Last week: The Conference Board Coincident Economic Index® for the U.S. was relatively flat again in October. That reinforces the view that although the recession is over, it can still feel like a recession in some respects. The Conference Board Leading Economic Index® for the U.S., however, rose markedly for a second straight month. Following a post-holiday lull, economic activity will probably pick up mildly in the spring of 2011. The longer it takes to improve, the more consumer frustration will build. And the frustration level is palpable. That is one reason, but not the only reason, why retail discounting has been early and heavy this season.

THE SITUATION ABROAD

The immediate problem in Europe is focused on Ireland. What does it need to avoid a sovereign debt default? The larger issue is how little has changed since the debt crisis erupted. There is even a more fundamental problem. Europe is experiencing more job growth among managers and professionals but also among less well paid personal service workers. The middle range of jobs is not keeping pace, due to improvements and utilization of technology as well as moving some operations to lower cost economies to the east and south. Among other consequences, it raises questions about the tax base, which will be needed now to pay debt service and later to pay back debt. In turn, these trends suggest the crisis may retreat from the headlines but it will be a while before it goes away.

FACT OF THE WEEK I

5 percent.  The International Energy Agency (IEA) estimates in the World Energy Outlook that fossil-fuel consumers receive a subsidy of about $312 billion. They further calculate that eliminating these subsidies might reduce fossil-fuel consumption by about 5 percent — or about as much as is consumed in Japan, Korea, and New Zealand combined. Critics object. They point that far more energy from such sources is consumed than is true of renewable, which receive about $57 billion in subsidies, a much larger dollar per kilowatt figure. A more salient criticism is that subsidies can tend to increase not just consumption but inefficiency. In one case, according to the IEA, there has been a 1.6 percent increase in the amount of energy used per unit of GDP in Iran, one of the biggest subsidizers.

The decline in global oil prices over the past two years has given some countries room to reduce subsidies. China and Russia are just two countries that have reduced subsidies. Indonesia is planning to eliminate them by 2014.

FACT OF THE WEEK II

$3 trillion.  The headlines are full of concern about the size of the national public debt and what to do about. A commission jointly chaired by Pete Domenici and Alice Rivlin is just the latest proposal of what might be done to pare down public debt. The larger problem is what to do about states and cities. They are slashing services for a third straight year. Plus, significant declines in home prices are only now being folded into tax assessments, very likely to reduce revenue from real estate taxes. On top of these considerations is the money owed to civil workers upon their retirement. The money put aside is not enough to pay out those pensions. How big is the shortfall? Some estimates put the figure at $3 trillion and there are a few who think it might be higher still. Chicago is one example. The unfunded liability is estimated to be as high as almost $42,000 per household. Put another way, Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester suggest the unfunded liability is equivalent to eight years of total city tax revenue. While there can be debate about the true magnitude of the problem, the larger issue is how soon workers will start to retire. Keep in mind, the baby-boom generation starts turning 65 this year.

QUESTION OF THE WEEK

A recent report suggests economic growth in the emerging markets will be higher than in the developed world over this decade. Will stronger growth there pull up growth in the developed world? Or will weakness in the developed world eventually slow growth elsewhere?

This is the classic question when two halves of any economy grow at different rates. To be sure, if emerging market growth is dominated by exporting, the higher growth in the developing world will not last. If, however, growth in China, India, perhaps Latin America is more tied to a burgeoning middle class market, then indeed exports from the developed world to supply that market would mean a stronger overall market globally. Put simply, this is a recipe for a tide lifting all boats. It is possible. Is it likely?