Fri Jan 18, 2013 7:07pm EST

n">(Reuters) - What's Jeff Immelt going to do with the money?

General Electric Co shareholders are wondering what the company's chief executive plans to do with a cash windfall that could total tens of billions of dollars over several years as the company sells its remaining stake in NBC Universal and recoups more of the profits earned by finance unit GE Capital.

Last year GE Capital sent $6.4 billion back to the company's headquarters in Fairfield, Connecticut. Analysts estimate that the unit could generate a similar amount of cash this year.

But GE could get an even bigger infusion in mid-2014, when it is set to cash in on its option of selling the rest of its stake in NBC Universal to Comcast Corp. The stake is currently valued at roughly $17 billion, but the final price and timing of the deal could vary.

Immelt spoke with investors on Friday in a conference call after GE posted earnings that rose 7.5 percent from a year earlier, beating expectations.

During the call, the CEO of the largest U.S. conglomerate was cagey about his spending plans. He did not venture far beyond his often-repeated mantra that GE's priorities were balanced between raising its dividend, buying back shares and doing some small takeovers.

"This company is going to have a ton of cash over the next three years, right?" Immelt said. "I don't really want to make any other pronouncements other than disciplined and balanced capital allocation. We'll go over the other bridges as we get there but let's start with that."

GE shares were up 3 percent on a day that major U.S. stock indexes barely budged.

In January 2011, GE sold a majority stake in NBC to Comcast back. About that time, GE embarked on a $12 billion wave of acquisitions of smaller makers of energy equipment. That is a pattern that could repeat itself, suggested Jeff Sprague, analyst with Vertical Research Partners.

"They do need to redeploy that cash in a way that, at a minimum, preserves and ideally enhances the earnings profile," Sprague said. The company might consider deals to build up its newly created $7.4 billion Energy Management division, which makes equipment used to transmit electricity.

The company would do well to stick with Immelt's stated goal of aiming for targets worth about $1 billion to $3 billion, Sprague added.

"If they can keep it in that smaller range, smaller for them at least, you just lower risk," he said. "It's more digestible."

DECEMBER DIVIDEND

Immelt's plans for the money also include continuing to raise its dividend and buy back shares.

Investors suggested that Friday's better-than-expected fourth-quarter earnings report could prompt the company to again boost its dividend, which it raised by 12 percent in December.

"Are they going to be in a position in the second quarter, perhaps if they perform so strongly again, to raise their dividend?" asked Oliver Pursche, president of Gary Goldberg Financial Services in Suffern, New York.

Chief Financial Officer Keith Sherin said the company did not plan to boost its payout quite so often.

"Our historical pattern was to do dividend increases at the end of the year by reviewing capital allocation plans with the board of directors and I would think that would continue to be our practice," he said in an interview.

The company's four increases from July 2010 through December 2011 were a special case, intended to make up for a sharp cut to the payout during the financial crisis.

Peter Sorrentino, senior vice president and portfolio manager at Huntington Asset Advisors in Cincinnati, suggested that GE should not try to reinvest all the money it gets when it sells the remainder of NBC to Comcast. Instead, he said the company should consider paying more out in dividends and buybacks.

"Let's benefit shareholders who've stayed the course over a long period of time," Sorrentino said. "Better to be lean and focused. Target new growth markets, but let's not continue to carry the size of the enterprise just because that's what we've always done."

The long languor of GE's shares stands as one of shareholders' main complaints about Immelt's tenure. While GE's 12 percent rise over the past year outpaced the 9 percent rise of the Dow Jones industrial average, it trades well below the $42 mark reached in 2007 before the financial crisis. The broader U.S. stock market also remains below its pre-crisis highs.

RECORD BACKLOG

GE, the world's biggest maker of jet engines and electric turbines, reported that its order backlog -- a closely watched indicator of future sales -- hit a record high $210 billion in the fourth quarter, up from $203 billion in the third quarter.

"The backlog was a really good number. I didn't expect to see a $7 billion, 3.5 percent rise in the backlog," said Jack De Gan, chief investment officer at Harbor Advisory Corp, which holds GE shares. "Orders in the fourth quarter must have been really good for the industrial side."

Orders were up 2 percent, and would have been up 7 percent factoring out a sharp drop in demand for wind turbines related to the expected expiration of a tax credit, as well as exchange-rate fluctuations.

GE shares were up 3 percent to $21.94 in early Friday afternoon trading on the New York Stock Exchange. The Dow Jones industrial average and the S&P 500 were up slightly.

Fourth-quarter earnings rose to $4.01 billion, or 38 cents per share, from $3.73 billion, or 35 cents per share, a year earlier.

Factoring out one-time items, profit came to 44 cents per share, a penny ahead of analysts' estimates, according to Thomson Reuters I/B/E/S.

Revenue rose 3.6 percent to $39.33 billion from $37.97 billion a year earlier.

Solid demand in China and oil-producing countries helped GE to offset unsteady economies at home and in Europe, Immelt said.

"We saw real strength in the emerging markets and the developed regions stabilized," Immelt told investors.

GE kicks off a wave of earnings reports from the nation's largest manufacturers, with United Technologies Corp, 3M Co and Honeywell International Inc all due next week.

(Reporting by Scott Malone; Additional reporting by Ernest Scheyder in New York; Editing by Jeffrey Benkoe, Tim Dobbyn and David Gregorio)

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Fri Jan 18, 2013 4:06pm EST

n">(Reuters) - Morgan Stanley Chief Executive James Gorman said the bank has turned itself around and can meet its goals for profitability, his boldest pronouncement yet about the near-term potential for a company that has long lagged its peers.

The investment bank and wealth manager on Friday posted fourth-quarter earnings that beat analysts' average estimate by a wide margin, helped by a big jump in trading revenue and stronger performance in its wealth management group.

Morgan Stanley's fixed-income trading business performed worse than its rivals, and its overall return on equity, a measure of how efficiently the bank wrings profit from shareholder money, was less than half that of Goldman Sachs Group Inc. But Gorman told investors the bank was "working aggressively" to improve its return on equity.

In current market conditions, the bank's return on equity can reach 10 percent, Gorman said on a conference call. Analysts said the figure is the bare minimum that many investors demand, but it is far above Morgan Stanley's recent performance, and Gorman's statement marks the first time Morgan Stanley has said it can meet that goal even if business doesn't pick up.

"After a year of significant challenges, Morgan Stanley has reached a pivot point," Gorman said in a statement. "Our firm is now poised to reach the returns of which it is capable on behalf of our shareholders."

Morgan Stanley's stock climbed as much as 8.2 percent on Friday, to $22.46, the highest price since August 2011 and marking the biggest intraday jump since June, before closing at $22.38.

"I think Morgan Stanley has turned the corner," said Joe Terril, president of St. Louis-based money manager Terril & Co, which invests in bank stocks. "I believe they'll gradually improve quarter after quarter -- it's not a one-time event."

Morgan Stanley said its wealth management division delivered a 17 percent pretax profit margin in the quarter, exceeding an internal target months ahead of schedule.

The wealth management division is closely watched by investors because Gorman is staking the future of the bank on it, arguing that more stable returns there will help offset volatility from trading and investment banking.

Morgan Stanley is one of several Wall Street banks using layoffs and compensation cuts to help boost its bottom line. The firm paid out 44 percent of adjusted revenue to employees in its securities and investment banking business last year, down from 53 percent in 2011, Chief Financial Officer Ruth Porat said in an interview.

Across the entire company, compensation costs fell by $711 million, or 4 percent, in 2012 as Morgan Stanley cut nearly 5,000 employees from its payroll.

One senior employee might decide to leave. The Obama administration is considering Porat for a position as Treasury deputy secretary, a source familiar with the matter told Reuters, which could leave Morgan Stanley shuffling the decks in top management. Porat would not comment.

Overall, the bank reported fourth-quarter income from continuing operations of $573 million, or 28 cents per share, compared with a loss of $222 million, or 13 cents per share, in the year-ago period, when it took a big one-time charge.

Excluding a charge related to changes in the value of Morgan Stanley's debt, the bank earned $894 million, or 45 cents per share. On that basis, analysts' average forecast was 27 cents per share, according to Thomson Reuters I/B/E/S.

In sales and trading, adjusted revenue more than doubled from a year earlier, to $2 billion from $867 million. Fixed-income, currency and commodities trading revenue was $811 million, adjusted for accounting charges, compared with a loss of $493 million a year earlier.

Glenn Schorr, an analyst at Nomura, said Morgan Stanley's fixed-income currency and commodities trading business posted an increase of 26 percent in adjusted revenue, while peers reported an average gain of 43 percent.

The division suffered because of historically weak revenue in commodities trading, which faced unexpected price movements related to weather and lower prices in its storage business. The unit reported its worst results since 1995, Gorman said on CNBC.

Curbs on banks trading with their own money and the impact of fracking lowering prices for certain commodities have eaten into banks' profits in commodities, a once-lucrative trading business for Wall Street.

Merger advisory revenue rose 12 percent to $454 million, while stock and bond underwriting revenue rose 62 percent to $771 million.

Morgan Stanley is the last big U.S. bank to report earnings this week. Rival Goldman Sachs on Wednesday said it cut compensation costs 11 percent in the fourth quarter, helping boost returns to shareholders.

(Additional reporting by Anil D'Silva in Bangalore and Rachelle Younglai in Washington; Editing by Supriya Kurane, John Wallace and Leslie Adler)

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Showgoers visit the Intel booth on the first day of the Consumer Electronics Show (CES) in Las Vegas in this January 8, 2013, file photo.

SAN FRANCISCO | Thu Jan 17, 2013 7:43pm EST

SAN FRANCISCO (Reuters) - Intel Corp forecast quarterly revenue that disappointed Wall Street and a sharp increase in capital spending it plans for 2013 unnerved investors already concerned about slow demand for personal computers.

Shares of the world's leading chipmaker slid more than 5 percent in after-hours trade on Thursday after it projected this year's capital spending at $13 billion, plus or minus $500 million, exceeding many analysts' estimates for about $10 billion.

Intel said $2 billion of its increased expenditures would go toward expanding a facility for researching future manufacturing technology. Some analysts worried that with PC sales already slow, expanding too quickly may create excess capacity that could hurt the bottom line.

"People are starting to freak out about the capex," said Sanford C. Bernstein analyst Stacy Rasgon. "The concern is that if I spend a lot of money and I build up my factories, I don't have enough demand to fill them. They have very high fixed costs, and it pulls your margins down."

Outgoing Chief Executive Paul Otellini, who plans to retire in May after a successor is identified, said the investment in manufacturing would lower costs in the long run.

"The leading edge capacity is the lowest cost for us on a per unit basis," Otellini told analysts on a conference call. "Regardless of what you think the size of the market is, the leading edge fabs are the single greatest asset that we have."

Otellini said the higher capex is not intended to bankroll a foundry or contract chipmaking business, but he did not rule out manufacturing semiconductors for other chip companies as long as that did not empower a rival.

Intel has agreed to manufacture custom chips on behalf of networking equipment company Cisco Systems Inc, Bloomberg reported on Thursday. An Intel spokesman declined to comment.

In the fourth quarter, Intel's revenue was $13.5 billion, compared with $13.9 billion a year earlier. Analysts had expected $13.53 billion.

It estimated first-quarter revenue of $12.7 billion, plus or minus $500 million. Analysts expected $12.91 billion.

STRUGGLING IN MOBILE

Intel is used to being king of the personal computer market, particularly through its historic Wintel alliance with Microsoft Corp, which has led to breathtakingly high profit margins and an 80 percent market share.

But it has struggled to adapt its technology for smartphones and tablets, a market dominated by Qualcomm Inc, Samsung Electronics Co Ltd and Nvidia Corp. PC makers are struggling to stop a decline in sales as consumers hold off on buying new laptops in favor of more nimble mobile gadgets.

Microsoft's long-awaited launch of Windows 8 in October brought touchscreen features to laptops but failed to spark a resurgence in sales that Intel and many PC manufacturers had hoped for.

Intel's hefty investment plans reflect its confidence in the future, even as Wall Street worries about the chipmaker's struggle to gain traction in the mobile market.

"Our core advantage really is our manufacturing leadership," Chief Financial Officer Stacy Smith told Reuters. "450 will give us a significant cost advantage relative to others."

Intel is expanding its research fab in Hillsboro, Oregon, to develop technology for manufacturing chips on 450 mm silicon wafers, a complicated step up from the current 300 mm wafer standard.

Larger wafers can translate into big savings because more chips can be etched onto each of them. But building 450 mm plants is expected to be so expensive that only a few industry leaders, including Intel, Samsung Electronics and TSMC, are expected to have the necessary scale.

Some Wall Street analysts gave Intel high marks for expected operating efficiency this year.

"The revenue isn't going to be there, but the margin and expense control is going to stabilize the bottom line," said Cody Acree, an analyst at Williams Financial. "I think it's probably a success if you can be flat in an industry that most people expect to be flat to down."

Intel foresees first-quarter gross margins of 58 percent, plus or minus two percentage points. Analysts on average expected gross margins of about 56 percent for the current quarter, according to Thomson Reuters I/B/E/S.

It estimated a 2013 gross margin of 60 percent, plus or minus a few percentage points. Analysts on average had expected 59 percent.

Net earnings in the December quarter were $2.5 billion, or 48 cents a share, compared with $3.4 billion, or 64 cents a share, year-ago period.

Analysts had expected 45 cents, and said the surprisingly strong performance was partly due to a lower effective tax rate of 23 percent. This was below Intel's forecast of about 27 percent.

Still, shares of Intel fell 5.6 percent in after-hours trade to $21.43, after closing up 2.58 percent at $22.68 on the Nasdaq.

"This is a company that is continuing to spend money to participate in the market. That may concern some investors," said Doug Freedman, an analyst at RBC Capital.

(Reporting by Noel Randewich; Editing by Richard Chang and Steve Orlofsky)

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NEW YORK | Fri Jan 18, 2013 6:01pm EST

NEW YORK (Reuters) - Life Technologies Corp (LIFE.O) is exploring a potential sale and has retained banks to advise on the process, the biotechnology company said on Friday, sending its shares more than 10 percent higher to an all-time record.

Life Technologies, whose market value surged to roughly $10.5 billion, said its board has hired Deutsche Bank Securities (DBKGn.DE) and Moelis & Company to assist in its "annual strategic review."

The Carlsbad, California-based company, which makes genetic testing equipment and products used in biotechnology development, has drawn initial interest from several large private equity firms, people familiar with the matter said.

Buyout firms Blackstone Group LP (BX.N), Bain Capital LLC and TPG Capital LP are among the several interested parties, said the people, who asked not to be named as details of the auction are not public. Life Technologies said its board of directors has not decided on any specific course of action.

Given the sheer size of a potential leveraged buyout, private equity firms are expected to team up as the sale process advances, the people said, adding that the auction is still at an early stage and bidders have yet to conduct due diligence.

Representatives of Blackstone were not immediately available for comment, while TPG and Bain declined to comment.

News of the potential sale adds to expectations that robust debt financing markets could lead to a return of the mega leveraged buyouts, which have remained elusive since the 2008 financial crisis.

In another potential deal that would mark the largest private equity deal since the global financial crisis, buyout firm Silver Lake Partners is in discussions to take Dell Inc (DELL.O) private, people familiar with the matter have said.

Gene-sequencing companies such as Life Technologies have become takeover targets over the last year by potential buyers seeking to acquire the technology that can be used to analyze a person's DNA and help provide personalized medicine.

Last year, Roche Holding AG (ROG.VX) made a hostile attempt, unsuccessfully, to buy San Diego-based gene sequencing company Illumina Inc (ILMN.O). Shares of Illumina fell 1 percent to $51.03 on Friday, valuing the company at nearly $6.4 billion.

Shares of Life Technologies rose 10.6 percent to $60.79 on the Nasdaq stock market, after reaching an all-time high of $62 during the session.

Canadian newspaper Financial Post, which earlier reported the sale process, said a potential deal for Life Technologies could come in the $65-$75 per share range.

"While price talk is reported to be in the $65 to $75 range, our initial analysis suggests an LBO transaction valuing Life's equity in the $50 to $60 range is at present more realistic," Jefferies & Co analyst Jon Wood said in a note.

While the company's strong revenue, scalable operating model and capital efficiency may support a higher sale price, buyers had less appetite for risk following the 2008 financial crisis, Wood added.

(Reporting by Soyoung Kim in New York, additional reporting by Esha Dey in Bangalore,; Editing by Saumyadeb Chakrabarty, M.D. Golan, Gunna Dickson and David Gregorio)

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n">(Reuters) - Johnson Controls Inc (JCI.N) forecast a smaller-than-expected profit for the current quarter due to lower auto production in Europe, sending the company's shares down more than 3 percent.

The company, the largest U.S. auto parts supplier, forecast a fiscal second-quarter profit of 40 cents to 42 cents per share, short of analysts' expectations of 51 cents, according to Thomson Reuters I/B/E/S.

"The forecast reflects the current European automotive production environment and short-term delays in flexing labor in the region," the company said on Friday.

Johnson Controls' stock was down 3.3 percent to $30.91 on the New York Stock Exchange. Shares fell even as the company posted a slightly better-than-expected profit in its fiscal first quarter.

The company in October said weaker business in Europe would reduce its first-half profit significantly. Restructuring actions initiated in the latter part of 2012 are expected to boost profit in the second half.

Johnson Controls, which makes car interiors and batteries, maintained its fiscal 2013 outlook of higher profit and sales.

Citi analyst Itay Michaeli said the second-quarter forecast suggested Johnson Control would earn 65 percent of its annual profit in the second half of the year, about 10 percentage points higher than in the last two years.

"Given the current demand environment and the operational pressures the company is facing in Europe, we believe the risks around this outlook are elevated and investors could avoid shares in the near term as this is discounted," Baird analyst David Leiker said in a research note.

In its fiscal first quarter, ended December 31, Johnson Controls earned $354 million, or 52 cents per share, compared with $424 million, or 62 cents per share, a year earlier. Analysts expected 51 cents.

Revenue rose marginally to $10.42 billion. Analysts on average had estimated revenue of $10.26 billion.

(Reporting by A. Ananthalakshmi in Bangalore and Deepa Seetharaman in Detroit; Editing by Maju Samuel)

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Fri Jan 18, 2013 4:25pm EST

n">(Reuters) - Shares of CyrusOne Inc (CONE.O) rose as much as 15 percent on their market debut after the data center operator priced its offering at the high end of its expected price range.

CyrusOne shares closed up nearly 12 percent at $21.20 on the Nasdaq on Friday while majority owner Cincinnati Bell's (CBB.N) stock closed down 6 percent at $5.00 on the New York Stock Exchange.

"What happened with CyrusOne is that people looked at the parent and found that the parent was very weak. They've basically spun off a division that's worth more than the parent," said Francis Gaskins, a partner at IPODesktop.com.

Texas-based CyrusOne priced its offering of 16.5 million shares at $19 each, raising $313.5 million. At the offer price, CyrusOne has a market value of about $1.18 billion.

Cincinnati Bell, valued at about $1 billion, will own about 71.6 percent of CyrusOne, which rents equipment, space and bandwidth to store and transfer data.

CyrusOne had 24 data centers in Austin, Chicago, Cincinnati, Dallas, Houston, London, South Bend and Singapore as of March 2012, according to its website.

CyrusOne has structured itself as a REIT, joining a string of technology companies looking to save on tax through the structure.

Companies with large real estate assets eye a REIT structure as it helps reduce the tax burden on their rental income. Shareholders also stand to gain as REITs are required to distribute at least 90 percent of their profits as dividends.

Shares of another REIT and data center company, Digital Realty Trust Inc (DLR.N), have risen about 8 percent in the last month, while those of data center operator Equinix Inc (EQIX.O), which is planning a REIT conversion, have risen about 9 percent.

Industry research firm Gartner estimates that the global market for data center services was about $150 billion in 2011 and will rise to about $200 billion in 2012, the company said in a regulatory filing.

Morgan Stanley and BofA Merrill Lynch were joint-bookrunners to the offering.

SUNCOKE ENERGY DEBUT

Shares of Illinois-based SunCoke Energy Partners LP (SXCP.N) opened flat on debut after the metallurgical coal producer priced its offering at the low end of its expected price range.

The company priced its offering of 13.5 million shares at $19 each, raising $256.5 million.

The downstream energy limited partnership listed Credit Suisse and Citigroup as lead underwriters to the offering.

SunCoke Energy Partners' share closed down 4 percent at $18.25 on the New York Stock Exchange.

(Reporting By Neha Dimri in Bangalore; Editing by Supriya Kurane and Don Sebastian)

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1 of 2. New housing construction is seen in Darnestown, Maryland, October 23, 2012.

WASHINGTON | Fri Jan 18, 2013 1:07am EST

WASHINGTON (Reuters) - Americans are feeling increasingly confident in the future and more and more are striking out to set up their own homes, a move that is helping propel the housing recovery.

The deep financial crisis and recession of 2007-2009 kept many Americans from leaving their parents' nests and drove others back into them, putting a sharp brake on the pace at which new households formed.

Household growth averaged about 500,000 per year from 2008 through 2010 - less than half the rate seen at the height of the housing boom in the years just before that. The pace in 2010 was the weakest since 1947.

But the rate at which individuals or families are getting their own homes picked up over the past two years, underpinned by a steady if tepid economic recovery and gradual labor market gains. In 2011, households increased 1.1 million and they grew closer to 1.2 million last year.

"The rise in household formation bodes well for the housing recovery. Instead of having too many houses, we are turning to a situation where there aren't enough," said Guy Berger a U.S. economist at RBS in Stamford, Connecticut.

Indeed, housing has turned from the economy's sorest spot to its brightest, with new building activity at 4-1/2-year highs. Housing activity in turn spurs related areas like furniture.

That is because of people like Linna Chhean. After graduating from college in May 2007, she moved back in with her parents, helping out in a family-run business.

The 27-year-old finally moved into her own one-bedroom apartment four weeks ago after she was hired as a designer in the Dallas offices of a global public relations firm.

"I wanted to get a job in my field, which is art. I was working for them in a convenience store, which is not what I wanted to do at all," said Chhean.

BRIGHTENING PROSPECTS

The worst recession since the Great Depression of the 1930s cost the economy 8.8 million jobs and drove the unemployment rate up to 10 percent.

Dim job prospects and growing financial stress undercut the pace of household formation - a central force behind housing demand - even though the population kept growing at a rate of about 2.7 million per year.

Republican vice presidential candidate Paul Ryan seized on the dashed hopes of young Americans in bashing President Barack Obama's policies at the Republican national convention in August.

"College graduates should not have to live out their 20s in their childhood bedrooms, staring up at fading Obama posters and wondering when they can move out and get going with life," he said.

An analysis by economist Timothy Dunne at the Cleveland Federal Reserve Bank found there was a shortfall of 2.6 million households from 2008 through 2011 compared to what pre-recession trends would have suggested.

Younger adults between the ages of 18 and 34 accounted for almost three quarters of this gap; the number of people in this age cohort living with their parents increased by 2 million between 2007 and 2011.

But the tide appears to be turning.

Last August, Edward Kennedy, 22, moved into his own apartment in Bridgeport, Connecticut, after landing a job at Sacred Heart University's undergraduate admissions office.

"I moved home after graduating in May 2012. It seemed like the best idea to save some money," said Kennedy. "I plan on getting my MBA over the next year and a half, while working at the university."

He said more and more of his peers were likewise setting out on their own.

HOUSEHOLD GROWTH BOOSTS RENTAL MARKET

The gains are being felt primarily in the rental market, where rising demand has spurred a sharp pick up in construction of apartment buildings. In contrast, the U.S. homeownership rate hasn't risen much from a 15-year low reached in early 2012.

"We are going to see more recovery in the rental market, in the very short run. As the market improves, people will start to face higher rents and over time, that will spill over into the owner-occupied market," said Gary Painter, a public policy professor at the University of Southern California.

New home completions have lagged the increase in household formation, leading to a tightening supply.

According to RBS' Berger, more than 1.3 million new residential structures should have been completed last year to keep pace with household growth. But only 651,400 homes were finished, the second lowest on record.

"Given that the stock of homes available for sale is already very low, inventories alone are unlikely to meet the demand presented by these new households," said Berger.

A monthly survey conducted by the National Association of Home Builders shows that growing demand and tightening supply have pushed homebuilder sentiment up to a near seven-year high.

NAHB Chairman Barry Rutenberg, a home builder from Gainesville, Florida, said builders were now gearing up, unperturbed by the possibility that banks could dump an increasing number of foreclosed homes onto the market as conditions improve.

"Even if we have a wall of supply coming in, we will have a wall of demand to balance it," he said.

Rutenberg estimated 916,000 new residential projects would be started this year, compared to 780,000 in 2012. And Rutenberg expects rising demand to keep builders busy for years to come.

He said new construction would satisfy about 46 percent of the demand for single-family homes this year, and 83 percent of the demand for apartment buildings over the next 10 years.

Although home building accounts for only about 2.5 percent of U.S. gross domestic product, economists believe the turnaround in the housing market has just enough momentum to take over the baton from manufacturing as a driver of growth.

Economists estimate that for every new single family home constructed, at least three permanent jobs are created. There is also a boost through demand for items ranging from furniture to paints.

"Housing will take a leading role. We anticipate that (inflation-adjusted) residential investment will grow 22 percent this year, the fastest since the early 1980s," economists at JPMorgan wrote in a research note.

They estimate homebuilding could add around 0.5 of a percentage point to economic growth this year.

(Reporting by Lucia Mutikani; Editing by Tim Ahmann and Tim Dobbyn)

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Job seekers stand in line to meet with prospective employers at a career fair in New York City, October 24, 2012.

WASHINGTON | Thu Jan 17, 2013 4:58pm EST

WASHINGTON (Reuters) - The number of Americans filing new claims for unemployment aid hit a five-year low last week and residential construction surged in December, the latest signs that the U.S. economic recovery remains on track.

The reports on Thursday showed the economy was weathering an uncertain fiscal environment surprisingly well. Still, growth in the fourth quarter was likely subdued with only a modest pick-up expected in the first three months of this year.

"While growth has been slow, the damage done from the uncertainty surrounding the fiscal cliff was not sufficient to topple the recovery," said Millan Mulraine, a senior economist at TD Securities in New York.

The fiscal cliff refers to a wave of deep government spending cuts and tax increases, part of which was avoided after a last-minute agreement by U.S. lawmakers. A fight over raising the government's borrowing limit looms.

Initial claims for state unemployment benefits fell 37,000 to a seasonally adjusted 335,000, the lowest level since January 2008, the Labor Department said. It was the largest weekly drop since February 2010 and ended four straight weeks of increases.

While problems adjusting the data for seasonal fluctuations might have exaggerated the decline, economists said the report still suggested an improvement in sluggish labor market conditions and the economy as a whole.

"Having taken a pinch of salt, however, we would suggest that the trend in claims generally show no pickup in layoff activity around the turn of the year," said John Ryding, chief economist at RDQ Economics in New York.

A separate report from the Commerce Department showed housing starts jumped 12.1 percent last month to their highest level since June 2008. Permits for future home construction were also the highest in about 4-1/2 years.

Stocks on Wall Street ended higher on the fairly upbeat jobs and housing data, with the broad Standard & Poor's 500 index hitting a five-year high. Commodity prices also firmed, but U.S. government bond prices slumped.

The dollar rallied to a 2-1/2-year high against the yen.

HOUSING GAINING TRACTION

Though warm weather likely helped, the data was confirmation of the improving housing market tone, and home building made gains across all four regions. Groundbreaking also increased for both single-family homes and multi-family units.

Builders started 780,000 houses in 2012. While still low by historical standards, it was the third straight year of gains in home construction. Housing is no longer a drag on the economy and residential construction is expected to have contributed to growth last year for the first time since 2005.

"The housing recovery has steam. Interest rates are rock-bottom low, inventories of new and existing homes are lean, and the economy is creating jobs," said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts.

Newport said they expected starts to rise to 970,000 this year. The reports came on the heels of data this week showing solid retail sales and manufacturing growth in December.

But weak exports, a slow pace of inventory accumulation and the reversal of a surge in defense spending probably slowed growth to below a 2 percent annual pace in the fourth quarter.

In a reminder that the outlook for the economy remained shaky, a third report showed factory activity in the U.S. mid-Atlantic region contracted this month as new orders tumbled.

The Philadelphia Federal Reserve Bank said its business activity index fell to -5.8 from 4.6 in December. A reading below zero indicates contraction in manufacturing in eastern Pennsylvania, southern New Jersey and Delaware.

"Manufacturing has slowed but it's still growing. I'm not going to read too much into this until I see other regional surveys," said Gus Faucher, a senior economist at PNC Financial Services in Pittsburgh.

The claims data covered the survey week for the January data for the closely watched nonfarm payrolls report. The four-week moving average of new jobless claims, a better measure of labor market trends, fell 6,750 to 359,250, suggesting some improvement in labor market conditions.

Job growth has been gradual, with employers adding 155,000 new positions in December. The unemployment rate held steady at 7.8 percent last month. High jobless is likely to keep the Federal Reserve on an expansionary monetary policy path.

Atlanta Fed President Dennis Lockhart said on Thursday the Federal Reserve will very likely need to continue its large-scale asset purchases into the second half of this year.

(Additional reporting by Jason Lange in Washington and Richard Leong in New York, editing by Chizu Nomiyama)

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U.S. House Speaker John Boehner (R-OH) (R) and House Majority Leader Eric Cantor (R-VA) speak to the media on the ''fiscal cliff'' on Capitol Hill in Washington, December 21, 2012.

WASHINGTON | Fri Jan 18, 2013 6:37pm EST

WASHINGTON (Reuters) - Republicans in the House of Representatives backed away on Friday from a fiscal clash with President Barack Obama next month that could have risked a government default and chaos in financial markets, shifting to a new, less aggressive stance.

Top Republican leaders, meeting in Williamsburg, Virginia, said they were prepared to allow the U.S. government to borrow enough money to keep it fully operating for the next three months without demanding immediate spending cuts from Obama.

Instead, the Republicans, who control the House, will require as part of the legislation raising the debt ceiling that the Democratic-led Senate pass a budget plan by April 15.

If the Senate fails to act, they said, members of Congress would not get paid. How that might work in practice, in light of existing budget law and constitutional restrictions on changing congressional salaries in the middle of a term, was unclear. House Republicans hope to pass the legislation next week.

Republican leaders, including House Speaker John Boehner and Majority Leader Eric Cantor, made the announcement after an annual retreat at a resort in Williamsburg, where members listened to pollsters describe the party's decline in standing among American voters.

It followed a humiliating defeat in the "fiscal cliff" battle that ended on New Year's Day with Obama getting tax increases he sought on the wealthy without committing to significant budget cuts Republicans were seeking in return.

World equity and oil prices rebounded after the statement by the Republican leaders.

STRATEGIC SHIFT

The announcement marked a major climbdown for Republicans, who have seen the debt ceiling as their strongest point of leverage in Washington's partisan spending wars, despite the consternation it caused the White House, global financial markets and public opinion.

The White House on Friday welcomed the three-month extension plan as long as it was not conditioned on spending cuts. Obama has argued that negotiations on spending cuts should be part of larger deficit reduction talks, and not be tied to the debt ceiling.

"We are encouraged that there are signs that Congressional Republicans may back off their insistence on holding our economy hostage to extract drastic cuts in Medicare, education and programs middle class families depend on," White House spokesman Jay Carney said in a statement.

Adam Jentleson, a spokesman for Senate Majority Leader Harry Reid, also said the Republican approach was reassuring.

"If the House can pass a clean debt ceiling increase to avoid default and allow the United States to meet its existing obligations, we will be happy to consider it," he said in a statement.

A spokesman for House Democratic leader Nancy Pelosi was less receptive. "This proposal does not relieve the uncertainty faced by small businesses, the markets and the middle class. This is a gimmick unworthy of the challenges we face and the national debate," Drew Hammill said.

The details on the new Republican approach appeared less pressing to party leaders than defusing the politically and economically explosive debt ceiling battle that was expected in late February and early March.

The Treasury needs congressional authorization to raise the current $16.4 trillion U.S. debt limit sometime between mid-February and early March. How long a debt ceiling lasts - a few months or a few years - depends on the amount of borrowing authorized.

Republicans had promised to use the occasion to demand deep spending cuts from Obama and his Democrats, and some had said they were willing to push the government to the brink of default if their demands were not met.

That sort of rhetoric all but vanished on Friday.

"Next week, we will authorize a three month temporary debt limit increase to give the Senate and House time to pass a budget," Cantor said in a statement.

"Furthermore, if the Senate or House fails to pass a budget in that time, Members of Congress will not be paid by the American people for failing to do their job. No budget, no pay."

The statement made no mention of the 27th Amendment to the U.S. Constitution, which says that no law "varying the compensation" of members of Congress shall take effect until after an intervening congressional election.

The plan aims to draw the Senate into action to shrink deficits. The Senate has failed to pass a formal budget resolution in nearly four years, and it has taken no action on House-passed Republican budgets.

Mitch McConnell of Kentucky, the Senate's Republican minority leader, said in a statement he welcomed the pressure on his Democratic counterparts who had "prevented this body from performing its most basic of duties: passing a federal budget."

RETREAT REFLECTION

A key theme to emerge at the Williamsburg conference was a willingness to pursue more incremental steps on deficit reduction. Rather than one massive deal, each fiscal deadline would represent an opportunity to find savings.

After the deadline for a debt ceiling increase, Congress faces a March 1 deadline to avert automatic spending cuts, and the March 27 expiration of funding for government agencies and programs. A three-month debt limit extension would add a further deadline in April or May.

Representative Mick Mulvaney of South Carolina, one of the House's most conservative budget hawks, said he had concluded that smaller steps were the best path forward in dealing with the immediate fiscal crisis.

Instead of passing regular budgets to try to reduce spending, Congress has relied largely on stop-gap spending measures, known as continuing resolutions, to keep the government running.

Senate leaders have said there was no need to pass a budget for the past two fiscal years because the last major budget deal in 2011 set spending levels that were more legally enforceable.

A House Republican leadership aide said it was not anticipated the three-month debt limit legislation would include spending cuts.

Although Boehner previously sought at least $1 in long-term spending cuts for every dollar of debt limit increase, the aide said the reforms associated with requiring budgets from both chambers would meet the speaker's requirements.

(Editing by Fred Barbash and Peter Cooney)

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NEW YORK | Fri Jan 18, 2013 4:11pm EST

NEW YORK (Reuters) - Mint has suspended sales of its 2013 American Eagle silver bullion coins after running out of stock due to soaring investor demand for the newly minted coins in the first two weeks of the year.

Sales to authorized dealers will resume on or about the week of January 28 after the U.S. Mint has replenished its inventory, it said in an email to authorized dealers on Thursday. The coins are produced at the Mint's West Point, New York, facility.

While it is typical for collectors to snap up newly stamped coins, interest this year has ballooned due to investors seeking refuge from U.S. economic uncertainty.

Silver Eagle sales to January 15 exceeded 5 million ounces and were on track to surpass the all-time monthly high of 6.1 million ounces, set in January 2012.

Physical coin sales had risen in the final months of 2012 as investors protected their nest eggs from a feared U.S. recession. Many economists predicted a U.S. economic downturn would occur if Congress and the White House did not act to stop pending huge tax hikes and automatic spending cuts known as the "fiscal cliff."

It is not the first time the Mint has faced a run on its stock. It started allocating sales to authorized dealers in recent years after its supplies were depleted by unprecedented demand.

The Mint on January 24 is due to start taking orders from the general public for silver proof coins, which fetch just under $63 each and are aimed at collectors.

(The story corrects last paragraph to make clear that silver proof coins, not silver bullion coins, fetch $63)

(Reporting By Josephine Mason; Editing by Gary Hill and Steve Orlofsky)

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