Last week: Demand is weak and unlikely to improve this fall. Consumer confidence is very low, because job and income growth are low. Business confidence is a little stronger than consumer confidence. But a weak operating environment and the lack of pricing power limit new revenue and provide little reason to ramp up physical or human capital investments. These conditions are not likely to be alleviated by stimulative monetary or fiscal policy. The only real question is how long will these conditions prevail. The light at the end of this tunnel remains dim, and far off.

THE SITUATION ABROAD

In a relatively weak global economy with the risk of deflation, where does money go? Stock prices are relatively low across the globe, while bond yields have fallen to historical lows. Real estate has not fully recovered. These are some of the reasons why gold prices and commodities like sugar have risen, as well as why activity and volatility in the foreign exchange markets have been stirred up. Changes in sentiment indicators are dominating these movements. The general assessment is that the global economy will improve very slowly in 2011, as output gaps gradually narrow. And if that happens, the probability of deflation, as well as sovereign default, will diminish. In other words, one prospect to look for in 2011 is for money to begin to flow out of the bond market, sending prices lower and sending bond yields higher — in a global financial system still on the mend.

FACT OF THE WEEK

36 percent. That was the average cost of housing as a percentage of income. New data from the American Community Survey shows that the median monthly housing cost for owner-occupied homes (with a mortgage) was about $1,505 in 2009. The same survey showed that median household income fell to $50,221 — down 2.9 percent from a year earlier. These data imply that the average cost of that home was about 36 percent of income. Other data show that as many as one in four homeowners owe more on their mortgage than they could obtain by selling the house. Such depressing statistics weigh on consumers and contribute to the sustained and very low level of confidence, which restrains spending.

QUESTION OF THE WEEK

Will the German economy remain strong and lend momentum to the rest of the Euro-zone?

The German economy outperformed the rest of Europe in the second quarter of 2010. The accompanying chart shows that its 2 percent growth was about twice as fast as most of the rest of the countries in the Euro-zone.

Can Germany sustain this pace? To do so, it would have to sustain very strong export performance and get domestic consumption to perk up. With the global economy moderating, as industrial output (to rebuild depleted inventory) slows, export opportunities are unlikely to be as robust as they had been. Second, like most of the rest of the continent, German wages are rising slowly, and employment growth is weak. Given these constraints, it’s hard to see how consumer spending can accelerate. So overall German growth is likely to cool a little. That would be consistent with The Conference Board Leading Economic Index® for Germany. It has been increasing for well over a year. But its rise has moderated in recent months, anticipating a still strong but somewhat slower growth path through the end of this year and into the early months of 2011.