Last week: A second consecutive weak report on job growth reflects the lack of momentum in the U.S. economy. Worried consumers are not spending on discretionary items. Specifically, consumers worried about losing their jobs are not willing to spend out of current savings or willing to borrow. Although lackluster demand is a big concern, a sharp drop off in profit growth is a much bigger issue for business. Following a weak report on orders, it appears that business is turning cautious on investing and hiring. This is a closed feedback loop, moving at a slow speed. The big question: what could speed this up? And how soon?

THE SITUATION ABROAD

Growth in industrial production for Japan reflected some moderation, as replenishing inventory has largely been accomplished. Much of the same has been occurring in both the Euro-zone and North America. There is some indication that production growth may not slow much more over the coming months. That is the reading from some of the surveys of purchasing managers across the globe. Moreover, the Tankan survey in Japan reflects some optimism with respect to export orders. In turn, that hinges on China’s economy not slowing down. The Conference Board Leading Economic Index® for China only rose by 0.3 percent in the latest month, a much slower reading than earlier in the spring. To be sure, consumers, business executives, even investors in Asia/Pacific, Europe, or North America are nervous about where the economy is headed in the second half of 2010.

FACT OF THE WEEK

9.3 percent. That is not the GDP growth rate of China, which was reported as 7.4 percent. Rather, it is the GDP growth rate of Peru. Indeed, the pickup in industrial production across the globe in the first half of 2010 raised demand for energy and minerals. That, in turn, resulted in a very strong rise in the economies of some commodity-producing countries like Peru. However, the increase in production was mainly to replenish depleted inventory. Because that task is largely accomplished (inventory is much less depleted at midyear than at the start of 2010), industrial production is very likely to grow more moderately in the second half of the year. So, in all likelihood, are some commodity-producing economies like Peru. Still, if Peru and others can build on earlier successes, that could be a big headline over the next few months.

QUESTION OF THE WEEK

Has the downturn in home prices finally run its course? What will be the impact on the economy if it finally gets better?

Homes started declining in 2007 in some metropolitan areas. In a few cases, prices are still declining, albeit more slowly. Declines will continue to shrink, as will the number of metro areas where prices continue to fall. Meanwhile, prices have started to rise in some metro areas and that list will gradually lengthen.

Still, a more than 3-year decline is unprecedented. When prices started to fall in 2007, it was only the third time in the past half century. When prices fell again in 2008, it marked the worst drop in more than a century. That didn’t happen even in the Great Depression.

From the start, the declines have been more severe in some areas than others. As the accompanying chart shows, some metro areas, especially on the west coast of Florida, southern California, and the entire state of Arizona, have undergone very sharp and prolonged declines. Conversely, Charlotte, North Carolina and Seattle, Washington were among the last to experience declines and are among the first to experience some turnaround. The dynamism of these two metro areas helps explain their unique experience. And they could well be a sign of how soon the rest of the country may see improved conditions in the housing market.

Housing is important to the rest of the economy in several ways. One, families that can sell and move, without taking a big loss, can move to take advantage of job opportunities — in a period of relatively weak job growth. Second, families that can afford a down payment and qualify for a mortgage signal improved housing and financial markets in a local area. Third, those new homes need new furniture and appliances. There may be other factors as well, but certainly, the rise in property values, with families staying current on their obligations, adds to the tax rolls in cash strapped municipalities across the land — relieving some stress on school, police, and social service budgets.