Last week's highlights: As the second half of 2010 gets underway, the waiting game is well underway. Consumers are waiting until the job market strengthens. As they wait, their spending and borrowing patterns reflect caution. Business is waiting for the consumer market – representing two-thirds of the economy – to pick up. Until it does, their investing and hiring plans reflect caution. And the data released this week, and over the next few weeks, continue to reflect the waiting game.

THE SITUATION ABROAD

The latest prediction from the IMF reflects a better than expected performance in the first quarter for many countries around the globe. Developed economies, busy rebuilding inventory, saw the industrial core of their economies improve. Many developing countries (Peru is a notable example) benefited from rising prices and shipments of raw materials. The problem this presents is that inventory rebuilding is likely to be moderate in the second half of 2010. This could spell more moderate growth in both the developed and developing economies. Markets reflect a level of concern about prospects. More moderate growth and more volatile markets could be the stories of the second half. The bigger stories could be about exceptions.

FACT OF THE WEEK

$5 billion. After cutting spending and raising taxes for the past two years, Illinois has a budget deficit of $14 billion to close this fiscal year. Only California ($19 billion) and possibly Michigan are in worse shape. But Illinois currently owes about $5 billion in bills past due. Altogether, states and municipalities have to find about $90 billion to close budget deficits this year, and potentially another $140 billion in 2011. Whether they cut spending or raise taxes, it will effectively be a $90 billion de-stimulus, at a time when stimulus spending is winding down. In short, the problems at the state and local level make it more difficult to stimulate the expansion, to accelerate job creation.

Speaking of jobs, many states and municipalities have already trimmed their workforce and more is coming, in order to close these budget gaps. How many more? There could be a reduction of 200,000 in 2010, and possibly 300,000 in 2011.

QUESTION OF THE WEEK

How can you say the economy is recovering? Everywhere I look, I see vacant store fronts.

The number of vacant stores has certainly increased, but this is not just because the economy is slow. To be sure, the vacancy rate for stores is now close to 11 percent or about the same high rate as last seen in 1991, another period of slow economic activity as well as a real estate decline. The data show that almost 2 million square feet of space previously occupied was vacated in the second quarter of this year, while 400,000 square feet of new space was being developed. That is roughly a quarter of the typical development trend. Thus, vacates are up sharply while building is down sharply.

In this slow economy, the rise in retail shopping is very slow — because job and income growth are slow. Consumers are also consciously saving more and borrowing less. Furthermore, more shopping is done online in 2010 than was the case in 1991. For example, there are fewer music stores in malls today.

Builders and real estate financial firms were slow to adapt to the slower pace of retail activity relative to the pace of the overall economy (as more shopping occurred online). The result was an excess of retail space. This is reflected in store rents, which declined in the second quarter for the seventh straight quarter.

Even when the economy regains stronger footing, consumers will likely continue to spend less of each paycheck, and save a little more. They are likely to continue to shop online for certain things. And even when they go to the mall, they are likely to continue to demand lower prices, or go home without buying. All that suggests retail space will be a hard sell for the foreseeable future.