WORLD ECONOMY HOT NEWS

But the World Bank on the weekend issued new and much more pessimistic forecasts. It expects the world economy will shrink by 2.9 percent and warned that a drop in investment in developing countries will increase poverty. The bank's previous forecast was for a 1.7 percent contraction.

With markets already braced for a sell-off following the springtime rally, the report led investors to take profits. The sharp overnight drop on Wall Street was another catalyst, analysts said.
"The markets have been overbought, and now the correction is beginning," said Peter Lai, investment manager at DBS Vickers in Hong Kong. "Investors are facing the reality again. People fear the liquidity and funds will start flowing out of the markets, so we're seeing profit taking."

Japan's Nikkei 225 stock average lost 283.46, or 2.9 percent, to 9,542.81 while Hong Kong's Hang Seng shed 550.13, or 3.1 percent, to 17,505.68.
South Korea's Kospi lost 2.4 percent, Australia's index was off 3 percent and Taiwan's benchmark dropped 1.9 percent. Shanghai's main stock measure traded lower by 1.4 percent.

U.S. investors, also unnerved by the World Bank report, dragged stocks to their largest declines in two months.

The Dow fell 200.72, or 2.4 percent, to 8,339.01, its lowest finish since May 27.
The Standard & Poor's 500 index fell 28.19, or 3.1 percent, to 893.04, also leaving the index with its biggest slide since April 20 and erasing its advance for the year.
Oil prices fell on expectations demand will remain weak. Benchmark crude for August delivery was down $1.04 at $66.80 in Asian trade.
In currencies, the dollar weakened to 95.21 yen from 95.48 yen. The euro was higher at $1.3861 from $1.3844.

The deal announced Friday is another example of how the cataclysm that hit Detroit's three carmakers is reshaping the global automotive landscape in profound ways, reducing their worldwide influence and — if Saturn turns out as Penske envisions — opening new markets to smaller companies.
"There's no doubt that the automotive deck chairs are changing," said Michael Robinet, vice president of CSM Worldwide, a Detroit-area auto industry consulting firm.

In the shake-up, well-known brands are changing flags quicker than an oil tanker in pirate-infested waters. Italy's Fiat SpA is waiting for U.S. courts to approve its acquisition of Chrysler LLC's assets. GM has worked deals to turn its German subsidiary Adam Opel GmbH over to a Canadian auto parts company with Russian backing. And Hummer may be going Chinese, although state media there reported Friday that the deal has hit regulatory hurdles.

Yet industry experts are doubtful that the flurry of mergers and alliances will be any more durable than failed marriages of the past, proving to be just one big distraction from the underlying issue that made them so vulnerable in the first place: making more cars than people can buy.

Still, Penske, who already runs Penske Automotive Group Inc., the second-largest U.S. dealer network, thinks his business model is different enough to be successful.

GM and Penske expect to close the Saturn deal in the third quarter, with the wounded Detroit automaker continuing to build three models for Saturn to distribute.
Key to its success, though, will be the ability to sign on other global manufacturers to make cars for Saturn, giving it a diverse portfolio of vehicles that will sell whether gasoline prices are high or low.

But by opening the door to automakers not now in the U.S., such as France's Renault, Penske could alter the market here, allowing smaller automakers to compete against Detroit.
Penske, in an interview with The Associated Press, said foreign automakers would be key to his business model, but they will have to match GM quality standards before Saturn's 350-dealer network will distribute their products.
"As people around the world look at that, they have the opportunity to tap us on the shoulder and say 'we have product that we'd like to bring into the U.S.,'" he said.

Other foreign automakers who have succeeded in the U.S. began with a distribution network, then started manufacturing operations, he said.
Honda Motor Co., for example, started selling motorcycles at a few U.S. dealerships in 1959, then imported cars as its dealership ranks grew. But the Japanese company didn't build vehicles in the U.S. until 1979, when it opened a motorcycle plant in Marysville, Ohio, that later grew to build the popular Accord sedan.

Penske said he expects to begin making money immediately on Saturn, which has never been profitable for GM.
"I would expect that the model that we're putting together, the distribution model, will be profitable Day One," he said. "We'll have less costs. We'll not be in the manufacturing side of it."

Fiat's takeover of Chrysler, in its final stages, follows a more traditional logic. CEO Sergio Marchionne has been studying U.S. plants for ways to raise efficiency, and will retool one so he can start making the stylish compact Fiat 500 and a sporty Alfa Romeo or two. Under terms of Chrysler's bankruptcy plan, it will close five more U.S. plants.

In Europe, the Opel deal was reached under enormous political and union pressure to keep open all four German plants — which appeared to be one of the things that knocked Fiat out of political favor with early reports that it would close an engine factory. The winning bidder, Magna International Inc., has pledged to cut just 10,000 GM Europe jobs — a number eventually matched by Fiat.
But that deal is still not final. Fiat restated its interest Friday, although German officials downplayed prospects of Magna failing to complete the takeover.
Marchionne's aim had been to combine Chrysler and Fiat with GM's European business to create a world automotive powerhouse to produce up to 6 million cars a year, his threshold for surviving toughening world market conditions.

Such strategies have raised the obvious question among analysts: If the industry is being strangled by overproduction, why not just let the gasping giants expire?
For years, the U.S. auto manufacturing base has been too large for the market, forcing automakers to overproduce to keep plants running and flooding the market with vehicles. As a result, the Detroit Three especially have been forced to discount vehicles to sell burgeoning inventories.
But Penske said the continued restructuring by Chrysler, GM and Ford Motor Co. should solve that problem, at least in the U.S.

"I think there's no question that this re-engineering of the manufacturing base in the U.S. by the Big Three will take capacity out," he said. "But more important, the plants that will survive will be the ones that are most efficient."
Yet London-based Morgan Stanley analyst Adam Jonas said he does not expect worldwide capacity to be significantly changed a year from now. And he questioned the logic of gathering brands under one roof without real synergies.

"Did we just hook up five or six companies that don't mean anything? To get common distributors, development, common planning, common everything, it takes a lot of time, a lot more money and a lot of risk," Jonas said.
Worldwide, analysts say automakers have the capacity to produce 18 million to 20 million more cars than the market demands, leaving many plants grossly underutilized. To make money, automakers have to run their plants above 90 percent capacity, but few are doing that in a depressed global market.
Nearly 70 million cars and light trucks were produced worldwide in 2007, when the latest figures are available from the International Organization of Motor Vehicle Manufacturers.

Ferdinand Dudenhoeffer, director of the Center for Automotive Research in Gelsenkirchen, Germany, said capacity will need to shift to emerging markets such as India and China, not saturated markets like the United States and Europe, where most of the dealmaking is centered.

All the changes brings to mind past unhappy auto mergers: Ford with Land Rover and Jaguar, Chrysler with Germany's Daimler AG, and General Motors with Fiat.
A big exception, Dudenhoeffer said, is Volkswagen AG, which gathers multiple brands from Bentley to Lamborghini to Skoda under one roof. "But it took 20 years to bring them onto the same technical platforms," he said.

Analysts say bigger isn't always better, as evidenced by GM's efforts to shrink itself to become profitable.
"The story of consolidation is not the story which drives the car world," Dudenhoeffer said. "If you look at a company like Porsche, the most successful car companies in the world are small."
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Colleen Barry reported from Milan, Italy. AP Auto Writer Dan Strumpf in New York contributed to this report.

But with companies still reluctant to hire, the nation's jobless rate rose to a quarter-century high of 9.4 percent, and it likely will keep rising into 2010, possibly within striking distance of its post-World War II peak of 10.8 percent.

The economy shed 345,000 jobs in May, the Labor Department said Friday — half what it was losing in a month at the start of the year. But the report also underscored how hard it has been for America's 14.5 million unemployed to find new jobs.
"Less bad, yes," Ian Shepherdson, chief U.S. economist at High Frequency Economics, said, summarizing the economy. "Good, no."

Companies probably won't ramp up hiring until they feel sure a recovery is here to stay. Still, considering the damage the recession has wrought — 6 million jobs lost since December 2007 — it was encouraging that employers cut far fewer jobs in May.
The 345,000 jobs lost was down sharply from 504,000 in April, and an even bigger improvement over the average of nearly 700,000 jobs lost monthly during the first quarter of this year.

"The light at the end of the tunnel just got a lot brighter," said Nigel Gault, chief U.S. economist at IHS Global Insight.
But not so bright that economists expect more employers to start hiring again this year. Economists expect the pace of layoffs to keep tapering off, but they don't think the economy will begin to create jobs steadily until late next year at the earliest.

"Payrolls are learning to crawl but far from walking," said Michael Feroli, economist at JPMorgan Economics.
Stocks rallied on the better-than-expected news, but then surrendered most of the gains. The Dow Jones industrial average made a brief foray into positive territory for 2009, then pulled back to close up about 13 points at 8,763.13.
The job losses was the fewest since September and the fourth straight month in which the pace of layoffs slowed. In another heartening note, job losses for March and April turned out to be 82,000 less than the government had reported.
"This tide is turning," said Richard Yamarone, economist at Argus Research. "We expect this trend of slower job loss to continue throughout the year."
With no place for the out-of-work to land, the unemployment rate bolted to 9.4 percent from 8.9 percent in April. It was the highest rate since August 1983.

Hundreds of thousands of people, perhaps feeling more confident about their job prospects, streamed back into the labor force last month looking for work. That was a factor in the jobless rate's rise, economists said.
Labor Secretary Hilda Solis called the uptick in unemployment "unacceptable" and pledged to bring it down by helping the unemployed get new skills or training.

Including laid-off workers who have given up looking for new jobs or have settled for part-time work, the so-called underemployment rate would be 16.4 percent in May, the highest on record dating to 1994.
And the number of people out of work six months or more rose to nearly 4 million in May, a record and triple the total from when the recession began.
Dan Blatt, 37, who found a retail job in January after being laid off in October, is one of the lucky few. "I'd be frantic if I didn't have anything now," he said while attending a job fair in New York and looking for something even better.

To cut costs and perhaps avoid imposing further layoffs, employers trimmed workers' hours in May. The average work week fell to 33.1 hours, the lowest on record dating to 1964.
Federal Reserve Chairman Ben Bernanke repeated his prediction this week that the recession will end this year, but again warned that any recovery will be gradual.
Against that backdrop, many economists say the jobless rate will hit 10 percent by the end of this year and will keep rising into 2010. Some economists think it could near 11 percent. The highest since World War II was 10.8 percent at the end of 1982.

"Let me be very clear: A lower job-rate loss is not our goal," Vice President Joe Biden said. "`Less bad' is not how we're going to measure success."
Biden said he will join Obama on Monday in seeking to put more juice into the president's stimulus effort, including higher spending on public works projects. Biden did not provide details.

Solis and some economists credited the stimulus with helping to reduce layoffs in May. But other analysts said the benefits of the stimulus wouldn't really kick in until later this year or more likely next year.
The construction industry saw particular improvement in May, losing 59,000 jobs compared with 108,000 in April. Retailers eliminated 17,500, down from 36,500. Financial activities axed 30,000, down from 45,000.

But factories cut 156,000 jobs in May, slightly more than in April. The government, adding workers for the 2010 Census, reduced its employment by 7,000 after bulking up by 92,000 in April.
Education, health care, leisure and hospitality were among the industries adding jobs.

The Fed says unemployment will remain elevated into 2011, with a tepid economic recovery. The job market may not return to normal — meaning a roughly 5 percent unemployment rate — until 2013, economists say.

Still, evidence is mounting that the recession is letting up, with fresh signs emerging earlier this week. The number of people drawing continuing unemployment benefits dipped for the first time in 20 weeks, and first-time claims also fell. Builders are boosting spending on construction projects, and home sales are somewhat firmer.
But ripple effects from the twin bankruptcies of General Motors and Chrysler could muddy the job market this month.
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AP Business Writer Tali Arbel in New York contributed to this report.