Factory, jobs data offer hope for economy (Reuters)

WASHINGTON (Reuters) – Factory activity in the Mid-Atlantic region rebounded in October and the number of Americans claiming new jobless benefits fell last week in fresh signs that the economy was likely to duck a new recession.

Optimism over the economy was tempered, however, by other data on Thursday showing a drop in sales of previously owned homes and only a small rise in a gauge of future growth.

"The numbers we have seen today provide some hints that the domestic economy is doing a little bit better, even with the challenges that are unfolding in Europe," said Michael Strauss, chief economist at Commonfund in Wilton, Connecticut.

Initial claims for state unemployment benefits slipped 6,000 to 403,000 last week, the Labor Department said. A four-week average, which smoothes out weekly volatility to give a better view of trends, hit its lowest level since April.

Separately, the Philadelphia Federal Reserve Bank's business activity index rebounded to 8.7 in October, the highest reading in six months, from minus 17.5 in September.

A reading above zero indicates factory activity is expanding in the region, which covers eastern Pennsylvania, southern New Jersey and Delaware.

U.S. stocks initially rose on the data, but surrendered most gains on nagging doubts over whether European leaders would decisively deal with the euro zone debt crisis at a summit this weekend. Prices for U.S. Treasury debt were little changed while the dollar was a touch weaker against a basket of currencies.

Fears had been mounting that the sickly U.S. economy was heading back toward recession after growth wobbled in the first half of the year and after consumer confidence plunged in August amid signs both the United States and Europe were having trouble coming to terms with their huge debts.

But the recent stream of data, including figures on retail sales and trade, suggest output sped up in the third quarter.

Analysts estimate U.S. gross domestic product grew at an annual pace of anywhere between 2.3 and 2.7 percent, a sharp step up from the second quarter's tepid 1.3 percent rate.

"There is little evidence the economy is ready to enter a downturn based on the Philadelphia Fed (data)," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank in New York.

JOBS MARKET TONE IMPROVING

That view was also underscored by the four-week moving average of initial jobless claims. The claims data covered the survey week for the government's closely watched nonfarm payrolls count for October.

Initial claims dropped 25,000 between the September and October survey periods, suggesting a step-up in nonfarm employment after payrolls increased 103,000 last month.

After spiking in mid-September, jobless claims appear to have settled near the 400,000 mark that is usually associated with some improvement in the jobs market.

Weak unemployment is a thorny issue for the Federal Reserve, which is weighing further options to boost output and lower the jobless rate after slashing interest rates to near zero and pumping about $2.3 trillion into the economy.

On Thursday, St. Louis Fed President James Bullard acknowledged the improved tone in economic data but his counterpart at the Cleveland Fed, Sandra Pianalto, did not believe growth would pick up soon. For more see

While most parts of the U.S. economy are plodding along, the housing market continues to show little signs of life, however.

Sales of existing homes dropped 3.0 percent to an annual rate of 4.91 million units in September, the National Association of Realtors said.

In another report, the Conference Board said its index of leading economic indicators edged up 0.2 percent in September, pointing to continued sluggish growth. Still, it warned that the economy faced a 50 percent chance of recession whereas a month ago it said recession risks were lower than that.

Most economists, however, see a lower chance of recession, and signs of continued manufacturing expansion have bolstered hopes another downturn can be avoided.

Factories in the Mid-Atlantic region this month reported growth in order books after shrinkage for two straight months. Shipments rose too and there was an increase in unfilled orders, although employment slowed from September.

Still, manufacturers remain leery on the economic outlook.

Diversified manufacturer Danaher Corp, air conditioner maker Ingersoll Rand Plc and electrical products company Cooper Industries Plc all reported higher-than-expected earnings but were guarded about the fourth quarter.

"Clearly, we're seeing some moderation in the economy," Danaher CEO Larry Culp said. "(But) I don't think we'll see anything like an '08, '09 collapse."

(Additional reporting by Pedro da Costa and Jason Lange in Washington and Nick Zieminski in New York; Editing by James Dalgleish)

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Ford Invests $200 Million, 1,200 New Jobs at Illinois Plants (ContributorNetwork)

This Wednesday, Illinois Gov. Pat Quinn announced that Ford Motor Company will be expanding its operations in Illinois and bringing more opportunities for residents and the state's economy.

* Ford Motor Company will be investing $200 million into expanding its Chicagoland facilities, specifically on the city's far south side at its assembly plant and at the company's Chicago Heights stamping plant.

* The company's investment will also help create approximately 1,200 jobs at its facilities in Chicago and Chicago Heights.

* Currently the assembly plant produces several Ford models, including the Explorer, Taurus, and Lincoln MKS.

* Gov. Quinn commented on the importance of Ford's decision to expand in the state, "Creating jobs for Illinois workers is our number one priority. This investment package not only will help create 1,200 new jobs and boost the local economy, but it will ensure the next generation of Ford vehicles are built by Illinois workers - the best workers in the world."

* Additionally, the expansion will also help support the automaker's launch of new police interceptors, specifically a sedan and an SUV.

* In order to support more jobs and the launch of producing new police interceptors at its assembly plant in Chicago, Ford will be adding a third shift for its workers and production.

* The Wall Street Journal reported that on the same day, Ford Motor Company and the United Auto Workers ratified a new labor contract that will affect 41,000 of the company's workers.

* "I want to thank Governor Quinn for his continued strong support of Ford," said Mark Fields, Ford Motor Company's president of The Americas. "The state's investment package is a critical component in helping support our investment in Illinois and in creating additional jobs."

* Similarly, Chicago Mayor Rahm Emanuel has continued to work with Ford on expanding its operations in the Windy City, especially since his inauguration this past May.

* Mayor Emanuel also spoke about Ford's decision today by saying, "I am pleased that Ford is making this additional investment in Chicago and creating 1,200 high-paying jobs for the City's hard-working, dedicated workforce. Ford's increased presence in Chicago bolsters our economic competitiveness and demonstrates that Chicago is a city on the move where businesses are growing and creating new opportunity."

* The automaker's decision to expand its stamping plant in Chicago Heights will also count for 400 more jobs.

* Fields added, "I want to thank Mayor Emanuel and his team for working on key infrastructure issues that will support Ford's increased production in Chicago and new jobs."

Rachel Bogart provides an in-depth look at current environmental issues and local Chicago news stories. As a college student from the Chicago suburbs pursuing two science degrees, she applies her knowledge and passion to both topics to garner further public awareness.

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Wall St. edges higher; Europe anxiety remains (Reuters)

NEW YORK (Reuters) – Stocks ended with modest gains on Thursday, shifting back and forth on incremental developments in Europe where leaders sought to reassure investors that a solution to the debt crisis would come soon.

The S&P has alternated gains and losses for seven days at the close and has kept to a tight range as markets watch for the latest news out of Europe.

Germany and France released a statement on Thursday saying leaders would now hold two summits to discuss the debt crisis, with a solution in place by Wednesday's second meeting.

"The statement was enough for us to come off the lows, but there is still a long way to go," said Robert Pavlik, chief market strategist at Banyan Partners LLC in New York.

Market anxiety remained elevated. The CBOE Volatility Index VIX (.VIX), Wall Street's "fear gauge," rose more than 1 percent to near 35, extending gains after rising nearly 10 percent on Wednesday.

Supporting the market, U.S. economic data showed factory activity in the U.S. Mid-Atlantic region rebounded in October while a separate report showed U.S. jobless claims fell last week.

On the negative side, other data showed a drop in sales of existing-homes last month and only a small rise in a gauge of future growth.

Financial and materials stocks were the day's top gainers. The S&P 500 financial sector index (.GSPF) rose 1.8 percent and materials (.GSPM) climbed 1 percent.

The Dow Jones industrial average (.DJI) ended up 37.16 points, or 0.32 percent, at 11,541.78. The Standard & Poor's 500 Index (.SPX) was up 5.51 points, or 0.46 percent, at 1,215.39. The Nasdaq Composite Index (.IXIC) was down 5.42 points, or 0.21 percent, at 2,598.62.

Progress by EU leaders toward a solution is considered vital for Wall Street stocks to break out of their trading range.

The S&P 500 has struggled after reaching the top end of a two-month trading range at around the 1,230-1,250 level.

Investors are also closely watching the developing U.S. earnings season. According to Thomson Reuters data, of the 109 companies in the S&P 500 that have reported earnings, 70 percent have topped analysts' expectations.

After the closing bell, Microsoft shares (MSFT.O) fell 0.5 percent to $26.87 following quarterly results. During regular trading Microsoft finished at $27.04, down 0.3 percent.

Ingersoll Rand Plc (IR.N) posted lower quarterly earnings, and its fourth-quarter profit forecast fell short of some Wall Street estimates, due to depressed housing and consumer markets, sending shares down 7.9 percent to $27.38.

Polycom Inc (PLCM.O) fell more than 25 percent to $16.33 and weighed on the Nasdaq after the videoconferencing company reported quarterly revenue well below market expectations. The NYSEArca networking index (.NWX) lost 1.8 percent.

Trading volume was about 7.8 billion shares on the New York Stock Exchange, NYSE Amex and Nasdaq, below this year's daily average of about 8 billion.

On the NYSE, advancers beat decliners by a ratio of three to two, while on the Nasdaq, decliners beat advancers by a ratio of 12 to 11.

(Reporting by Angela Moon, Editing by Kenneth Barry)

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Occupy Wall Street becomes NYC tourist stop (AP)

NEW YORK – Shawn Lahey, a ruler factory worker from Poughkeepsie, was watching the show. A dancing man held a pole marked "corporation," attached to a noose marked "financial system" — from which another dancing man was "hanging." Masked drummers provided a thumping soundtrack.

Times Square? Nope. He was all the way down in Manhattan's financial district, where the Occupy Wall Street protesters have camped out for more than a month.

Zuccotti Park has become a hub for more than demonstrators. Visitors, curious to see protest in action, are regular arrivals. Some take photographs of themselves, protesters and their signs in the background. On a typical day they clog the pedestrian traffic in the area, which is often bustling with financial district employees pushing their way through.

"I think it's great — they're trying to make a point," Lahey said, though he added with a wry smile, "... I don't think it'll make any difference. ... The government won't make any changes, because it's all about money."

Jackie Qualizza of Bucyrus, Kansas, challenged protester Art Udeykin, asking him to explain the purpose of the demonstration, which has inspired similar activism in many cities across the nation and around the world.

"Right now, we don't have a goal — except to back away from the system that's not working," replied Udeykin, a 23-year-old Russian-born Iowan. "This is a way to feel free, to feel normal."

Qualizza said she couldn't see herself demonstrating, but added, "I don't disagree with them. The government bailed out everyone, and things are still not working. Something has to change."

The protest against corporate influence in government and wealth inequality has many of the things tourists look for, including photo-worthy moments and even some trinkets. In this case, the T-shirts and buttons offered by protesters are generally free, though they accept donations.

The double-decker buses offering tours of Manhattan pass by on Broadway, with guides pointing out the park site and tourists — in sunny weather — often waving sympathetically at protesters from the top decks.

Wednesday was rainy, but visitors included a group of Chinese tourists accompanied by an interpreter and a guide.

Molly Schwad, a jeweler from Kansas traveling with Qualizza and other friends, said she was surprised by what she saw, compared to the TV coverage of the protest movement.

She saw a rather quiet encampment in the rain, of only about 200 people. At times several hundred people have camped at the park, and some of the demonstrations organized as part of the Occupy Wall Street movement have drawn thousands.

"I thought it was much bigger," Schwad said. "We were afraid there might be violence here."

Marsha Spencer, an unemployed seamstress knitting in the rain at the park Wednesday, gives visitors a view of the protests they may not have expected to see. She returns to her home in the Hell's Kitchen neighborhood at night but spends most of each day at the protest.

"When people see a 56-year-old grandmother sitting here, knitting — they pay attention," she said. "... I tell them I'm here because I want things to change for my five grandchildren."

Some visitors echoed her concerns, including Karen Conrad of Johnstown, Pa., who was in New York last week to visit family and stopped by to show her support.

"I'm a middle-class mother and I can't get ahead. If anything, I'm going downward," she said. She said her two children are burdened by debt from college loans and "won't be out of debt until their own children are ready for college probably."

Demonstrator Julian DeMayo, a law student from Montreal bundled up against the wind and rain, said the tourists' attitude toward the protest has changed over the weeks.

"At first, they seemed skeptical, looking at this like it was a circus show," he said. But more recently, he said, many visitors "looked genuinely interested, and inspired. And they seem impressed by the level of infrastructure."

He added, "I think they also see that there's a huge variety of people here — young and old, of all races, from everywhere."

Some nearby businesses are far less enamored of the protesters, and say the hubbub outside their doors is costing them money.

Stacey Tzortzatos, manager of Panini & Co., a casual restaurant that's normally bustling as it serves financial district clients, said the eatery has been losing business because police barricades discourage customers from coming in, and media vans are blocking the view.

But the biggest problem, she said, was protesters coming in to use the bathroom — "30 at a time." She said she put locks on the bathroom doors in response.

"They take showers using the sink, they brush their teeth, and they make a huge mess," she said.

Tzortzatos said she's been harassed and verbally abused by protesters, who have come in eating donated food.

"I was called `evil' for asking whether they were customers, when they came in eating their free pizza, smelling so bad," she said. "It's a constant battle, and it's getting worse as the weeks go by."

Other food venues didn't mind.

"Business is business!" said Alex Gervis, who works behind the counter at Manon, a cafe near Zuccotti Park that sells imported Italian coffee and Belgian chocolates.

He said protesters have come in "six, or even 10, at a time. And as long as they buy something and don't make a mess, we're happy to have them."

The only disruption came several days ago, "when they tried to play guitar," he said. "We can't have that."

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Eurozone crisis efforts in disarray amid divisions (AP)

BRUSSELS – Europe's efforts to solve its escalating debt crisis plunged into disarray Thursday, after Germany and France could not bridge their differences in time for a summit Sunday, forcing them to call a second meeting.

Sunday's summit was supposed to deliver a comprehensive plan to finally get a grip on the currency union's debt troubles by detailing new financing for debt-ridden Greece, a plan to make Europe's banks fit to sustain worsening market turbulence and a scheme to make the eurozone bailout fund more powerful.

The offices of French President Nicolas Sarkozy and German Chancellor Angela Merkel announced that they needed more time after it became clear that the currency union's two biggest countries could not agree on the main points of the plan.

Both governments said that all elements of the eurozone's crisis strategy would be discussed on Sunday "so it can be definitively adopted by the Heads of State and Government at a second meeting Wednesday at the latest."

It also said that the two leaders would meet Saturday evening ahead of the summit in Brussels in the hope of making progress.

"The chancellor is confident that in this way good, coordinated measures for the stability of the eurozone can be achieved," Merkel's spokesman Steffan Seibert told journalists in Berlin.

The announcement of a second summit is likely to increase concern over the eurozone's ability to stick together and stabilize the common currency. Sunday's summit had already been delayed from earlier in the week to give the leaders more time to agree on the key issues.

"The parochialism and procrastination that got us into this mess continues," said Sony Kapoor, managing director of economic think tank Re-Define. "Unless EU leaders pull a rabbit out of their hat now, this will worsen the already deep politico-economic crisis that Europe is facing."

European officials said ahead of the announcement that the eurozone remained deeply divided on important parts of its strategy on debt-ridden Greece, banks and its bailout fund.

Germany and several other rich countries have been pushing for banks and other private investors take steeper losses on their Greek bondholdings, before the eurozone can sign off on a second multibillion euro rescue package for the struggling country.

France and the European Central Bank have so far opposed forcing banks to write off more Greek debt, fearing that would destabilize the banking sector and worsen market turmoil.

But Greece's international debt inspectors warned earlier in the day that even under a rescue package tentatively agreed in July the country's debts were not sustainable.

In their statements Thurday, Merkel and Sarkozy said that — based on the inspectors' report — Greece should immediately start negotiations with the private sector to reach a deal "that would improve this debt sustainability."

The eurozone is also divided on how to give its bailout fund more firing power, with the French wanting the ECB to help out, which Germany opposes.

A third point of contention is how to fund expensive capital injections into weak banks that might take losses on Greek debt and have already taken a hit from falling prices of other government bonds. France and several other countries are worried that bailing out their banks could hurt their credit rating and want the bailout fund to support lenders directly, rather than lending first to governments.

Ahead of the announcement, one European official, who was speaking on condition of anonymity, suggested that the need for more time may also have been caused by disagreement between Merkel's government and the German parliament, which felt that decisions affecting taxpayer money were being taken over its head.

Seibert appeared to support that assessment, saying further changes to Europe's bailout fund would require the agreement of the Bundestag, the German parliament.

"A two-step summit allows for this to take place," Seibert said.

Merkel's address to parliament scheduled for Friday was canceled, and Seibert said it would take place next week.

Governments in rich and poor countries are finding it increasingly difficult to get their parliaments to support the common rescue efforts.

Greek lawmakers late Thursday barely passed a deeply resented austerity bill needed to get the next batch of rescue money and avoid a disastrous default next month.

But the vote further diminished the ruling Socialists' grip on parliament and triggered violent protests on the streets of Athens, leaving one person dead and dozens injured.

Tear gas choked the air in Athens' central Syntagma Square as riot police tried to separate more than 50,000 peaceful protesters from smaller groups determined to wreak havoc with firebombs and stones. The scene degenerated into running battles between groups of protesters beating each other and between helmeted, heavily armed police and masked rioters.

One central Athens hospital said it had treated 74 people injured in the clashes. Some of the injured were covered in blood from head wounds.

___

Juergen Baetz and Melissa Eddy in Berlin, David McHugh in Frankfurt, Germany, and Nicholas Paphitis in Athens contributed to this report.

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Free necklaces and shipping for holiday shoppers? (AP)

NEW YORK – Retailers are so desperate this holiday season that they're willing to lose money to get you to spend yours.

Take online jeweler Stauer. It's offering a $249 amethyst necklace for free — provided customers pay the $24.95 it costs to ship it. Stauer will lose money on the deal, but it hopes to reel in new customers who will buy other jewelry.

"In this economy, you have to be outrageous in your offers," said Michael Bisceglia, the president of Stauer who found that more than a third of customers who took advantage of a similar deal on a $179 pearl necklace in 2009 bought additional items. "You have to shake up the world a bit."

Not every retailer will go as far as giving away merchandise during the holidays, but many will offer profit-busting incentives to lure cost-conscious consumers. It's a critical time of year for merchants, which can make up to 40 percent of their annual revenue in November and December. And they're so worried that Americans are spooked by the weak economy that they're willing to sacrifice profit for sales.

Nordstrom, for instance, is one of the first retailers to offer free shipping on most orders, no matter how small, even though it could wind up paying $3 to ship a $7 pair of socks. Furniture chain Raymour & Flanigan is allowing customers to go four years without paying interest on their purchases — the longest period it has ever offered — even though it will have to help cover a chunk of those charges itself. And Sears is not only offering to match the cheapest prices customers find online, but the department store chain is giving them an additional 10 percent off the difference.

"You may be making a $1 profit instead of a $3 profit," Fiona Dias, chief strategy officer of members-only shopping service ShopRunner.com, said about retailers. "But you're not losing a sale."

Retailers are rolling out incentives that essentially make their merchandise more affordable because they know the only way to get holiday sales is to offer the one thing that will attract shoppers these days: low prices. That's a change from better economic times when stores could lure customers with promises of higher quality products or better customer service.

The shift is happening as Americans continue to cut back on their spending as they grow increasingly concerned about the stubbornly high unemployment rate, stock market turmoil and an overall fragile U.S. economy. In fact, a recent Gallup poll found that eight of 10 Americans think the country is in a second recession.

"Retailers are now scared because some believe they're in a second recession," said C. Britt Beemer, chairman of America's Research Group. "And the second recession is hitting them in the biggest shopping season of the year."

Despite the challenging environment, revenue in November and December is expected to be up about 3 percent from those months last year. Such an increase — below last year's 5.2 percent spike over 2009 — would be above the 2.6 percent average gain over the last 10 years.

But Americans are expected to do more online comparison shopping and spend less time in stores. ShopperTrak, a Chicago research firm that tracks how many customers come in at more than 25,000 stores, expects foot traffic to drop 2.2 percent during the holiday season compared with a year ago. So far this year, consumers have gone to an average of three stores during a mall trip, down from an average of five stores in 2006.

To get people to spend more money once they're in stores, retailers are offering incentives that could shrink their profits.

For instance, merchants long have matched prices at competing bricks-and-mortar stores, but not online retailers. After all, it's hard for them to compete with the online-only guys that can offer lower prices because they don't have the high overhead costs of running physical locations. But now a growing number of bricks-and-mortar stores like Bed Bath and Beyond Inc. are matching prices with online-only merchants like Amazon.com.

Staples Inc. doesn't have a formal policy to do so, but it has started leaving price matching with online-only competitors to the discretion of its store managers. Amy Lee, 40, found this out when she saw an Epson printer for about $25 cheaper on Amazon.com. A Staples sales clerk in New York City agreed to give it to her for the lower price.

"I was surprised. Twenty-five dollars off is huge," said Lee, who paid $124.95 for the printer. "I would have gone home and ordered on Amazon."

Sears Holdings Inc. is going one step further by giving customers an additional 10 percent off the difference between its price and a competitor's online price. So, if a shopper finds a TV that's $30 cheaper at Best Buy Co., the consumer would get the lower price and an additional $3 off. The catch? The retailer will only match online prices of retailers that have physical locations, not online-only merchants.

"We're not focusing on short-term profits," said Tom Aiello, a Sears spokesman, about why the retailer is offering the deal. "We believe that if customers know they're going to get the product at the price they want, they will come to us more and more."

Some retailers, meanwhile, are sweetening incentives they already offer to the point that it could erode profits.

Raymour & Flanigan, for instance, is beefing up the terms of its no-interest loans, which have become popular among retailers of big-ticket items like furniture and TVs. The loans typically enable customers to forgo paying any interest on purchases for one to three years provided they make the monthly payments on time. Retailers, along with manufacturers, must help pay some of customers' interest charges — about 12 percent for three-year terms — to the financing companies that provide the loans. But the companies hope to make up for those costs in sales volume.

This holiday season, Raymour & Flanigan is offering the loans on sofas and dining room sets until Jan. 1, 2016. Lisa King, the chain's senior vice president of marketing, declined to say how much Raymour & Flanigan will have to pay its financing company, but analysts estimate that it could wind up shelling out up to 16 percent on each purchase.

"These programs do come at a cost to all retailers that offer them," King said. "This reduces the profit in a sale to the retailer."

Likewise, luxury retailer Nordstrom Inc. used to require that customers spend at least $200 to qualify for free shipping because bulk orders make up for the merchant's cost to ship items. Now, Nordstrom will ship most items for free, which means it could wind up losing money: it could pay up to $3 to ship a $7 pair of socks, for example. Nordstrom is following a similar move by catalog retailer L.L. Bean, which got rid of its minimum-order requirement for free shipping in March.

"This is increasingly becoming an expectation of customers," said Colin Johnson, a Nordstrom spokesman.

___

Anne D'Innocenzio can be reached at http://twitter.com/ADInnocenzio.

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Feeble Windows holds back Microsoft profit (Reuters)

SEATTLE (Reuters) – Microsoft Corp's flagship operating system made only slight gains last quarter, largely due to business and emerging market spending, holding back profit growth for the world's largest software company.

Sales of Windows, which still runs more than 90 percent of the world's personal computers, edged up only 2 percent from the year-ago quarter, in line with limp PC sales across the board.

That broke the streak of three straight quarters of declines, but it fell short of some analysts' hopes.

"We still had Windows miss again, although not by nearly as much as it has the last couple quarters," said Brendan Barnicle, an analyst at Pacific Crest Securities.

Sales of Windows 7, Microsoft's latest system, have leveled off after a big launch in 2009. Growth is now dependent on Microsoft's core business customers, which are still spending on technology despite the slow economy.

In contrast, hard-up consumers are waiting for next year's Windows 8, putting off purchases indefinitely, or opting to buy Apple Inc iPads instead.

Microsoft Chief Financial Officer Peter Klein said the cycle of businesses buying new PCs to replace aging machines was still in the "middle innings," offering hope of continuing modest growth.

"We expect that dynamic of business PCs growing faster (than consumer) to last throughout this fiscal year at least," Klein said on a conference call with analysts.

Microsoft's shares, which have traded in the $20-$30 range for the last decade, fell 0.7 percent in after-hours trading, to $26.85. They closed at $27.04 on Nasdaq.

BING LOSS NARROWS

The brightest spot for the world's largest software company was an indication that its perennially money-losing online services unit -- including the MSN Internet portal and Bing search engine -- may have turned a corner.

The unit lost $494 million in the quarter, the lowest loss in the last seven quarters, slowing the flood of red ink that has cost Microsoft more than $5 billion since it launched Bing in mid-2009, as it invests heavily to catch up with Google Inc.

Microsoft made no new statements about Yahoo, which is up for sale. Reuters and the Wall Street Journal have reported that Microsoft may work with private equity firms in putting together a bid for the ailing Internet giant, which it tried and failed to buy outright in 2008.

CFO Klein sidestepped an analyst's question on whether a sale of Yahoo might interfere with Microsoft's search engine cooperation with the company, which has yet to yield the expected profits.

"This is a long-term alliance," said Klein. "They're super-focused on what we need to do. And no matter what, that's the goal at hand."

NO BEAT

The Redmond, Washington company reported fiscal first-quarter net profit up 6 percent to $5.74 billion, or 68 cents per share, compared with $5.41 billion, or 62 cents per share, a year ago.

That met Wall Street's average estimate, according to Thomson Reuters I/B/E/S. It is the first time in 10 quarters that Microsoft has not exceeded the average estimate.

"They were just in line on EPS, which typically Microsoft beats," said Barnicle. "Q1 is seasonally not a big quarter for Microsoft, and this was no exception."

Overall sales rose 7 percent to $17.37 billion, helped by Office, which remains popular with businesses even in the difficult global economy.

The Office unit posted an 8 percent gain in sales to $5.6 billion, making it Microsoft's biggest-selling and most profitable unit.

The server and tools unit, which sells the server software behind the datacenters enabling "cloud" or Internet-based computing, rose 10 percent to $4.2 billion, but even that fell short of some analysts' expectations for the fast-growing area of the technology market.

The entertainment and devices unit posted a 9 percent gain in sales, helped by the Xbox, which remains the most popular game console in the United States.

MORE CASH OFFSHORE

Microsoft said its $8.5 billion deal to buy online chat service Skype, which closed last week, would add about $600 million to expenses this fiscal year. The company now estimates costs of $28.6 billion to $29.2 billion for fiscal 2012, which started July 1.

Microsoft has a cash hoard of $57.4 billion, with $51 billion of that -- or 89 percent -- parked overseas. The company is increasing its overseas cash aggressively. Three months ago, Microsoft said it had $52.8 billion in total cash, with only $45 billion -- or 85 percent -- overseas.

Faster-growing rival Apple on Tuesday reported it has $81 billion in cash.

(Additional reporting by Lisa Richwine in Los Angeles; Editing by Richard Chang and Matthew Lewis)

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