Last week: The U.S. economy, sandwiched between a robust Mexican economy and a Canadian economy that’s strong enough to open up new jobs, could use some help from its neighbors. Data this week reinforce that the U.S. is stuck in the slow lane. The weak ordering rate suggests business has turned cautious about investing, other than to keep its capital stock in good working order. The employment data indicate companies are even more cautious about investing in human capital.

Why are firms more cautious on hiring than investing? The relative cost of labor is higher. Having spent much of last year sharply cutting costs, businesses in 2011 are very cautious about adding to that cost structure, especially in a weak economic environment. But they are hiring, albeit just a bit. They are investing, although cautiously. And they are earning profits. The economy remains in the slow lane – but it’s not heading for the exit ramp.

THE SITUATION ABROAD

The Mexican economy grew by 5.9 percent in the first half of 2010, on a year-over-year basis. It is expected to grow by about 4.5 percent over the second half of the year. Even more remarkable, Mexico is achieving this performance despite the drop in the world price of crude oil. Thus, the recovery from recession in Mexico has more to do with reigniting domestic consumption and investment. The industrial countries around the world would like to replicate these results. Stock markets across the globe roiled this past week on fears that they may not come close to achieving anything like that performance until, perhaps, sometime in 2011.

FACT OF THE WEEK I

12.5. The housing market appears to be stabilizing. The number of unoccupied homes peaked at a little more than the equivalent of 11 months worth of construction during the recession. The first-time home buyer tax credit and record low mortgage rates – as well as an economy slowly on the mend – brought that figure down closer to 9 months. But with the end of the tax credit and a poor labor market this summer, the sales pace slumped badly and the figure has now shot up to almost 12 months. This is a marker of the continued weakness in the weakest segment of the economy. The question is whether it can quickly turn around or will it sap strength from elsewhere in the economy — an economy with not much strength to sap.

FACT OF THE WEEK II

6. Japanese manufacturing for export had planned on a worst case scenario of nothing higher than 90 yen to the dollar this year. With the yen currently closer to 84, that is 6 yen below that threshold, and presumably 6 yen deducted straight from the bottom line.

QUESTION OF THE WEEK

If the U.S. economy is really close to a full year out of recession, why aren’t growth and jobs more robust?

The Zarnowitz rule (Victor Zarnowitz, an economist, spent the better part of his last two decades at The Conference Board) says that the steeper the recession, the more robust the recovery. This certainly was the steepest recession in decades. The recovery from recession, however, has been anything but robust. This is a nearly $16 trillion economy, producing goods and services ranging from fast food to recombinant DNA and gene splicing. Anything that big and complicated has multiple determinants. Two factors to focus on are the state of housing and the fundamental structural change in consumer behavior.

The saving rate has basically gone from zero before the recession to 6.2 percent in the second quarter of this year. Every dollar saved is a dollar not spent. And consumer spending accounted for 70 percent of the level of GDP in that quarter. The timing of the housing market decline is separate from the timing of the overall economic decline. And this underlines the point that different pieces of this huge complicated economy move at different speeds at different times. But because all the pieces of the economy link up, the net impact is anything but the robust growth suggested by the Zarnowitz rule. These are two of the many reasons why the economy remains stuck in the slow lane.