. Growth in the current quarter, which wraps up at the end of next month, remains a wild card, he added. IHS and other companies do expect a pickup in the second half of 2013, but more fallout from the fiscal tightening in Washington could still be felt, he cautioned.

“So far the effects have been fairly muted,” Mr. Behravesh said. “We’re puzzling over that.”

Were it not for the federal cuts, growth would have been close to 2 percent in both the first and second quarters, said Steve Blitz, chief economist at ITG Investment Research. But that’s about the best Americans can hope for, he said, at least in 2013.

“I don’t see the economy breaking away from that 2 percent rate for now,” Mr. Blitz said. He is more optimistic about 2014, when he said he thought the annual rate of growth could rise to about 3.5 percent. “The economy will have adjusted to the downshift in federal spending by then, and Europe won’t be decelerating as rapidly, nor will China and Japan,” he said.

The pace at which spending by the federal government is dropping stabilized last quarter. It fell by 1.5 percent, compared with an 8.4 percent decrease in the first quarter of 2013 and a 13.9 percent plunge in the final quarter of 2012.

More clues about the economy’s performance will come on Friday, when the Labor Department reports on monthly job creation and the unemployment rate. Economists estimate the economy created 185,000 jobs in July, according to a Bloomberg survey, a bit below the 195,000 level in June, with the unemployment rate falling to 7.5 percent, from 7.6 percent.

Postal Service Posts $1.9 Billion Loss in Second Quarter

Over all, the Postal Service reported operating revenues of $16.3 billion in the second quarter, an increase of $121 million, or 0.7 percent, which it attributed to strong growth in e-commerce deliveries and a small increase in standard mail, also known as junk mail. It is the first increase in revenue for the agency in five years.

But postal officials said the service’s expenses of $18.2 billion, which included continuing debt, offset the modest increase in revenue. Joseph Corbett, the Postal Service’s chief financial officer, said it had nearly $50 billion in debt obligations.

Officials said the Postal Service continues to lose $25 million a day as it waits for Congress to pass legislation to overhaul the postal system.

The Postal Service has struggled as mail volume has declined, which it continued to do in the second quarter, to 38.8 billion pieces, down from 39.4 billion for the same period a year earlier, according to agency financial documents.

Revenue from first-class mail, which provides the bulk of Postal Service revenue, declined $198 million, or 2.7 percent, from the same period last year, with a decrease in volume of 713 million pieces, or 4.1 percent.

There were a few bright spots in the gloomy report. Revenue from advertising mail increased $96 million, or 2.4 percent, in the second quarter compared with the same period a year earlier, on a volume increase of 181 million pieces, or 1 percent.

Revenue from package deliveries continued to grow, up $267 million, or 9.3 percent, compared with the same period last year.

Postal unions praised the second-quarter numbers, saying the figures show the continuing viability of the Postal Service.

“This positive trend undermines the doom-and-gloom scenarios postal critics cite — and it shows the folly of reducing services to Americans, as the postmaster general seeks to do,” said Fredric Rolando, president of the National Association of Letter Carriers.

Postal officials said they were able to curb the losses by cutting back the hours at many post offices, reducing staff through attrition and consolidating about half of the service’s processing plants. But the agency said these actions were not enough to reduce its huge debt.

Patrick R. Donahoe, the postmaster general, said Congress should pass a postal overhaul bill that will give the service the flexibility it needs.

“We need comprehensive legislation to provide the Postal Service with a workable business model for today’s marketplace,” Mr. Donahoe said at a morning briefing on the service’s finances for its board of governors.

The Postal Service said it continued to suffer from a 2006 Congressional mandate that requires it to pay $5.5 billion annually into a health fund for its future retirees. The agency defaulted on two payments last year for the first time and said it would not be able to make payments into the fund this year because of its worsening finances. The Postal Service and postal worker unions said Congress needed to fix the requirement by lowering the amount of the payments and stretching out the length of time needed to pay it.

The service also said the continuing shift to electronic communication, including online bill paying and e-mail, was affecting its bottom line. To offset the losses in this area, postal officials have asked Congress for the authority to enter into new lines of business, like beer and wine delivery, from which it is currently prohibited. The Senate passed a postal overhaul last year, but a House version never made it out of committee. Congress has not set a timetable for work on a new bill.

Mickey D. Barnett, chairman of the Postal Service board of governors, said that in the absence of Congressional action the board has asked agency officials to take several steps to deal with the continuing losses.

The changes include renegotiating labor agreements with postal worker unions, administrative actions to reduce costs and, as a last resort, increasing prices on post office products.

“We’re looking at every option to close our widening budgetary gap,” Mr. Barnett said.

DealBook: JPMorgan Shows Strength in Quarter

Larry Downing/ReutersJamie Dimon, the chief of JPMorgan Chase, at a Senate panel last year.

JPMorgan Chase, the nation’s largest bank, reported a 33 percent rise in first-quarter earnings on Friday, bolstered by gains in the investment banking business and a surge in mortgage lending.

“All our businesses had strong performance, and our client franchises did exceptionally well,” Jamie Dimon, the bank’s chief executive, said in a statement.

As the economy recovers slowly, demand for loans remained stagnant. JPMorgan said total loans at the bank fell 1 percent. Yet gains from investment banking allowed JPMorgan to record 12 consecutive quarters of profit.

Within the investment banking unit, assets grew by 8 percent to $19.3 trillion for the first quarter. Fees rose 4 percent, to $1.4 billion.

The net earnings of $6.5 billion, or $1.59 a share, exceeded Wall Street analysts’ expectations of $5.41 billion, or $1.40 a share. Revenue was $25.8 billion, compared with $26.8 billion in the same period a year earlier.

The report kicked off the bank earnings season. As the nation’s largest bank by assets, JPMorgan is often looked at as a bellwether.

A bright spot for JPMorgan’s earnings was mortgage lending, fueled in part by federal programs that have helped damp interest rates. Those low rates have prompted homeowners to refinance. In total, the mortgage banking group posted a profit of $673 million for the first quarter, down 31 percent from a year earlier.

Mortgage originations rose 37 percent in the quarter, to $52.7 billion. Still, application volumes were down, 1 percent from a year earlier, settling in at $60.5 billion. Appetite for loans was dampened, the bank said, by an uptick in interest rates earlier this year.

“We are seeing positive signs that the economy is healthy and getting stronger,” Mr. Dimon said. “Housing prices continued to improve, and new home purchases are also starting to come back.

The bank’s credit card business also improved, with sales volume rising to $94.7 billion, an increase of 9 percent from the same quarter a year earlier, but down 7 percent from last quarter. Auto lending also grew by 12 percent from a year earlier to $6.5 billion.

The results point to some of the larger challenges facing the nation’s biggest banks. As low interest rates continue to undercut profits, banks like JPMorgan are under pressure to cut expenses.

JPMorgan said on Friday that its total head count continued to fall, reaching 255,898. Non-interest expenses plummeted by 16 percent to $15.42 billion from a year earlier.

The bank has pinned some of its hopes for future profitability on its asset management business, as profits from riskier businesses like trading get undercut by a spate of new regulation. The asset management business reported net income of $487 million for the quarter, up 26 percent from a year earlier.

JPMorgan continued to gain business in private banking, accumulating $2.2 trillion in assets under management, up 8 percent from a year earlier.

Some of the strength in earnings, however, were helped by JPMorgan’s decision to reduce reserves for mortgages and credit-card loans. By moving money from the reserves, which cushion the bank against potential loses, the bank got a net 18 cent gain a share.

Addressing questions on Friday about whether the earnings are deceptively strong, Mr. Dimon said in a conference call that even after the reserve reductions, “we had really good numbers everywhere.”

JPMorgan also disclosed on Friday that it had changed a crucial measure that had helped obscure the risk of a series of complex wagers on credit derivatives. Those bets, made by the bank’s chief investment office, ultimately led to more than $6 billion in losses, claimed the jobs of top bank executives and forced Mr. Dimon to account for the losses before Congress.

The measure, called value at risk, or VAR, is used to estimate the losses associated with trading positions. JPMorgan said in a supplemental filing Friday that it had altered the value at risk metric for the corporate and investment bank to “achieve consistency with like products.”

As the traders in London assembled increasingly complex bets that ultimately led to the trading losses, JPMorgan changed how it measured risk in January 2012. That tweak allowed the traders in the chief investment office, to continue building the large wagers, according to Congressional investigators.

JPMorgan has changed its VAR model at least four times since January 2012. Explaining one such change, Mr. Dimon told the Senate Banking Committee in June that the bank had decided the model wasn’t effectively gauging risk and changed it in May. But that change alone meant that risk on the trades was underestimated by at least half.

Still, another quarter of robust earnings give the bank another chance to move beyond that multibillion-dollar trading loss.

Since announcing the trading loss last May, JPMorgan and its influential chairman, Mr. Dimon, have struggled to reassure skittish investors and defray a series of federal investigations related to the bungled wagers on complex-credit derivatives. Mr. Dimon has testified before Congress, vastly reshuffled its executive ranks and fortified risk controls. In January, JPMorgan’s board slashed Mr. Dimon’s compensation by 50 percent to $11.5 million.

More recently, Senator Carl Levin, Democrat of Michigan, grilled current and former senior executives at the bank about lax oversight policies and gulfs in risk management. The Congressional hearing, which lasted for nearly four hours, renewed pressure on Mr. Dimon and the bank. At times, senior executives floundered as they tried to combat lawmakers’ accusations that the officials misled investors and regulators about the soured bet. The hearing came just a day after a scathing 300-page report into the losses.

Mr. Dimon has struck a more contrite tone, seemingly chastened by the continued fallout from the trading losses. In his annual letter to shareholders, released on Wednesday, Mr. Dimon repeatedly apologized for the losses. He described the losses as the “the stupidest and most embarrassing situation I have ever been a part of,” vowing to continue to bolster risk controls and rout out problems.

Rather than taking a combative tone toward regulations that rein in Wall Street, Mr. Dimon expressed regret for how the trading losses “let our regulators down.”

In his letter, Mr. Dimon also warned shareholders that the bank would continue to face regulatory challenges in the “coming months.” JPMorgan, Mr. Dimon said, will deploy resources to improve firmwide controls on risk and compliance. “We are reprioritizing our major projects and initiatives,” he said.

The earnings on Friday come just a month before JPMorgan’s annual shareholder meeting, where the results of a crucial vote will be announced. Shareholders will decide whether to strip Mr. Dimon of his chairman title, a role he has held since 2006. Ahead of the nonbinding vote, JPMorgan has been working behind the scenes to make their case to shareholders that Mr. Dimon should keep the dual roles.

First Quarter

The two largest mutual funds specializing in health care — from Vanguard and T. Rowe Price — both have new managers.

Sluggish economic growth seems to be with investors for the long haul. So portfolio managers, noting record corporate profits, are puzzling out ways for shareholders to benefit.

U.S. Current-Account Deficit Narrows for Third Quarter

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Foxconn Profit Surges in Third Quarter

TAIPEI — Shares of Hon Hai Precision Industry of Taiwan jumped Wednesday after Hon Hai, the main manufacturer of Apple products, posted a sharp increase in quarterly net profit, lifted by Apple’s new products.

But strong early gains were later tempered by investors’ caution about Apple’s prospects for long-term growth, analysts said.

Hon Hai, also known as Foxconn, the assembler of both the iPhone 5 and the iPad mini, started mass production for the products in late August. Hon Hai also provides electronics to other companies, including Cisco, Dell, Nokia and Sony.

The company reported late Tuesday a nine-month profit through September of 57.8 billion Taiwan dollars, or $1.98 billion, 24 percent higher than in the same period a year earlier.

Net profit in the July-to-September period was 30.3 billion dollars, according to Reuters and analysts’ calculations, up 58 percent from a year earlier. Profits in the quarter were 140 percent higher than in the previous three months.

Hon Hai said in a brief statement that it had achieved a notable market share gain “in the midst of the European-led global economic uncertainty and potential industry shrinkage.” It did not give further details in a statement late Tuesday to the Taiwan stock exchange or in a subsequent statement Wednesday.

Shares of Hon Hai finished Wednesday up 0.7 percent after quickly rising 3.4 percent at the opening of trading.

“The rise we saw this morning was not much, given the strong Q3 figures; in fact many foreign investors have been selling Hon Hai shares recently,” said Vincent Chen, an analyst at Yuanta Securities. “Many foreign investors who bought Hon Hai were buying into Apple’s future, but they’re now showing concerns over Apple’s growth.”

Last week, Apple delivered a second consecutive quarter of disappointing results and iPad sales fell well short of Wall Street’s targets, but investors said they would focus on the year-end holiday quarter.

Analysts have generally expected Hon Hai’s shipments to Apple to increase in the fourth quarter as the production of the iPhone 5 and the iPad Mini becomes more efficient than in the initial production period.

Hon Hai’s results in the third quarter were also helped by higher subsidies from Apple and a reversed charge of 4.5 billion dollars from investment in Sharp. Hon Hai had agreed to buy 9.9 percent of Sharp in March, but said in August that the two companies had agreed Hon Hai did not have to honor the purchase deal because Sharp’s shares had plunged after the March agreement.

Although neither Apple nor Foxconn has said what the cost-sharing arrangements, if any, are between the two companies, some analysts assumed that Apple was paying higher fees for the iPhone 5 and also covering part of the cost of rising wages.

Foxconn Technology Group, the trading name of Hon Hai, announced in mid-February that it had raised wages for workers in a range of 16 percent to 25 percent. In late March, it reached an agreement with Apple to hire tens of thousands of new workers to reduce overtime work as it fought perceptions that its plants in China were sweatshops.

“Foxconn’s margin improved owing to Apple’s subsidies,” said Mr. Chen, the analyst at Yuanta Securities, “but the subsidy level is hard to predict in nature and it may vary each quarter.”

In a trading note, Kirk Yang, an analyst with Barclays Capital, said he expected fourth-quarter consolidated sales to grow 14 percent from the level of a year ago because of strong shipments of Apple products.

Taiwan trims outlook

Taiwan cut its growth forecast for 2012 for a ninth time in a year Wednesday as Europe’s problems, concerns about the U.S. economy and mainland China’s slowdown kept third-quarter growth below forecasts, but bright spots indicated the economy might have bottomed out, Reuters reported in Taipei.

The economy grew a preliminary 1.02 percent in the third quarter of 2012 from the same time the previous year, the statistics agency said in a preliminary reading, below the median forecast in a Reuters poll for 1.55 percent growth. But the agency cut its full-year forecast to 1.05 percent from 1.66 percent.

U.S. Economy Grew at 2% Rate in 3rd Quarter

The new figure, released by the Commerce Department on Friday, is the government’s first estimate of growth in the third quarter. It compares with the 1.3 percent pace of growth in the second quarter. In the first quarter of 2012, the economy also grew by 2 percent.

The slow pace of growth since the end of the recession has been a dominant theme in the presidential race, with Republicans pointing to recent data as evidence that the economy is moving too slowly to make a meaningful dent in unemployment.

But there were several elements of good news for the White House in Friday’s report. Consumer spending rose at a seasonally adjusted annual rate of 2 percent, compared with 1.5 percent in the second quarter. Residential investment increased at an annual rate of 14.4 percent in the third quarter, versus 8.5 percent in the second quarter, a positive sign for the housing sector.

“All in, today’s report showed somewhat faster domestic demand driven by the household sector,” said Maury Harris, chief economist at UBS Securities.

The report comes amid fears that companies are clamping down on spending in the face of potential tax increases and spending cuts in the United States, a recession in parts of Europe and a deceleration in demand from China. Some economists fear that all these factors will keep a lid on any pickup in growth in the final quarter of 2012 and the first quarter of 2013.

Friday’s report, for example, showed that exports decreased by 1.6 percent in the latest quarter, compared with a 5.3percent increase in the second quarter. It was the first time exports had fallen since the first quarter of 2009, when the global economy was reeling from the collapse of Lehman Brothers and the ensuing financial crisis in the United States.

In recent days, government data and a steady drumbeat of disappointing earnings reports from corporate bellwethers have suggested that companies are becoming more cautious. On Thursday, the Commerce Department reported that orders for nondefense capital goods, excluding aircraft, were flat in September, disappointing experts who had forecast a slight gain.

There have already been several layoff announcements this week from big American companies like Dow Chemical and DuPont. That list grew Friday, with Newell Rubbermaid announcing plans to cut 2,000 workers, or just over 10 percent of its work force, while Rockwell Collins said it would eliminate 1,250 jobs, equivalent to roughly 6 percent of its staff.

Despite the hesitancy among businesses, the nascent recovery in the housing market and a slight drop in the unemployment rate are translating into more optimism among consumers. A survey released Friday showed consumer sentiment at its highest level in more than five years, with the Thomson Reuters/University of Michigan index rising to 82.6 in October from 78.3 in September, though it was lower than a preliminary October reading of 83.1 reported earlier.

Nigel Gault, chief United States economist for IHS Global Insight, added that while the uncertainty hanging over businesses did not seem to be affecting consumers, that could change if Washington did not avert a wave of tax increases and automatic spending cuts set to go into effect early next year.

This so-called fiscal cliff is already being blamed for a chill in spending on equipment and software by businesses, which fell 0.1 percent in the third quarter. “Consumers are not so forward looking as businesses,” Mr. Gault said. “So there are two ways this can go. Either we clear up the uncertainty or consumers start focusing on the fiscal cliff and we see consumer spending hurt as well.”

Among the biggest factors in the uptick of growth in the gross domestic product was a 13 percent jump in defense spending. On the other hand, a drop in farm inventories —fallout from the severe drought this summer — shaved 0.4 percent off overall growth.

Without the increase from defense spending, the economy would have grown at an annual rate of 1.4 percent, said Steve Blitz, chief economist at ITG Investment Research.

“The economy really just continues to churn at a very slow rate,” he said. Two big engines that initially powered the economy in the wake of the recession — exports and business investment — have both been fading recently, he said, and that does not bode well for growth.

Euro Watch: Euro Zone Data Point to Recession in 3rd Quarter

Business activity and new orders in the 17-nation currency bloc declined in the three months through the end of September, according to a survey of purchasing managers by Markit Economics, a financial data provider. Markit said its composite index came in at 46.1 in September, ticking down from 46.3 in March but revised up from its initial estimate of 45.9.

A value below 50.0, where the composite index has remained for eight straight months, suggests the economy is contracting. Ireland was the only country to report an increase. German activity was largely unchanged, and French activity fell sharply.

Chris Williamson, Markit’s chief economist, said in a statement that it appeared “inevitable” that the euro zone returned to recession in the third quarter, following a 0.2 percent decline in the second quarter. The commonly accepted definition of recession is two consecutive quarterly declines in gross domestic product.

“There therefore seems little scope for a return to growth in the fourth quarter,” Mr. Williamson said. “The uncertainty is perhaps whether policy makers will be able to induce an improvement in business and consumer confidence to help ease the rate of decline, or whether the pace of downturn will accelerate further towards the end of the year.”

The E.C.B. meeting Thursday comes as Spain, which is battling to meet demands for fiscal consolidation amid a devastating recession, is thought to be preparing to ask its European partners for a bailout. Prime Minister Mariano Rajoy said Wednesday that no bailout request was imminent.

After a period of intense activity to calm the euro zone crisis, the E.C.B. is not expected to announce major new policy actions Thursday following a meeting of its governing council in the Slovenian capital of Ljubljana.

Last month, Mario Draghi, the president of the E.C.B., set out the terms for the central bank to begin buying bonds of countries like Spain to hold down their borrowing costs. One of the conditions was that countries must request help from the euro zone bailout fund. Until Spain takes that step, the E.C.B. is not likely to buy Spanish bonds.

The E.C.B. is not expected to cut the benchmark interest rate, which is already at a record low of 0.75 percent. Mr. Draghi has expressed concern that the official rate is no longer having much effect on borrowing costs for business and consumers in the troubled countries.

The rationale for E.C.B. bond buying is that by lowering the cost of government borrowing, interest rates in the private sector would also fall. Market interest rates in euro zone countries like Italy tend to track the rates that their governments pay.

In addition, a rate cut now would leave the E.C.B. with few policy options if the situation in the euro zone deteriorates further.

“While a rate cut could easily be justified by the economic outlook,” analysts at ING wrote in a note Wednesday, “we think that the E.C.B. is not yet willing to fire this very last shot.”

European stocks were mixed in afternoon trading Wednesday. The Euro Stoxx 50, a barometer of euro zone blue chips, was down 0.13 percent, and the FTSE 100-share index in London was up 0.11 percent.

The Bank of England is also due to announce an interest rate decision Thursday, though most observers believe the central bank will not enact any new stimulus measures in light of recent data showing that the British economy is strengthening.

The euro was at $1.2903, down from $1.2940 late Tuesday in New York.

David Jolly contributed reporting from Paris.