The world's most expensive cities

The annual survey from Mercer compares the cost of living in 214 cities, considering factors like food, clothing and entertainment. Housing is often the largest expense for expats, so that factor plays a big role in the rankings.

Luanda, the capital of Angola, lies on the coast of the country and serves as a port city. After an Angolan civil war ended in 2002, Luanda underwent major reconstruction sparked by the city's diamond and oil production.

New York is still the most expensive city in America, but it dropped 19 places on a worldwide basis to rank 27 overall. Los Angeles is the second most expensive city in America, followed by White Plains and Chicago.

Quiz: Which country has more debt?

U.S. cities fell in the worldwide rankings because of a weak dollar and falling house rental costs, the report said.

Africa was the standout continent, with three of its cities cracking the top 10 for the first time: Luanda at No. 1; Ndjamena at No. 3; and Libreville in Gabon at No. 7.

The world's least expensive city is Karachi in Pakistan. Its cost of living is three times cheaper than that of Luanda. 

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Obama on faux deficit hawks: 'I'm calling their bluff'

"When I start presenting some very difficult choices to the country, I hope some of these folks who are hollering about deficits and debt step up, because I'm calling their bluff," the president said at a press conference during the G-20 summit in Toronto.

Of course, such a pledge works both ways. Tried-and-true deficit hawks -- in and out of Congress -- will be ready to call the president's bluff if his 2012 budget proposal, due out in February, doesn't meet their standards for substantial deficit reduction.

"Time has run out," said Bob Bixby, executive director of the Concord Coalition, a nonpartisan deficit watchdog group. "He really is going to have to be serious in February. There's no more calling for commissions or saying we have to address this in the future."

To date, Obama has made mostly symbolic steps toward fiscal restraint, budget experts say. For example, he has called for a three-year freeze on non-defense discretionary spending and imposed tougher requirements on lawmakers to pay for new proposals.

What's more, Bixby said, the pledge made at the G20 summit for member countries to cut their annual deficits in half by 2013 isn't as big a deal as the leaders made it sound. Economic growth alone can accomplish much of that reduction, he said. "It's really where you go from there."

Budget experts say Obama needs to attack the real problem: the so-called structural deficit, which will continue to balloon faster than the economy grows. The structural deficit is made up primarily of spending on Medicare, Medicaid and Social Security.

And that deficit is made worse by a tax system that is projected to consistently bring in less revenue than needed to pay for total spending.

Making changes will spark stiff opposition from Democrats, who don't want to curb entitlement benefits, and Republicans, who despise tax increases.

"I hope Obama challenges them both and says, 'We're going to have to put entitlements on the table and taxes on the table. And here's my plan,'" Bixby said.

The president may draw a number of his proposals from the work of an 18-member bipartisan fiscal responsibility commission that he created to make recommendations for putting the budget on a fiscally sustainable track for the long run.

It's not clear yet what will come from the commission, which will deliver a report to Obama on Dec. 1. But deficit experts have identified many measures that could notably improve the country's debt trajectory. Among them:

Let the 2001/03 tax cuts expire: If the series of tax cuts implemented during the Bush administration are allowed to expire at the end of this year as scheduled, it could save up to $3 trillion over 10 years.

Cap growth in discretionary spending: Currently Congress putsno official brakes on discretionary spending. Deficit hawks have proposed making some cuts or imposing a cap on its growth -- so, for instance, it could not exceed the growth rate for inflation.

Make changes to Social Security and Medicare: Spending on these two programs is on track to grow faster than the economy, and retirement and budget experts have called for any number of measures to curb that growth. These include raising the retirement age, increasing the taxes higher income workers pay into Social Security, raising Medicare premiums and slowing the growth in future benefits for both programs.

Cap tax expenditures: The government does without roughly a trillion dollars a year because of tax breaks -- everything from the mortgage-interest deduction, to education and child credits, to low rates on investments.

Those breaks can translate into higher tax rates and a federal budget that is much bigger than advertised, according to tax experts Len Burman, a professor at Syracuse University, and Edward Kleinbard, a professor at University of Southern California.

Reduce defense spending: Defense spending has accounted for more than half of all discretionary spending in recent years. And there have been growing calls to cut it back with proposals such as terminating funding for outdated weapon systems to curtailing involvement in the wars in Iraq and Afghanistan. 

Obama tells agencies: Cut 5%Consumer caution may fuel debate over stimulus, deficits

Scurrying to save Wall Street reform bill

Instead, they proposed paying for Wall Street reform by ending the $700 billion federal bailout program called the Troubled Asset Relief Program immediately upon final passage of the bill.

Lawmakers would redirect the stream of bailout repayments as well as untapped dollars to offset shortfalls created by the Wall Street reform bill, which spends money by creating new agencies. The move would offset $11 billion in spending.

Currently, the repayments and untapped TARP dollars are supposed to pay down federal deficits. But under these changes, they'd go specifically to pay down new Wall Street reform-created deficits.

The lawmakers would also hike the premiums that the biggest banks, those with more than $10 billion in assets, pay for taxpayer-backed federal insurance on their commercial deposits, which would offset roughly $5.7 billion of the bill's costs.

"We tried to come up with an alternative idea to address concerns," said Sen. Christopher Dodd, D-Conn.

Republicans involved in financial reform talks balked and tried to get Democrats to cut the federal stimulus program to pay for Wall Street reforms.

"This ranks right up there at the top of the list for pure deception for treating the American taxpayer in an appropriate way," said Sen. Judd Gregg, R-N.H.

The revised provision requires agreement by both the House and Senate negotiators to be included in the bill. Votes are expected later Tuesday.

Democrats have been hoping to get final passage of the bill this week, ahead of the July 4 recess.

But the last-minute changes to the bill, coupled with a planned memorial for Sen. Robert Byrd, mean that if the Senate doesn't finish work passing the bill by Wednesday, they could run out of time this week.

"I want to pay due respect to him, and so there are a lot of feelings that maybe we should be careful about trying to proceed too aggressively with the legislation in the midst of a funeral and everything else," Dodd said.

The full House is expected to take up the bill Wednesday.

Democrats need 60 votes in the Senate to overcome any filibuster of the measure. With Byrd's death and a promise that Sen. Russ Feingold, D-Wis., opposes the bill, they are down to 57 supportive Democrats in the Senate. Democrats need three Republicans to overcome a filibuster on the bill.

Earlier Tuesday, Sen. Scott Brown, R-Mass., announced in a letter that he would oppose the bill, thanks to a new tax on banks, which was tacked on to the final Wall Street reform bill late last week. Two other Republicans who had originally supported the bill were non-committal, because of the same issue.

The tax would have been levied against the largest banks and hedge funds to pay the tab for implementing the new reforms. A Congressional Budget Office analysis estimates the tax would raise $18 billion from 2012-2015.

The reform measure, the result of more than 18 months of negotiation and debate, aims to strengthen consumer protection, shine a light on complex financial products and establish a new process for shutting down giant financial firms in trouble.

While leaving an economic briefing, President Obama said Tuesday that he believes that the Senate will pass the reforms, despite Byrd's death.

"I'm confident that given the package that has been put together, that senators, hopefully on both sides of the aisle, recognize it's time we put in place rules that prevent taxpayer bailouts and make sure that we don't have a financial crisis that can tank the economy," Obama said. "I think there's going to be enough interest in moving reform forward that we're going to get this done."

A spokesman for Sen. Maria Cantwell, D-Wash., who also voted against the bill said she was still reviewing it.

- CNN Congressional Producers Ted Barrett and Deirdre Walsh contributed to this report.  

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Solar power done cheap

Morris is an installer for California-based SolarCity, one of a handful of companies pioneering an all-inclusive approach to solar, making it as easy and cheap for the consumer as possible.

Under the company's model, customers agree to a monthly lease and sign the rights to claim subsidies over to SolarCity.

In return, homeowners get a solar array installed on their roof, maintained for the life of the lease. They're hooked up to the electric grid, so when they need more power than the panels provide, there's no disruption. And SolarCity guarantees the panels will produce a set amount of power, which the company says should offset the electric bill and more than compensate for the monthly fee.

"Our goal is to get millions of homes to go solar, but the biggest barrier is the experience," said Lyndon Rive, the company's 33-year old CEO with major entrepreneurial connections. "Humans are lazy by nature. They want to do the right thing, but they don't want to jump through ten hoops to do it."

The challenge now facing SolarCity, and competitors like Akeena and Sunpower: Can these residential-mounted solar systems compete with the massive utility-scale solar arrays being built in the desert or the vast commercial solar systems being put atop big box stores nationwide? And can they do it competitively when the generous government subsidies expire?

The obstacles are no doubt huge, but Rive may just be the man for the job. He's a serial entrepreneur, having started his own cosmetics business in South Africa at the age of 17. He sold it five years later, moved to the U.S., and along with his brother started a multi-million dollar tech company.

The brothers are now in SolarCity together, along with their more famous entrepreneur cousin - PayPal co-founder and Tesla Motors CEO Elon Musk.

Green jobs

SolarCity is the type of company President Obama and other supporters of the new "green economy" love to highlight.

It's creating good jobs for construction workers hard-hit by the real estate bust. Solar City pays its installers $15 to $30 and hour, plus full benefits.

It's growing. Last year the company had 300 employees. Now it's up to 560, and plans to have 800 by the end of 2010. It operates in five states, and is eyeing expansion plans in at least three others.

In a working class suburb just south of Los Angeles, Wayne Holder is not the typical person one often conjures up when thinking of solar power.

Holder, 44-years old and an electrical engineer with the Los Angeles sanitation department, uses a lot of power.

Between him, his wife and their two kids Holder says the washer and dryer get a constant workout. Plus, the family has a salt water pool the requires the filter to run nearly non-stop.

The result was an electric bill that reached nearly $600 a month last year, said Holder.

That's when he decided to call SolarCity. Now, he says he pays about $300 a month to the utility, and another $180 to SolarCity, with no change in electricity use.

"It was a no-brainier," he said. "and the only thing I have to do is hose off the panels every once in a while."

0:00/2:19'I switched to solar'

Other customers do it more for the environment.

On a hillside overlooking nearly all of Los Angeles, Andrea Kreuzhage recently put down $1,000 to install a SolarCity system on her roof.

Kreuzhage, a 47-year old documentary film maker, is not a big user of power. Before her solar system, her monthly electric bill was about $50 a month. Her lease with SolarCity is $55, although her solar panels now actually produce more power than she uses. (Local law doesn't yet allow her to sell that power back to the utility, although people are working to change that.)

But for her, the extra $5 a month is well worth it.

"The idea is to walk the walk, to be active, to do more," she said. And besides, "I'd rather pay a green business instead of a huge utility."

The helping hand

If SolarCity's customers and employees seem happy with the arrangement, they owe one entity a big thanks: the government.

Thanks to a mix of federal, state and local incentives, some 50% of the costs of solar power are subsidized.

Many of those subsidies are set to expire in eight years. The solar industry thinks it can compete without them, but it's clear costs will have to come down.

"It's dependent on a lot of key breakthroughs and variables," said Bill Ong, a solar power analyst at the investment bank of Merriman Curhan Ford. "One can debate whether they are on track or not, but progress is being made."

As for solar power mounted on homes like SolarCity's model, known as "integrators" Ong said there is room for that type of power and larger commercial systems.

"It's a big market for multiple players," he said, "and the integrator has this niche."

But with so many challenges facing solar, and Rive's proven track record seemingly allowing him to get into any industry, why he'd pick one as risky as solar? For the potential. 

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Manufacturing (ISM)

The reading came in slightly higher than the decrease to 59.4 economists had expected, according to a Briefing.com consensus survey.

Levels higher than 50 signal manufacturing growth, while readings below 50 indicate contraction.

"All in all, this is a very good sign for the overall economy and suggests sustainable growth in the manufacturing sector in the U.S.," said John Silvia, chief economist at Wells Fargo.

May's manufacturing activity was largely driven by an uptick in employment and continued strength in production and new orders, said ISM chairman Norbert Ore in a prepared statement.

Inventory drop: The slight slowdown in manufacturing growth from the previous month was due to a sharp decrease in inventory levels, said Silvia.

ISM's inventory index fell for a second consecutive month to 45.6 in May from 49.4 in April, with eight out of the 18 industries surveyed reporting drops in inventory.

"What happened is the inventory number came down, so inventory rebuilding is falling, which is part of a correction to an inventory buildup," he said. "But everyone was worried that with the inventory reduction, everything else would come down too, so the fact that that's not the case is a very good sign."

Of the 18 industries surveyed, the only sector that reported a slowdown in growth in May was the petroleum and coal products industry, the report showed.

Sixteen of the 18 industries reported expansion. Growth in the paper products, wood products, transportation equipment and electrical equipment industries increased the most in May.

New orders and production: ISM's index of new orders remained steady at 65.7 in May, marking the eleventh month of growth, while the institute's production index edged lower to 66.6 in May from 66.9 in April.

While the production index was lower, it still marked the 12th consecutive month of growth, and 15 industries reported expansion, led by the wood and paper products sector.

Employment: The employment index ticked up to 59.8 in May from 58.5 in April, the index's sixth month of growth.

Twelve of the 18 industries surveyed reported increased employment in May, led by the petroleum and coal products, paper products, transportation equipment and fabricated metal products sectors.

Given the overall trend of manufacturing growth over the past 10 months, and with May's increase in employment, Silvia said he expects activity in the sector to continue to expand.

"We should definitely see continued growth as the economy improves," said Silvia. "It may not move ahead as fast as some people would like, but its getting there."

The monthly report surveys ISM members, who are purchasing managers in the manufacturing industry. The index tracks new orders, production, employment, supplier deliveries, inventories, customers' inventories, backlog of orders, prices, new export orders, imports and buying policies. 

TN faces a slow economic recoveryManufacturing (ISM)

G-8: 'Resist protectionist pressures' amid 'fragile recovery'

In addition to the United States, the summit included Canada, France, Germany, Italy, Japan, Russia and the United Kingdom.

The summit immediately preceded a gathering in Toronto of the G-20, which includes the leaders of other important economies, most notably China.

In the run-up to the meetings, President Obama had stressed the need to keep economic stimulus measures in place to prevent a global slowdown. But European nations have been moving toward more conservative fiscal policies as the region grapples with an ongoing debt crisis.

In a letter to G-20 leaders sent earlier this week, the president wrote that safeguarding and strengthening the economic recovery should be "our highest priority in Toronto."

"In fact, should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to avert a slowdown in economic activity," he wrote.

Meanwhile, European nations have been cutting back on public spending and raising taxes to cope with massive budget deficits.

Since Obama issued his call to focus on growth, German Chancellor Angela Merkel called budget cuts "urgently necessary," and European Central Bank President Jean-Claude Trichet said stronger public finances are part of a "policy which we would call confidence-building."

Last week, the United Kingdom unveiled one of its harshest budgets in decades.

In a statement Saturday, U.S. Treasury Secretary Tim Geithner acknowledged the differences, while again stressing the need for pro-growth policies: "We all need to act to strengthen the prospects for growth. This will require different strategies in different countries. We are coming out of the crisis at different speeds." Geithner added, "We need to act together to strengthen the recovery and finish the job of repairing the damage of the crisis." (See 'The great spending debate')

0:00/2:24Will this G-20 be remembered?

Also expected to be discussed at the G-20 meeting will be China's currency, the yuan. China moved last week to begin letting it trade freely against the U.S. dollar, but the move may have been too little to head off debate. Since 2008, China has pegged its currency to the dollar, and many think it is artificially cheap, making it harder for U.S. companies to compete.

The yuan has risen only slightly against the dollar in the past week.

Still, Geithner praised China's move: "China is acting to allow its exchange rate to appreciate in response to market forces. This is an important step toward helping China better meet its own challenges and providing a more level playing field for all its trading partners."

Separately, President Obama met with the president of South Korea. Obama hopes to complete a free trade agreement with South Korea later this year, according to a senior White House official.

The plan is to double U.S. exports over the next five years, he said. The United States already exports $50 billion worth of goods and services to South Korea, which is the world's 14th largest economy. 

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Deficit hawks score points at G-20

Throughout the weekend, discussions have focused on how to balance two competing goals: fostering the global economic recovery with government spending, while at the same time reining in ballooning debt levels (see 'The great spending debate').

The United States had been vocal about the need for governments to continue pressing for growth, while Europe -- fresh off its own debt crisis -- has been taking steps toward austerity.

In its statement Sunday, the G-20 appeared to try walk that middle ground.

"Strengthening the recovery is key. To sustain recovery, we need to follow through on delivering existing stimulus plans," the statement said.

But in declaring its deficit-reduction goals, the statement also noted: "Sound fiscal finances are essential to sustain recovery...and avoid leaving future generations with a legacy of deficits and debt."

The debate has highlighted differences between the Obama administration and European leaders.

Last week, German Chancellor Angela Merkel called budget cuts "urgently necessary," and European Central Bank President Jean-Claude Trichet said stronger public finances are part of a "policy which we would call confidence-building." Last week, the United Kingdom unveiled one of its harshest budgets in decades.

In comments following the summit, President Obama stressed the importance of promoting economic growth as a means to set up future fiscal soundness.

"We must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs and growth today," Obama said.

Still, the deficit-reduction pledge is not a significant setback for the Obama administration, which already had a goal to slice the U.S. deficit, running at more than 10% of the size of the economy, as measured by gross domestic product.

The White House's 2011 budget proposal, unveiled in February, said the U.S. deficit would be 3.9% of GDP by 2014, achieved through spending discipline, as well as higher taxes on higher-income households.

The long-term goal is for the deficit to reach 3% of GDP, which many economists consider sustainable. But reaching the 3% target depends on the success of a bipartisan fiscal commission created by President Obama. The commission will make recommendations on Dec. 1.

China: Getting no mention in the G-20 statement was China's currency, the yuan.

China moved last week to begin letting it trade freely against the U.S. dollar. Since 2008, China has pegged its currency to the dollar, and many think it is artificially cheap, making it harder for U.S. companies to compete.

But the yuan has risen only slightly against the dollar in the past week, and many observers are skeptical China is committed to letting its currency rise.

Still, in statements this weekend, both Obama and Treasury Secretary Tim Geithner praised the action by China.

0:00/4:52Clinton: U.S. budget is broken

Financial Reform: The leaders also pledged to finalize regulations for financial firms by the next G-20 summit in November.

Among the key areas under review are bank capital requirements, increased transparency for hedge funds and other market players and more effective oversight.

The G-20 leaders also agreed to conduct "peer reviews" to ensure that reforms are implemented. In addition, they called for a plan to deal with "systemically important" financial firms that could threaten the global economy. The G-20 also agreed that the financial sector should make "a fair and substantial contribution" to pay for the cost of taxpayer funded bailouts. But they stopped short of taxing banks directly. 

Consumer caution may fuel debate over stimulus, deficitsChina loosens its currency chokehold

The best stimulus? Spend less, borrow less

So Thatcher summoned Meltzer, along with a group of trusted advisors, to explain why the experts were wrong. Even leaders of her own party advised Thatcher to make what they called a 'U-Turn,' and enact a big spending program to pull Britain out of recession. "Our job was to explain why lower deficits and spending discipline were the key to recovery," recalls Meltzer.

Thatcher was regally unamused by arcane jargon. "Being right on the economics wasn't enough," intones Meltzer. "She made it clear that our job was to explain it so she could understand it. If we didn't, she made it clear we were wasting her time. She'd say, 'You're not telling me what I need to know.'"

Thatcher stuck with draconian policies, invoking the battle chant "The Lady's Not for Turning." She launched Britain on years of balanced budgets, modest spending increases, falling joblessness, and extraordinary economic growth.

Misunderstanding Keynes

For Meltzer, the courageous, damn-the-sages stance that Thatcher took three decades ago should guide President Obama today. "If Obama announced a strategy to deal with the long-term debt and stopped doing things to increase the uncertainty that businesses face, it would do a great deal to stimulate the economy," declares the 82-year old Meltzer.

Meltzer is right, and most of the "experts" -- from Paul Krugman to Ben Bernanke -- are wrong. The best stimulus is a solid, credible plan to radically reduce government spending, starting right now.

To be sure, President Obama frequently advocates shrinking deficits in future years. The problem is that he wants to keep spending heavily today, in what's supposedly a classic Keynesian formula for charging a weak recovery and lowering unemployment.

But that formula isn't what Keynes recommended. "Keynes championed temporary deficits to stimulate consumption during recessions," says Steve Hanke, an economist at Johns Hopkins. "But he also insisted that deficits disappear during recoveries, so that budgets would be balanced or in surplus during most of the business cycle."

Today, the administration is pursuing a totally different policy. It's sharply raising expenditures when the U.S. already faces gigantic, chronic deficits that barely shrink even in a recovery, and burgeoning debt. "Keynes specifically warned against structural deficits when both U.S. and British economists were pushing for them at the end of World War II," says Meltzer. "He never said that more spending on top of chronic deficits was a stimulus. Just the opposite, in fact."

The Obama administration is calling for an extra $316 billion in "stimulus" spending in addition to the $862 billion already appropriated. The rub is that the all of the "stimulus" money is being borrowed, and that's adding to already mushrooming debt. Right now, the CBO forecasts deficits of $1.25 trillion or an immense 5.6% of GDP in 2020 -- and that's following a strong recovery. That year, the federal debt will reach 90% of national income, putting the U.S. in the fragile position of a Greece or Portugal. Interest payments will absorb one dollar in every six of federal spending.

The rub is that the shadow of inexorably rising debt, with no plan to curb it, isn't a stimulus at all, but a heavy depressant. The solution is to sharply reverse course and bring the budget into balance over the next decade. That solution will require either a 50% increase in taxes, a 35% reduction in spending, or some combination of the two. The weight should fall heavily on the spending side.

That blueprint would prove a powerful tonic for the economy for four reasons -- call them the four growth factors. First, it would dramatically raise the labor supply by allowing Americans to pocket more of their pay. Second, it would prevent real interest rates from soaring and crippling private investment. Third, it would encourage companies to stop hoarding cash and make the big investments in factories and computers that always drive a recovery. And fourth, it would enormously boost investors' confidence in America's future by showing that, like Thatcher long ago, our leaders won't get swamped by chaos, and really have a plan.

1. The labor force factor

Economic growth is driven by two forces -- increases in the labor force and rising productivity nurtured by investment in new technologies, plants and equipment that enable each worker to produce more from each hour of labor. "The quickest way to spur growth is to get more people working, or to get existing workers to put in more hours," says Brian Riedl, an economist with the conservative Heritage Foundation.

But excessive spending threatens to shrink, rather than expand, America's workforce by driving up taxes. The top income tax rate is already scheduled to rise from 35% to 39.6% in 2011.

Especially troubling are the perverse incentives built into the health-care reform bill. Middle class Americans who aren't insured through their companies can buy heavily subsidized policies under the plan. The problem is that as their incomes rise, the subsidies decline, giving them far less incentive to work more hours or stretch for raises. For example, if the income for a family of four rises from $55,000 to $66,000, their contribution to their premium jumps from $4,400 to $6,600, erasing 22% of the $10,000 increase. (See also 5 painful health-care lessons from Massachusetts)

Lowering spending is the only way to hold down tax rates that largely determine how hard Americans work. The crazy math of health-care reform is another "tax" that itself needs radical reform--before it takes hold in 2014.

2. The interest rate factor

To achieve robust growth, US companies need to borrow at stable, modest real interest rates. They're defined as the rates lenders charge after adjusting for inflation. In the past, relatively high real rates -- say 4% to 5% -- usually came during periods of great prosperity, when companies brimmed with optimism, and demand for capital was strong. The danger now is that unbridled future spending makes borrowing extremely expensive even when growth is weak, and remains so high that it undermines or prevents recoveries.

Real rates threaten to jump, and remain far higher than normal, for three reasons. First, part of the price of borrowing is a "risk premium" that rises or falls depending on investors' belief that the U.S. is following policies that will foster stable growth. Today, investors are far more fearful than confident.

Second, higher taxes raise rates, since investors who can buy bonds anywhere in the world seek the best returns after tax; if levies rise, as now scheduled, investors will demand bigger interest payments to compensate for the higher tax bite.

0:00/2:29The $1 trillion problem

Third, government borrowing is reaching such stratospheric levels that it's almost bound to pressure rates. In the past, deficits in the 4% to 6% range proved relatively harmless, with the debt seldom reaching more than 40% of GDP. But by 2020, the burden will reach almost 100% of GDP, or around $20 trillion. The U.S. will need to constantly refinance that debt, and borrow still more.

Those gigantic borrowings will compete for the modest pool of savings, threatening to hold real rates high for years, even when growth is slow. But can't the U.S. keep tapping the foreign creditors who now purchase the bulk of our Treasuries? Sure. But debt levels in Europe and Japan are also extremely high, so more and more private savings are going to finance their big deficits as well.

As a result, the reserve of global savings available to U.S. companies will be largely claimed by governments. To attract lenders, the U.S. will need to compete by raising rates. The solution: Spend less, and borrow less. Once again, low real rates are real stimulus.

3. The investment factor

"Recoveries are led by investment," says John Cochrane, economist at the Booth School of Business at the University of Chicago. "You need a big surge in investment to lead you out of recession."

In the short term, both consumption and investment spending lift GDP. But over longer periods, it's investment that raises productivity by adding software systems, mainframes and ultra-efficient factories that produce more products at fewer working hours.

The numbers tell the story. The administration has chiefly succeeded in supporting consumption through its $800 per family rebates and grants to the states to maintain public jobs. Amazingly, since 2008, consumer spending has actually grown by almost 1% after inflation, and rose to a lofty 72% of GDP for 2009. By contrast, private investment dropped 18% in real terms in the same period.

A fall in investment is normal in recessions. The problem this time is that corporate profits are rebounding fast, yet companies are extremely reluctant to reinvest them in new projects. "What I see out there is apprehension," says Randy Altschuler, founder of CloudBlue, a recycler of used electronics equipment, and a Republican candidate for a seat in the House of Representatives from Eastern Long Island. "The owners of small companies I talk to are especially worried about health-care costs. Hence, they're holding back hiring and capital investment."

It's not so much that companies fret that consumers won't have enough to spend on their cars, insulation and restaurants. Their big concern is over their future costs. Employers with more than 50 workers that don't currently provide health care will soon need to pay for it, or face stiff penalties. The health-care bill is part of the spending agenda that's scaring business. Reducing its burdens is crucial to getting companies to make the investments that are essential to spurring growth.

4. The confidence factor

This one is impossible to quantify. It's a feeling that says we're headed the right way.

Put simply, if investors are convinced that Washington has a plan to restore fiscal balance, they'll be content with lower returns on their stocks, bonds and buildings for a simple reason: those returns will prove more stable and predictable. That comfort level, in turn, lowers risk premiums and raises the prices of equities, corporate bonds, houses, and office towers.

Right now, many investors and managers are simply terrified by the absence of a roadmap to avoid ruinous debt. "We need to know that Washington can make tough choices, that our leaders are willing to do things that are unpopular," says Paul Willen, an economics professor at MIT. "More than anything, people need to feel that this is not out of control."

That's the confidence the Iron Lady brought in 1980, against all odds, and against most advice. The world's greatest economy will follow if Washington will only lead.  

The best stimulus? Spend less, borrow lessFederal Reserve keeps rates at record lows

How Susan Collins became the key to financial reform

If the massive overhaul is ultimately successful in leveling the economic rollercoaster, Collins, a former financial regulator herself, will be lauded for skillfully deflecting pressure from her own party and working in a bipartisan manner to put her country on better financial footing.

However, should the legislation fail to hit the mark, Democrats will likely alienate one of the last centrist conservatives in the upper chamber who is still willing to cut a deal and break with GOP leadership. Collins could also find herself in a tough spot defending her decision with voters in the traditionally blue state of Maine.

Collins has a vested interest in getting regulatory reform across the finish line. Maine's jobless numbers are bleak, but better than the country's overall -- the state had an 8% unemployment rate in May. But an even greater reason for her to play a key role in reforming the financial system is the state's impressive statistic of being one of seven states to avoid having a single bank failure. In fact, TD Bank is a key job creator for the state. Headquartered in Portland, Maine, the banking and financial services company is one of the 35 largest commercial banking companies in the U.S.

Securities and investment firms also rank among the top three industries bankrolling Collins' campaign coffers. In the past five years, banks and other financial firms have contributed more than $400,000 to Collins. New York-based investment firm Elliott Management is her third-largest contributor, behind General Dynamics and Marriott.

Party backlash

Collins has asserted her independence throughout financial regulatory reform negotiations, first as the only Senate GOPer to refuse to sign a letter opposing a vote on the Democratic proposal. Then in April, she was one of only four Republican senators to vote in favor of the Senate's Wall Street reform legislation. And even more recently, Collins has risen above the fray as a must-have vote for Senate Democrats to move ahead with the bill they expect to pass next week.

Collins got what she asked for on financial reform. The Senate-passed bill included an amendment she sponsored that requires strong capital requirements for financial institutions. Collins also pushed for a council of regulators in an independent bill that was incorporated in the overhaul.

Her Republican colleagues have not taken kindly to Collins embracing the Maine state logo, "Dirigo," which means "I lead" in Latin. After the stimulus vote, Collins publicly noted how her role in the negotiations had taken a toll on relationships with her GOP colleagues. "It is very hard," she said. "These are my friends. I work with them every day. I believe I have done the right thing, but there is a cost, there is a definite cost."

But that doesn't stop Collins from inserting herself into the center of controversial votes. Over the years, Collins has bucked the party line on a range of issues such as taxes, health, environmental policy and the budget. In 2005, she gained notoriety as a member of the 'Gang of 14,' which forged a compromise on the use of judicial filibusters.

More recently, as the number of moderate Republicans in the Senate has dwindled, Collins has received attention from Democrats as a centrist that they can work with. Last year, Collins made her mark over the stimulus project after President Obama courted her for her vote. Working in tandem with fellow Mainer Olympia Snowe (R), the two wielded an inordinate amount of power in shaping the final package, which only went through after nearly $100 million was cut from the House bill.

At the time, Collins said, "This crisis is extraordinary, and my constituents don't expect me to stay on the sidelines... They expect me to jump in. People don't want us to be the party that says no, just no."

At the outset of the latest financial regulatory reform process, Collins made it a point to cite her bona fides as a former financial regulator for Maine -- she served for five years as Commissioner of the Department of Professional and Financial Regulation in Maine before being appointed New England regional director for the Small Business Administration by President George W. Bush. Collins has made it clear that she understands Wall Street reform better than most.

Mainers have rewarded Collins for her independent streak. The last election cycle, when President Obama garnered 58% of the vote in Maine, was a particularly tough one for GOP candidates.Yet Collins was reelected with 61% of the vote.

Although she is not one of the conference committee members negotiating the final package, Collins is masterfully playing herself as the key vote to get reform done. 

Wall Street reform finale expected this weekFinancial overhaul measures rile small banks

Inflation (CPI)

The government report attributed most of the month-to-month decline to the energy index, which fell by 2.9% in May. The gasoline index fell by 5.2% in May, and was down 27% over the year.

"Up to this point, the U.S. economy has been the beneficiary of an 'inflation-less' recovery," said Jim Baird, partner and chief investment strategist for Plante Moran Financial Advisors, in a research note.

"While [some] point to the risk of inflation down the road," he added, "there is still sufficient slack in the economy to keep price levels from moving higher."

Core CPI and inflation: The closely watched core CPI, which excludes volatile food and energy prices, ticked up by 0.1% in May after being unchanged in April. That matched economists' expectations.

It was only the second monthly increase in core CPI so far this year. The rate is down by 0.9% over the previous 12 months.

"The core inflation rate remains uncomfortably low," Baird said. "The economy may be expanding, but at a pace that isn't inspiring."

The core rate is a gauge of inflation. Experts say concerns are sparked only when core CPI rises consistently by 0.2% or more each month.

"Muted inflation, and the risk of deflation, seems likely to provide the Fed continued incentive to maintain its accommodative stance," Baird said. 

Home construction fails to lift recoveryInflation (CPI)

The great spending debate

Case in point: The Senate this week failed for the third time to extend unemployment benefits for the long-time jobless and to offer more money to states to help them meet their Medicaid obligations.

"If we end up provoking another Great Depression, it will end up costing us way more. This is a very scary economic event," said Syracuse University professor and budget expert Len Burman.

Burman is convinced the United States faces catastrophic budget failure unless lawmakers adopt fiscally responsible policies and tame debt over time. But he is equally worried now that the country's fiscal condition will get that much worse if more isn't done to boost the economy in the short run both in the United States and Europe.

In his opinion, Congress should do whatever it takes to support states and to provide extensions for unemployment benefits.

"The idea of all the states and Europe contracting is [terrifying]," Burman said.

Economist Mark Zandi, who has advised both Democrats and Republicans, concurs. He thinks Congress should spend $25 billion to $50 billion to help the states, or risk up to 500,000 jobs being lost in the next 18 months at the state and local government levels.

If potential private-sector job loss is included, the liberal Center on Budget and Policy Prioritiesestimates that 900,000 jobs could be lost.

Another deficit hawk, former Congressional Budget Office director Douglas Holtz-Eakin who now runs a Republican think tank, takes a different view on the need for more stimulus.

Holtz-Eakin said he favors extending unemployment benefits because it's the humane thing to do for Americans struggling to find work. But he opposes more aid to the states because he doesn't believe it will stimulate the economy or solve states' budget problems.

"Previous rounds of state aid led them to expect they would get more when there was no promise of more," he said. "In the long run state budgets don't line up. And you're never going to get the states going until the [national] economy gets going."

He believes that business-friendly federal policies -- not more government spending -- will jumpstart the economy.

He also thinks comparisons to 1937 -- when the United States went into a deep recession after the government began to pull in the fiscal reins in the face of growing concerns over deficits -- are overblown.

Indeed, Zandi said that he actually believes there's a better-than-even chance that the economy will not go back into recession, even if Congress doesn't offer any additional help to states and to the unemployed.

"That's a reasonable forecast," Zandi said. "But the risks are too high to take that chance with a 10% unemployment rate, a 0% federal funds rate and a $1.4 trillion annual deficit," he said.

One thing all deficit hawks do agree on is that economic growth can help reduce U.S. debt levels. But even double-digit growth for decades won't be enough to cure what ails the budget.

There are two parts to the country's deficits. One is short term -- incurred because of drops in revenue due to the recession and increased spending to combat the downturn. Short-term deficits can be greatly helped by economic growth, because growth generates more tax receipts and thus reduces the need to borrow.

But the other part is the country's structural deficit, much of which is the projected spending on Medicare and Social Security. The structural deficit will continue to increase long after the economy recovers.

0:00/2:24Will this G-20 be remembered?

Many deficit hawks -- including one of the staunchest, former U.S. comptroller general David Walker -- believe that now may be too soon for serious debt reduction. But they also say now is exactly the time to plan for that reduction when the economy strengthens.

That's the job of President Obama's bipartisan fiscal commission, which will meet for its third full meeting next week. Congressional Budget Director Douglas Elmendorf will address the panel to present the agency's long-term budget outlook. Here's a sure bet: the word "unsustainable" will come up ... a lot. 

Europe cuts deep, the U.S. spends onProblems spotted in economic revival

Manufacturing (ISM)

The reading came in slightly higher than the decrease to 59.4 economists had expected, according to a Briefing.com consensus survey.

Levels higher than 50 signal manufacturing growth, while readings below 50 indicate contraction.

"All in all, this is a very good sign for the overall economy and suggests sustainable growth in the manufacturing sector in the U.S.," said John Silvia, chief economist at Wells Fargo.

May's manufacturing activity was largely driven by an uptick in employment and continued strength in production and new orders, said ISM chairman Norbert Ore in a prepared statement.

Inventory drop: The slight slowdown in manufacturing growth from the previous month was due to a sharp decrease in inventory levels, said Silvia.

ISM's inventory index fell for a second consecutive month to 45.6 in May from 49.4 in April, with eight out of the 18 industries surveyed reporting drops in inventory.

"What happened is the inventory number came down, so inventory rebuilding is falling, which is part of a correction to an inventory buildup," he said. "But everyone was worried that with the inventory reduction, everything else would come down too, so the fact that that's not the case is a very good sign."

Of the 18 industries surveyed, the only sector that reported a slowdown in growth in May was the petroleum and coal products industry, the report showed.

Sixteen of the 18 industries reported expansion. Growth in the paper products, wood products, transportation equipment and electrical equipment industries increased the most in May.

New orders and production: ISM's index of new orders remained steady at 65.7 in May, marking the eleventh month of growth, while the institute's production index edged lower to 66.6 in May from 66.9 in April.

While the production index was lower, it still marked the 12th consecutive month of growth, and 15 industries reported expansion, led by the wood and paper products sector.

Employment: The employment index ticked up to 59.8 in May from 58.5 in April, the index's sixth month of growth.

Twelve of the 18 industries surveyed reported increased employment in May, led by the petroleum and coal products, paper products, transportation equipment and fabricated metal products sectors.

Given the overall trend of manufacturing growth over the past 10 months, and with May's increase in employment, Silvia said he expects activity in the sector to continue to expand.

"We should definitely see continued growth as the economy improves," said Silvia. "It may not move ahead as fast as some people would like, but its getting there."

The monthly report surveys ISM members, who are purchasing managers in the manufacturing industry. The index tracks new orders, production, employment, supplier deliveries, inventories, customers' inventories, backlog of orders, prices, new export orders, imports and buying policies. 

Manufacturing (ISM)TN faces a slow economic recovery

Congress reverses Medicare cuts

The House vote passed 417-1. Rep. George Miller, D-Calif., voted against the measure.

The measure will cost the government $6.4 billion over 10 years. It will now be sent to President Obama to be signed into law.

The passage of the legislation brings an end to a two-month battle that has left many doctors uncertain about their ability to continue accepting Medicare patients. All told, 43 million people, mostly seniors, receive Medicare benefits.

The root of the dispute is a 1997 law that requires that doctors' Medicare rates be adjusted each year based on a formula tied to the health of the economy. The law says rates should be cut every year to keep Medicare in the black.

Congress has now blocked such cuts 10 times in the last eight years, including four times since January.

The Medicare reimbursements were slashed starting June 1. The Centers for Medicare & Medicaid Services temporarily delayed processing claims in hopes that Congress would reverse the cuts.

The Medicare agency was hopeful that its freeze would buy it enough time so it wouldn't have to send doctors reduced checks.

But the Medicare agency, saying it couldn't wait any longer for congressional action, had started processing all claims from June 1 through now -- and those included the 21% rate cuts.

Lawmakers had been stuck in a stalemate driven by concerns about federal spending.

Obama said in a statement that he was "pleased" the measure passed because a cut would have forced some doctors to stop accepting Medicare.

"We should also agree, as I've said in the past, that kicking these cuts down the road just isn't an adequate solution to the problem," Obama added, calling the system of temporary fixes "untenable."

0:00/3:17Doctors opt out of Medicare

The American Medical Association has railed against the Medicare reimbursement formula, arguing that without a total overhaul, lingering uncertainty will remain for both physicians and consumers. Lawmakers counter that retooling the current setup would cost $210 billion over 10 years.

"The six-month Medicare patch Congress passed today is a very temporary reprieve for seniors and baby boomers who rely on the promise of Medicare," the AMA said in a statement immediately following the House vote. "Delaying the problem is not a solution."

-- CNN's Deirdre Walsh contributed to this report.  

Doctors’ Medicare payouts to be cut 21% June 1Seniors get Medicare drug checks early

Manufacturing (ISM)

The reading came in slightly higher than the decrease to 59.4 economists had expected, according to a Briefing.com consensus survey.

Levels higher than 50 signal manufacturing growth, while readings below 50 indicate contraction.

"All in all, this is a very good sign for the overall economy and suggests sustainable growth in the manufacturing sector in the U.S.," said John Silvia, chief economist at Wells Fargo.

May's manufacturing activity was largely driven by an uptick in employment and continued strength in production and new orders, said ISM chairman Norbert Ore in a prepared statement.

Inventory drop: The slight slowdown in manufacturing growth from the previous month was due to a sharp decrease in inventory levels, said Silvia.

ISM's inventory index fell for a second consecutive month to 45.6 in May from 49.4 in April, with eight out of the 18 industries surveyed reporting drops in inventory.

"What happened is the inventory number came down, so inventory rebuilding is falling, which is part of a correction to an inventory buildup," he said. "But everyone was worried that with the inventory reduction, everything else would come down too, so the fact that that's not the case is a very good sign."

Of the 18 industries surveyed, the only sector that reported a slowdown in growth in May was the petroleum and coal products industry, the report showed.

Sixteen of the 18 industries reported expansion. Growth in the paper products, wood products, transportation equipment and electrical equipment industries increased the most in May.

New orders and production: ISM's index of new orders remained steady at 65.7 in May, marking the eleventh month of growth, while the institute's production index edged lower to 66.6 in May from 66.9 in April.

While the production index was lower, it still marked the 12th consecutive month of growth, and 15 industries reported expansion, led by the wood and paper products sector.

Employment: The employment index ticked up to 59.8 in May from 58.5 in April, the index's sixth month of growth.

Twelve of the 18 industries surveyed reported increased employment in May, led by the petroleum and coal products, paper products, transportation equipment and fabricated metal products sectors.

Given the overall trend of manufacturing growth over the past 10 months, and with May's increase in employment, Silvia said he expects activity in the sector to continue to expand.

"We should definitely see continued growth as the economy improves," said Silvia. "It may not move ahead as fast as some people would like, but its getting there."

The monthly report surveys ISM members, who are purchasing managers in the manufacturing industry. The index tracks new orders, production, employment, supplier deliveries, inventories, customers' inventories, backlog of orders, prices, new export orders, imports and buying policies. 

Manufacturing (ISM)TN faces a slow economic recovery

Early signs of consensus at G-8 summit

The official acknowledged that there were different "points of emphasis" among the leaders at the meeting, which is in its early stages. But he said there is a "convergence of views" and that the president is "confident" about the upcoming meetings of the Group of 20 nations, which includes China, India and other developing economic powers.

"There is broad consensus among G-8 leaders on how to maintain durable growth while reaffirming our shared commitment to fiscal consolidation going forward," the official said.

President Obama has stressed the need to keep economic stimulus measures in place to prevent a global slowdown. But European nations have been moving toward more conservative fiscal policies as the region grapples with an ongoing debt crisis.

0:00/2:45G-20 global expectations

In a letter to G-20 leaders sent earlier this week, the president wrote that safeguarding and strengthening the economic recovery should be "our highest priority in Toronto."

"This means that we should reaffirm our unity of purpose to provide the policy support necessary to keep economic growth strong," he wrote. "In fact, should confidence in the strength of our recoveries diminish, we should be prepared to respond again as quickly and as forcefully as needed to avert a slowdown in economic activity."

Meanwhile, European nations have been cutting back on public spending and raising taxes to cope with massive budget deficits. The euro has been in a tailspin as investors bet against the proposed austerity measures and worry the European Union could slide back into recession.

On Tuesday, the United Kingdom unveiled one of its harshest budgets in decades. The five-year budget, widely anticipated by fiscal experts, may hold lessons for U.S. policymakers who will face similar quandaries about how to rein in debt.

"The president sees deficit reduction as part of a long-term growth strategy," the White House official said. 

European debt worries worldEurope cuts deep, the U.S. spends on

Retail Sales

It was first decline since last September, when retail sales fell 2.3%. Economists surveyed by Briefing.com expected sales would increase by 0.2% in May.

Sales excluding autos and auto parts dropped 1.1% last month. Economists had projected sales excluding autos to edge up 0.1% in May.

"The trend as of late has been modest growth, and around the trend of modest growth, you're going to get some ups and downs," said Scott Hoyt, a retail economist with Moody's Economy.com. "That's clearly what we're seeing here."

Sales declines were led by a 9.3% drop in building material and supplies.

But because sales growth in this area was up more than 6% in both March and April, Hoyt said last month's correction was not surprising.

"It was up so much [in March and April] partly related to the appliance incentives administrated by states that were mostly rolled out in March and April and part of it was probably pent up demand after winter weather," he said. "But once you work off that pent up demand, you go back to a normal level."

Sales at gasoline stations also fell significantly in May, dropping 3.3%.

"This has to do with seasonality, since gas prices usually increase at this time of year but were flat or even down last month," said Hoyt. "When there isn't an increase in gas prices, this shows up in retail sales."

Meanwhile, motor vehicle and parts sales dropped 1.7% in May. Hoyt said this was the most surprising part of May's report, since automakers such as Ford (F, Fortune 500) and General Motors posted large May sales increases earlier this month.

Excluding the weakness in these three areas -- building supplies, gasoline stations and motor vehicles -- Hoyt said overall sales would have increased 0.1% in May.

Total retail sales were up 6.9% over the same period last year.

Consumer spending accounts for two-thirds of U.S. economic activity, so related reports such as retail sales are closely watched to gauge whether a recovery is underway.

Despite May's disappointing data, Hoyt said that given the overall trend of growth this year, he expects retail sales to improve in the long run, just not as quickly as earlier this year.

"The pace of consumer spending growth we saw in the first quarter was too fast and couldn't be sustained," he said. "But if you put this [report] in the context of the last few months, where growth was quite strong, and smooth it all out a bit, we are still consistent with the story of modest spending growth, and this is where we should be." 

Tax credit, low mortgage rates lifted April home salesRetail Sales

Stealth ban on Gulf drilling

"I'm almost out of business over here," said Paul Butler, president of Spartan Offshore, a small drilling company in Metairie, La.

Butler said that only one of his four drill rigs are operating; all four were drilling before the spill. Spartan has six contracts that would put his entire fleet back to work, but he can't get going until the permits come through, he added.

The week before last, Butler said he had to lay off 72 employees. Come Tuesday he'll have to let another 140 go.

"That's 140 families, is how I look at it," Butler said.

Same is true at Hercules Offshore, the largest shallow water driller in the Gulf.

0:00/2:00Drilling moratorium digs deep

"The Department of Interior isn't issuing permits," said Jim Noe, a Hercules executive. "By mid July all of our rigs will be on the beach, and the workers without a job."

That could be a lot of jobs.

Jobs on the line: Deep water drilling, which is currently banned while an investigation into the Deepwater Horizon accident is underway, is estimated to employ at least 35,000 people on both the rigs and in jobs that support them.

Nearly that many jobs could also be at stake over shallow water drilling. While shallow water rigs are smaller and employ only about half as many people, there are almost twice as many of them in the Gulf, according to the Louisiana Mid-Continent Oil & Gas Association.

"Do not close down Louisiana's economy with this ill-conceived freeze," Lt. Gov. Scott Angelle said in a recent statement on the deep water ban. "Louisiana's offshore industry is critical to the economic survival of this nation."

Angelle is leading an effort to prod the administration into issuing shallow water permits as well, and is on a twice-weekly briefing call with federal officials on the matter.

"Every time he asks them how many permits they've issued, and each time the answer is zero," said Hercules' Noe.

Drilling ban: The jobs at stake

Safety first: An Interior Department spokeswoman said there is no freeze on shallow water drilling. However, she said, new safety procedures were put in place following the Deepwater Horizon spill.

"Companies have to comply before we can issue them permits," the spokeswoman said. "No one has fully complied."

Spartan's Butler said there was a long delay between when Interior stopped issuing permits and when the new safety guidelines came out. Indeed, the first Interior Department notification to oil companies about the new requirements was dated June 8, nearly two months after the disaster.

Butler said he has been scrambling to get his paperwork in order and hopes that permits will be issued soon.

Shallow water drillers feel their operations are safer than the deep water operations like BP's.

The drillers say that an oil leak is easier to stop in shallow water, because the safety equipment is mounted right under the rig -- not a mile under the ocean surface. The geology is also better known and the water pressure is less. In addition, oil is easier to corral in shallow areas.

'System is broken': But others say that's not true, and believe the new safety requirements are reasonable. The massive Gulf oil leak, so far unstoppable, is one of the worst environmental disasters in American history. And it appears that a series of faulty industry procedures and shoddy government oversight are to blame.

"The system regulating offshore drilling operations is broken," Regan Nelson, senior oceans advocate at the Natural Resources Defense Council, wrote in a recent blog post. "A broken system could lead to additional failures, regardless of the depth of water."

Nelson noted that two bad oil spills -- one in Mexico in the late 1970s and one recently off the coast of Australia -- both occurred in shallow water.

"Until we have a better handle on what it takes to drill safely, the president's moratorium should cover all new drilling activities," she said.  

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Inflation (CPI)

The government report attributed most of the month-to-month decline to the energy index, which fell by 2.9% in May. The gasoline index fell by 5.2% in May, and was down 27% over the year.

"Up to this point, the U.S. economy has been the beneficiary of an 'inflation-less' recovery," said Jim Baird, partner and chief investment strategist for Plante Moran Financial Advisors, in a research note.

"While [some] point to the risk of inflation down the road," he added, "there is still sufficient slack in the economy to keep price levels from moving higher."

Core CPI and inflation: The closely watched core CPI, which excludes volatile food and energy prices, ticked up by 0.1% in May after being unchanged in April. That matched economists' expectations.

It was only the second monthly increase in core CPI so far this year. The rate is down by 0.9% over the previous 12 months.

"The core inflation rate remains uncomfortably low," Baird said. "The economy may be expanding, but at a pace that isn't inspiring."

The core rate is a gauge of inflation. Experts say concerns are sparked only when core CPI rises consistently by 0.2% or more each month.

"Muted inflation, and the risk of deflation, seems likely to provide the Fed continued incentive to maintain its accommodative stance," Baird said. 

Home construction fails to lift recoveryInflation (CPI)

GDP

Economists expected the third reading of GDP during the first quarter to hold unrevised at 3%, according to a consensus of economist opinion from Briefing.com.

The Commerce Department said increased personal spending continued to stimulate the economy, but those advances were partly offset by "a larger decrease in state and local government spending."

The downward revision "leaves the current economic recovery looking even less impressive compared with previous ones," said Paul Dales of Capital Economics in a research note.

While Dales expects growth in the second quarter to pick up to an annual rate between 3% and 4%, he said that will not be sustainable.

"Growth will soon slow as the rebound in world trade fades, inventory rebuilding slows and the size of fiscal injection shrinks," he said. "Overall, the U.S. economy may be performing much better than those in Europe, but this is still the weakest and longest economic recovery in U.S. post-war history."

During the last three months of 2009, economic activity grew at an annual pace of 5.6%.  

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Banks: We're hiring so we can make more home loans

JPMorgan Chase (JPM, Fortune 500), one of the nation's largest lenders, is in the midst of hiring 1,200 mortgage officers. "We may not be inundated with applications tomorrow, but we are confident the the need will be there," said Christine Holevas, a spokeswoman for JPMorgan Chase.

Housing experts, however, warn that overall mortgage lending is expected to remain flat, largely due to a decline in refinancing.

Loans for home purchases should steadily increase over the next two years to $916 billion, up from an expected $725 billion this year, according to forecasts by the Mortgage Bankers Association. But refinancings should plummet to $474 billion in 2012, down from $717 billion this year.

"It's pretty premature," said Mark Dotzour, chief economist at Texas A&M's Real Estate Center. "They are doing some long-range planning, with the emphasis on 'long'."

More branch-based lending

Chase expects to put its new mortgage lending army in the branches of the former Washington Mutual, which Chase acquired in 2008. It also plans to expand its mortgage lending operations to cities outside its footprint, including Boston, St. Louis and Washington, D.C.

The bank is also shifting to a branch-based lending strategy because it found that these mortgages are much less likely to default. And the bank sees a need in these markets.

"We wouldn't be out there hiring if we thought these people would be sitting around," said Holevas. "We don't think they'll be idle."

Citizens Bank, meanwhile, is also growing its mortgage operations. The Providence, R.I.-based bank, which operates in a dozen states, increased its lending by 167% in 2009, compared to the year before.

Owned by the Royal Bank of Scotland, Citizens ranked as the 24th largest lender in the first quarter of this year, according to Inside Mortgage Finance, a trade publication.

0:00/2:39Whitney: Housing set to fall again

And they plan to get even bigger, adding 400 loan officers by 2013. This year alone, they are growing the department by more than 100 people.

"There are a significant number of people purchasing homes," said Ellen Steinfeld, senior vice president for home lending solutions. "There is a lot of opportunity for us to increase our lending."

Optimistic view

Not everyone, however, has such a cheery view of the housing market.

It will take time for the mortgage market to rebuild, said Jay Brinkmann, chief economist at the Mortgage Bankers Association. He is predicting banks will issue fewer mortgages this year than last.

"Until the uncertainty in the employment situation resolves itself, you'll find people will be hesitant," Dotzour said. 

TARP’s tiniest failures add upGovernment shuts down 4 failing banks

Retail Sales

It was first decline since last September, when retail sales fell 2.3%. Economists surveyed by Briefing.com expected sales would increase by 0.2% in May.

Sales excluding autos and auto parts dropped 1.1% last month. Economists had projected sales excluding autos to edge up 0.1% in May.

"The trend as of late has been modest growth, and around the trend of modest growth, you're going to get some ups and downs," said Scott Hoyt, a retail economist with Moody's Economy.com. "That's clearly what we're seeing here."

Sales declines were led by a 9.3% drop in building material and supplies.

But because sales growth in this area was up more than 6% in both March and April, Hoyt said last month's correction was not surprising.

"It was up so much [in March and April] partly related to the appliance incentives administrated by states that were mostly rolled out in March and April and part of it was probably pent up demand after winter weather," he said. "But once you work off that pent up demand, you go back to a normal level."

Sales at gasoline stations also fell significantly in May, dropping 3.3%.

"This has to do with seasonality, since gas prices usually increase at this time of year but were flat or even down last month," said Hoyt. "When there isn't an increase in gas prices, this shows up in retail sales."

Meanwhile, motor vehicle and parts sales dropped 1.7% in May. Hoyt said this was the most surprising part of May's report, since automakers such as Ford (F, Fortune 500) and General Motors posted large May sales increases earlier this month.

Excluding the weakness in these three areas -- building supplies, gasoline stations and motor vehicles -- Hoyt said overall sales would have increased 0.1% in May.

Total retail sales were up 6.9% over the same period last year.

Consumer spending accounts for two-thirds of U.S. economic activity, so related reports such as retail sales are closely watched to gauge whether a recovery is underway.

Despite May's disappointing data, Hoyt said that given the overall trend of growth this year, he expects retail sales to improve in the long run, just not as quickly as earlier this year.

"The pace of consumer spending growth we saw in the first quarter was too fast and couldn't be sustained," he said. "But if you put this [report] in the context of the last few months, where growth was quite strong, and smooth it all out a bit, we are still consistent with the story of modest spending growth, and this is where we should be." 

Tax credit, low mortgage rates lifted April home salesRetail Sales

Consumer Confidence

Economists were expecting the index to increase to 58.3, according to a Briefing.com consensus survey. The figure, which is based on a survey of 5,000 U.S. households, is closely watched because consumer spending makes up two-thirds of the nation's economic activity.

The Conference Board said the survey cutoff date was May 18, meaning that the data took into account such events as the "flash crash" of May 6 and the ongoing European debt crisis. It would not have included some of the events that have roiled markets in recent days, such as the tensions in Korea.

"Consumer confidence posted its third consecutive monthly gain, and although still weak by historical levels, appears to be gaining some traction," said Lynn Franco, director of the Conference Board, in a statement. "Consumers apprehension about current business conditions and the job market continues to dissipate.

The overall index has been recovering slowly since reaching a record low of 25.3 in February 2009, but was still far from a reading above 90, which indicates the economy is stable, and 100 or above, which indicates strong growth.

The expectation index, which measures consumers' outlook over the next few months, rose to 85.3, the highest level since August 2007, when it came in at 89.2.

"The improvement has been fueled primarily by growing optimism about business and labor market conditions." Franco said.

The percentage of Americans expecting business conditions to pick up increased to 23.5% from 19.7% last month, and fewer expected circumstances to worsen.

The percentage of those expecting the job market to improve also edged higher to 20.4% from 17.7% the previous month. Last month, employers added the most jobs since March 2006, and economists expect payrolls to increase by 500,000 jobs this month, which would be the most since September 1997.

Those expecting a rise in their incomes improved modestly to 11.3% from 10.5%.

"The Consumer Confidence Index tends to reflect consumer impressions of the direction of the jobs market," said Jim Baird, partner and chief investment strategist for Plante Moran Financial Advisors, in a research note. "The recent marked improvement in the pace of job creation is clearly lifting spirits."

But as spooked investors remain fixated on debt problems in Europe and growing tensions in Korea, Baird said the market's recent turmoil "will undoubtedly weigh" on consumer sentiment.

"We do not expect discretionary spending to return to pre-recession levels for some time," Baird said. "Nonetheless, should we see continued improvement in the jobs market as anticipated in the months ahead, improving personal income should be supportive of spending growth." 

Consumer ConfidenceProblems spotted in economic revival

Last stop: Wall Street's risky bets

For nearly two weeks, a negotiating committee of 43 lawmakers has been reconciling the House and Senate versions of the most sweeping overhaul of the financial regulatory system since the 1930s.

The panel is on track to complete negotiations by Thursday evening, preparing bills for final passage by each chamber next week, said Rep. Barney Frank, D-Mass., who is running the conference committee.

"We want to make sure that this bill can be voted on before the July 4th break...no one is interested in prolonging uncertainty," Frank said Wednesday. "We have to conclude tomorrow night."

The Wall Street reform bills aim to strengthen consumer protection, shine a light on complex financial products, create a new process for taking down giant, failing financial firms, and make them stronger to prevent such failure.

Thursday's agenda

One of the outstanding issues is the best way to craft a provision, first proposed by former Federal Reserve Chairman Paul Volcker, to stop banks from owning hedge funds and trading for their own accounts.

That provision is being merged with another one that aims to prevent big banks from making risky bets and having access to emergency taxpayer-backed loans. That measure originally would have required banks to spin off their departments that trade complex financial contracts called derivatives.

The House bill doesn't include similar language, but some lawmakers have said they're open to the idea. Meanwhile, some of the more conservative Democrats have expressed reservations about portions of this section, according to a letter penned last week.

Senate Banking Chairman Sen. Christopher Dodd, D-Conn., said Wednesday they hadn't finished work on provisions to limit Wall Street's investment activities.

He said he was trying to strike the right balance of putting "real limitations" on risky banking activities without preventing banks from "proper hedging' against legitimate risks.

"Striking that balance is the challenge," he said. "We've been trying to find that sweet spot we could agree with."

Also, on Thursday, lawmakers will tackle general differences on the bills that aim to shine a light on derivatives, which are currently traded in the shadows.

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Both bills push many derivatives onto clearinghouses and exchanges that can better pinpoint the value of the securities and create firewalls between buyers and sellers. However, the House version allows more leeway for financial firms to avoid exchanges and avoid posting collateral on such contracts.

Progress made

The panel has made progress on many items of contention.

On Wednesday, lawmakers agreed to go with a Senate measure to pay to unwind failing financial firms by taxing banks after a major collapse. But lawmakers plan to require some sort of repayment plan get lined up before any money goes toward taking down a failing firm.

They're also on track to weaken a Senate provision requiring banking parent companies to bulk up their capital cushions with assets that can be more easily converted to cash. The Senate measure would cause all banks to have to raise a lot of money. House negotiators are concerned about the impact, especially on smaller banks, and pitched ways to weaken the measure.

Lawmakers are moving toward allowing those bank holding companies with less than $15 billion in assets to "grandfather" in existing assets under existing rules. But banks would have to move toward tougher standards for new securities over some period of time, either five, seven or 10 years. Lawmakers are still negotiating the timing.

They also agreed to house a consumer protection regulator inside the Fed and give it power to regulate credit cards and mortgages, but not auto dealers who make auto loans. 

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GDP

The figure was less than the initially reported GDP rise of a 3.2% annual rate, which the government announced on April 30.

It was also less than economists were expecting. The revised GDP was forecast to have risen at a 3.3% rate in the first quarter, according to a consensus of economist opinion from Briefing.com.

The Commerce Department said personal spending, investment and export activity were fueling the economy. However, the government said these gains were offset by "negative contributions from state and local government spending and residential fixed investments," as well as increases in import activity. 

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The best stimulus? Spend less, borrow less

So Thatcher summoned Meltzer, along with a group of trusted advisors, to explain why the experts were wrong. Even leaders of her own party advised Thatcher to make what they called a 'U-Turn,' and enact a big spending program to pull Britain out of recession. "Our job was to explain why lower deficits and spending discipline were the key to recovery," recalls Meltzer.

Thatcher was regally unamused by arcane jargon. "Being right on the economics wasn't enough," intones Meltzer. "She made it clear that our job was to explain it so she could understand it. If we didn't, she made it clear we were wasting her time. She'd say, 'You're not telling me what I need to know.'"

Thatcher stuck with draconian policies, invoking the battle chant "The Lady's Not for Turning." She launched Britain years of balanced budgets, modest spending increases, falling joblessness, and extraordinary economic growth.

Misunderstanding Keynes

For Meltzer, the courageous, damn-the-sages stance that Thatcher took three decades ago should guide President Obama today. "If Obama announced a strategy to deal with the long-term debt and stopped doing things to increase the uncertainty that businesses face, it would do a great deal to stimulate the economy," declares the 82-year old Meltzer.

Meltzer is right, and most of the "experts" -- from Paul Krugman to Ben Bernanke -- are wrong. The best stimulus is a solid, credible plan to radically reduce government spending, starting right now.

To be sure, President Obama frequently advocates shrinking deficits in future years. The problem is that he wants to keep spending heavily today, in what's supposedly a classic Keynesian formula for charging a weak recovery and lowering unemployment.

But that formula isn't what Keynes recommended. "Keynes championed temporary deficits to stimulate consumption during recessions," says Steve Hanke, an economist at Johns Hopkins. "But he also insisted that deficits disappear during recoveries, so that budgets would be balanced or in surplus during most of the business cycle."

Today, the administration is pursuing a totally different policy. It's sharply raising expenditures when the U.S. already faces gigantic, chronic deficits that barely shrink even in a recovery, and burgeoning debt. "Keynes specifically warned against structural deficits when both U.S. and British economists were pushing for them at the end of World War II," says Meltzer. "He never said that more spending on top of chronic deficits was a stimulus. Just the opposite, in fact."

The Obama administration is calling for an extra $316 billion in "stimulus" spending in addition to the $862 billion already appropriated. The rub is that the all of the "stimulus" money is being borrowed, and that's adding to already mushrooming debt. Right now, the CBO forecasts deficits of $1.25 trillion or an immense 5.6% of GDP in 2020 -- and that's following a strong recovery. That year, the federal debt will reach 90% of national income, putting the U.S. in the fragile position of a Greece or Portugal. Interest payments will absorb one dollar in every six of federal spending.

The rub is that the shadow of inexorably rising debt, with no plan to curb it, isn't a stimulus at all, but a heavy depressant. The solution is to sharply reverse course and bring the budget into balance over the next decade. That solution will require either a 50% increase in taxes, a 35% reduction in spending, or some combination of the two. The weight should fall heavily on the spending side.

That blueprint would prove a powerful tonic for the economy for four reasons -- call them the four growth factors. First, it would dramatically raise the labor supply by allowing Americans to pocket more of their pay. Second, it would prevent real interest rates from soaring and crippling private investment. Third, it would encourage companies to stop hoarding cash and make the big investments in factories and computers that always drive a recovery. And fourth, it would enormously boost investors' confidence in America's future by showing that, like Thatcher long ago, our leaders won't get swamped by chaos, and really have a plan.

1. The labor force factor

Economic growth is driven by two forces -- increases in the labor force and rising productivity nurtured by investment in new technologies, plants and equipment that enable each worker to produce more from each hour of labor. "The quickest way to spur growth is to get more people working, or to get existing workers to put in more hours," says Brian Riedl, an economist with the conservative Heritage Foundation.

But excessive spending threatens to shrink, rather than expand, America's workforce by driving up taxes. The top income tax rate is already scheduled to rise from 35% to 39.6% in 2011.

Especially troubling are the perverse incentives built into the health-care reform bill. Middle class Americans who aren't insured through their companies can buy heavily subsidized policies under the plan. The problem is that as their incomes rise, the subsidies decline, giving them far less incentive to work more hours or stretch for raises. For example, if the income for a family of four rises from $55,000 to $66,000, their contribution to their premium jumps from $4,400 to $6,600, erasing 22% of the $10,000 increase. (See also 5 painful health-care lessons from Massachusetts)

Lowering spending is the only way to hold down tax rates that largely determine how hard Americans work. The crazy math of health-care reform is another "tax" that itself needs radical reform--before it takes hold in 2014.

2. The interest rate factor

To achieve robust growth, US companies need to borrow at stable, modest real interest rates. They're defined as the rates lenders charge after adjusting for inflation. In the past, relatively high real rates -- say 4% to 5% -- usually came during periods of great prosperity, when companies brimmed with optimism, and demand for capital was strong. The danger now is that unbridled future spending makes borrowing extremely expensive even when growth is weak, and remains so high that it undermines or prevents recoveries.

Real rates threaten to jump, and remain far higher than normal, for three reasons. First, part of the price of borrowing is a "risk premium" that rises or falls depending on investors' belief that the U.S. is following policies that will foster stable growth. Today, investors are far more fearful than confident.

Second, higher taxes raise rates, since investors who can buy bonds anywhere in the world seek the best returns after tax; if levies rise, as now scheduled, investors will demand bigger interest payments to compensate for the higher tax bite.

0:00/2:29The $1 trillion problem

Third, government borrowing is reaching such stratospheric levels that it's almost bound to pressure rates. In the past, deficits in the 4% to 6% range proved relatively harmless, with the debt seldom reaching more than 40% of GDP. But by 2020, the burden will reach almost 100% of GDP, or around $20 trillion. The U.S. will need to constantly refinance that debt, and borrow still more.

Those gigantic borrowings will compete for the modest pool of savings, threatening to hold real rates high for years, even when growth is slow. But can't the U.S. keep tapping the foreign creditors who now purchase the bulk of our Treasuries? Sure. But debt levels in Europe and Japan are also extremely high, so more and more private savings are going to finance their big deficits as well.

As a result, the reserve of global savings available to U.S. companies will be largely claimed by governments. To attract lenders, the U.S. will need to compete by raising rates. The solution: Spend less, and borrow less. Once again, low real rates are real stimulus.

3. The investment factor

"Recoveries are led by investment," says John Cochrane, economist at the Booth School of Business at the University of Chicago. "You need a big surge in investment to lead you out of recession."

In the short term, both consumption and investment spending lift GDP. But over longer periods, it's investment that raises productivity by adding software systems, mainframes and ultra-efficient factories that produce more products at fewer working hours.

The numbers tell the story. The administration has chiefly succeeded in supporting consumption through its $800 per family rebates and grants to the states to maintain public jobs. Amazingly, since 2008, consumer spending has actually grown by almost 1% after inflation, and rose to a lofty 72% of GDP for 2009. By contrast, private investment dropped 18% in real terms in the same period.

A fall in investment is normal in recessions. The problem this time is that corporate profits are rebounding fast, yet companies are extremely reluctant to reinvest them in new projects. "What I see out there is apprehension," says Randy Altschuler, founder of CloudBlue, a recycler of used electronics equipment, and a Republican candidate for a seat in the House of Representatives from Eastern Long Island. "The owners of small companies I talk to are especially worried about health-care costs. Hence, they're holding back hiring and capital investment."

It's not so much that companies fret that consumers won't have enough to spend on their cars, insulation and restaurants. Their big concern is over their future costs. Employers with more than 50 workers that don't currently provide health care will soon need to pay for it, or face stiff penalties. The health-care bill is part of the spending agenda that's scaring business. Reducing its burdens is crucial to getting companies to make the investments that are essential to spurring growth.

4. The confidence factor

This one is impossible to quantify. It's a feeling that says we're headed the right way.

Put simply, if investors are convinced that Washington has a plan to restore fiscal balance, they'll be content with lower returns on their stocks, bonds and buildings for a simple reason: those returns will prove more stable and predictable. That comfort level, in turn, lowers risk premiums and raises the prices of equities, corporate bonds, houses, and office towers.

Right now, many investors and managers are simply terrified by the absence of a roadmap to avoid ruinous debt. "We need to know that Washington can make tough choices, that our leaders are willing to do things that are unpopular," says Paul Willen, an economics professor at MIT. "More than anything, people need to feel that this is not out of control."

That's the confidence the Iron Lady brought in 1980, against all odds, and against most advice. The world's greatest economy will follow if Washington will only lead.  

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Debt-laden U.K. to cut budget drastically

So serious, in fact, that a higher capital gains tax rate will take effect at midnight for high-income taxpayers.

The five-year budget, widely anticipated by fiscal experts, may hold lessons for U.S. policymakers who will face similar quandaries about how to rein in debt.

"The types of policy changes there are certainly a more realistic insight into what we will have to contemplate than talk of earmark reform and incremental changes we are still focusing on here," said Maya MacGuineas, president of the bipartisan Committee for a Responsible Federal Budget.

U.K. Chancellor George Osborne told Parliament that the overarching goal is to eliminate major parts of the annual deficits by 2015, and to ensure that the country's debt will begin to fall as a percentage of GDP.

Britain's debt, which tops $1 trillion, is on pace to double in the next five years. Interest payments on that debt, already high, are set to climb by an estimated 67% during that period. Meanwhile, its annual deficit reached 11% of GDP last year and is on track to hit 10.5% this year.

The budget comes at a time when policymakers in Washington and in Europe are debating when to make the switch from nursing economic recovery to embarking on fiscal discipline. Critics of immediate fiscal austerity warn that it would snuff out still-fragile economic growth.

0:00/2:18Tightening time for the U.K.

Osborne doesn't buy it.

"Some have suggested that there is a choice between dealing with our debts and going for growth. That is a false choice. The crisis in the Eurozone shows that unless we deal with our debts there will be no growth," Osborne told the Parliament.

'The country was living beyond its means'

The path the coalition government has set up is stringent to say the least.

Osborne said 77% of the consolidation called for will come from spending cuts and 23% by way of increased tax revenue.

Spending in the public sector, which has continued to grow even as the private sector has shrank, will be reined in.

"I know there are many dedicated public sector workers who work very hard and did not cause this recession -- but they must share the burden as we pay to clean it up," Osborne said. "The truth is that the country was living beyond its means when the recession came. And if we don't tackle pay and pensions, more jobs will be lost."

He proposed a two-year freeze on public-sector pay for all but the lowest income workers. He also proposed capping the pay of those who run public sector organizations so that it doesn't exceed 20 times that of the lowest paid worker.

The government is also analyzing how best to control costs in state pensions.

In terms of targets for national agencies, the government is aiming to cut spending by 25% by 2014. But the National Health Service will be protected, and cuts in education and defense are not likely to be as harsh as they are for other areas.

Social welfare benefits -- such as those for the unemployed, disabled and pregnant -- will reduced or eliminated for some people.

Osborne also said Queen Elizabeth's budget will be frozen at the same level where it's been for the past 20 years, and her future expenditures to carry out her duties will be subject to audit.

The budget proposes several tax increases. These include the capital gains tax, currently 18%, which will rise to 28% for high-income taxpayers. The value-added tax will increase from 17.5% to 20%. And banks will be subject to a new tax. In addition, a financial transactions tax is under consideration.

The value of several tax credits -- both for individuals and business -- will be limited.

But not all of Osborne's plan is austere. In order to attract business to Britain, for example, he said the corporate tax rate will be cut as will small business tax rates. In addition, almost 900,000 low-income people will no longer owe any income tax.

And to the relief of English football fanatics, the coalition government will reverse a planned increase this month in the duty on cider "just in time to celebrate England's progress to the quarter finals, or else to drown our sorrows," Osborne said.

A lot is riding on the reception of the budget in the markets. While Britain maintains a sterling AAA credit rating, Standard & Poor's in May 2009 lowered its credit outlook on U.K. debt to "negative" from "stable." And the agency said it would revisit its decision after the release of the new government's budget.

"Questions that were asked about the liquidity and solvency of banking systems are now being asked of the liquidity and solvency of some of the governments that stand behind those banks," Osborne said. "I do not want those questions ever to be asked of this country."

Nursing recovery vs. cutting debt

The U.K.'s bold move to start its deficit-cutting regime this year seems to be exactly the kind of immediate belt-tightening that President Obama cautioned against in a letter to leaders of the G20, who will meet in Toronto this weekend.

While acknowledging the need for G20 countries to commit to stabilizing their debt-to-GDP ratios in the medium term, the president said pulling in the reins on spending too soon could hurt the nascent economic recovery.

"We must be flexible in adjusting the pace of consolidation and learn from the consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession," Obama wrote.

The country's new Office for Budget Responsibility estimates that under the new budget annual real GDP growth in Britain will average 2.4% over the next five years.

Should the economy underperform relative to those projections, all bets are off politically. "The huge risk for the government is on the growth side," said Wolfango Piccoli, an analyst at the Eurasia Group. "They took a significant bet."

Whether fiscal tightening in Britain derails the country's recovery depends on the state of the global economy, said IHS Global Insight chief UK economist Howard Archer in a research note. The stronger it is, the more likely it is that the U.K. recovery will withstand fiscal austerity.

But, Archer noted, "if the global economy suffers serious problems ... particularly related to events in the Eurozone, then the U.K. economy could struggle terribly." 

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