Last week: The latest jobs report helped narrow the range of forecasts. Some predicted consumer spending would improve slightly during the second half of 2010, aided by better job numbers and retail discounting. Our view, expressed in this column over the past few months, is that the economy is sailing into strong head winds. With inventory restocking moderating, and less impact from various stimulus programs, the economy and the labor market are likely to show less growth in the second half. Based on the latest jobs report, the more optimistic have been busy revising their outlooks, according to new forecast surveys released this past week. In short, more forecasts now reflect an economy stuck in the slow lane. The debate will now center on how long this will continue (probably for a while). Sustained high unemployment, slow wage growth and high debt weigh on confidence and result in slow spending, regardless of discounting.

THE SITUATION ABROAD

The global economy continues to improve slowly. The industrial core of these economies had a period of fairly robust growth, driven essentially by a process of inventory restocking. And that, in turn, drove up commodities, including energy prices. With the restocking phase moderating, overall growth is continuing, but at a more modest pace, as indicated in the accompanying chart.

Technically, the global leading economic and coincident series are merely the weighted average of the indexes for the individual countries monitored (individual country data are on our website). With growth moving to a somewhat more moderate pace (as suggested by the slower pace of change in the Coincident Economic Index), so too are commodity prices, especially energy prices. The Leading Economic Index suggests it will be several months at a minimum before another spurt of growth develops.

Will global growth get a second wind? From housing? Or trade? Or the financial sector’s return to health? The economic story for 2011 is largely dependent on what happens in these sectors.

FACT OF THE WEEK

$75,000. Based on polling data from 2007 and 2008, Angus Deaton of the Center for Health and Wellbeing at Princeton found that emotional wellbeing (happiness) increases along with income up to $75,000. Those earning less are not as happy. The real surprise, however, is that when incomes rose above $75,000, the increase in happiness leveled off. In other words, a raise from $70,000 to $75,000 generally was associated by survey respondents with a corresponding rise in wellbeing. But a raise from $75,000 to $80,000 had less impact. Deaton suggests that added income obviously gives the individual more resources, but not necessarily that much more wellbeing.

QUESTION OF THE WEEK

Is the U.S. housing market mending or does it remain fundamentally broken?

It remains broken. But how much longer? Two million families lost their homes in 2008. Another 2.8 million defaulted in 2009. Housing experts suspect the number could be even higher this year. Why? About one family in four has an outstanding mortgage larger than the current value of their home. The result: thousands of unoccupied homes right now. And yet, 1.5 million people spent at least one night in a shelter in 2009.

Would it help if banks simply wrote down the value of mortgages that they are unlikely to collect? Of course it would. But it would lower bank capital at a time when the banking system is being asked, under new regulations, to hold a higher degree of capital.

A bank effectively loses money on every foreclosure. Banks rarely collect as much at the auction as they do from a mortgage. Writing down the value of mortgages adversely affects their capital. Write downs could result in some banks becoming insolvent.