Unions under fire as states try to curtail benefits

Thousands of Wisconsin's public employees have descended on Madison to protest Gov. Scott Walker's proposal to raise their benefit contributions and limit their collective bargaining ability.

Protests have also erupted in Columbus, Ohio as a bill proposing to eliminate collective bargaining for state workers and public university employees makes its way through the state legislature.

Both states are seeking the flexibility to change employee benefits, and they're not alone.

Health care and pension costs are soaring, making it even harder for public officials nationwide to close massive budget gaps.Forty-four states and Washington, D.C. are facing a total shortfall of $125 billion for fiscal 2012, according to the Center on Budget and Policy Priorities.

In many places, public officials have little leverage to lower these costs because they are set in union contracts. If benefits were removed from the collective bargaining process, states and localities could change them without having to negotiate with the unions, a process that can drag on for months or even years.

"It gives state and local officials more control over the costs of employing government workers," said James Sherk, senior policy analyst in labor economics at The Heritage Institute, a conservative think tank.

Many state and local governments have been leaning on their employees as they look to cut costs and balance their budgets during the Great Recession. Workers, to varying degrees, have made concessions -- taking furloughs or pay freezes and upping their contributions to their health care and retirement benefits.

State officials have long floated so-called right-to-work proposals that would curtail or eliminate union power. But this year, they are getting more traction because Republicans -- who are generally not big fans of unions -- have gained control of more state capitols and governor's mansions.

0:00/2:58Budget crisis: police and fire cuts

For instance, a bill that would end collective bargaining for teachers is currently working its way through the legislature in Tennessee, where Republicans captured the governor's office and took a commanding lead in the house.

And in Indiana, which banned collective bargaining on the state level in 2005, lawmakers are considering a bill to curtail the power of teachers' unions, which are at the local level.

Gov. Walker's controversial proposal

Under Wisconsin Gov. Walker's plan, many state and local workers would pay about 5.8% toward their pension and about 12% of their healthcare benefits. They currently pay little toward their retirement benefits about about 6% of their medical premiums, Walker said.

Walker says these changes would help the state save $30 million in the last three months of the current fiscal year. Wisconsin is facing a $3.6 billion budget deficit for the biennium that starts on July 1, according to the state's Department of Administration.

Even more controversial, Walker is looking to limit collective bargaining for most public employees to wages only. Local law enforcement and fire employees, as well as state troopers and inspectors would be exempt.

That means health care and pension contributions would no longer be subject to contract negotiations, giving state officials greater freedom to raise them.

Governors put state jobs on the chopping block

A bill in Ohio, meanwhile, would not only eliminate collective bargaining but would also make fewer police and firefighters eligible to participate in unions.

Additionally, the Ohio bill would make all public workers pay at least 20% of their health insurance premiums and would eliminate tenure as a consideration when making layoffs. And it would require pay be based on merit for most workers.

Ohio is facing an $8 billion budget shortfall for the coming fiscal year. Gov. John Kasich supports the bill as a way to help stabilize the budgets of the state and localities.

"We need to give our cities, towns and school districts the tools to combat one of their biggest costs -- the cost of labor," said Rob Nichols, his press secretary.

Thousands of teachers and public employees have flocked to Columbus to protest the bill.

"Students need their teachers to focus on them and their classrooms, and allowing the union to represent teachers allows them to do what they do best -- teach," said Philip Hayes, a teacher in Columbus and member of the Ohio Education Association, which sent nearly a thousand school workers to a rally on Thursday.

Concessions from public workers

Given state budget woes, workers' pay and benefits are "an obvious place" to cut back, Sherk said. If employees don't make concessions, state officials will have to cut elsewhere to balance the budget.

"It means there are less tax dollars to fund government services," he said.

But union leaders say that public employees have been giving plenty throughout the recession. Many states have effectively cut pay by instituting furloughs and workers have been contributing more to their benefits.

In California, for instance, workers agreed last year to contribute 10% of their pay to their pensions, up from 5%, said Steven Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees. Ohio public employees made $250 million in concessions in 2008, including an increase in their health care contributions.

"Public employees, through their unions, are making sacrifices," Kreisberg said. "Any argument that workers are not willing to make concessions is clearly not demonstrated by the facts." 

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Government shutdown: What's at stake

It's difficult to predict how the current government would respond to a shutdown, because each federal agency is responsible for crafting and updating its own "shutdown plan."

Those plans are not made public. But the past offers some clues.

The last time the federal government went dark was for five days in November 1995 and another 21 days, ending in January 1996, during the Clinton administration.

As a result, the government closed 368 National Park Service sites, along with national museums and monuments, according to a Congressional Research Service report.

In addition, 200,000 passport applications went unprocessed, and toxic waste cleanup work at 609 sites stopped, according to the same report. The National Institutes of Health stopped accepting new clinical research patients, and services for veterans, including health care, were curtailed.

Debt deal: 'History will condemn us' if U.S. punts

A shutdown would also result in the furlough of hundreds of thousands of federal employees, but the government would keep essential services -- like air traffic control, and the national security apparatus -- in full operating mode.

And yes, the mail will still be delivered.

Still, a large number of federal workers would be asked to stay home.

"When we go into a funding hiatus, this restricts activities ... and agencies are going to trim back the number of people who actually show up at the office," Denise Fantone, director of strategic issues at the Government Accountability Office, told CNNMoney the last time a shutdown seemed likely. "The first thing any agency is going to do is pull out their list of essential personnel."

While on furlough, federal employees won't receive a paycheck, nor would government contractors. Federal employees will eventually receive back pay, but contractors won't be so lucky.

The longer the shutdown goes on, the trickier it gets for agencies to define "essential personnel."

During the last long-term shutdown, the Social Security Administration kept enough staff in place to ensure benefits were paid out, but new claims weren't being processed. As the shutdown wore on, the agency recalled workers to start processing new claims.

What has to happen

With Congress in recess this week, lawmakers will have only four working days to pass a spending bill before the current temporary measure expires.

The good news, if you can call it that, is that Congress has come down to the wire many times before and has usually managed to pass a funding bill.

The starting point for negotiations is a bill approved by the House just before dawn on Saturday that would cut $60 billion in federal spending for the current fiscal year.

But that bill would set spending below levels acceptable to Democrats. President Obama said last week he would veto the House measure should it reach his desk.

0:00/05:05Roubini: Avoid a 'fiscal train wreck'

If lawmakers can't strike a long-term deal that both Senate Democrats and conservative House Republicans will go along with, Congress might resort to passing another short-term measure that would fund the government while negotiations continue on a deal for the rest of the fiscal year.

Typically, lawmakers pass 12 appropriation bills for the president's approval. Those bills give federal agencies the legal authority to spend and conduct business.

This year, not one of the 12 has been approved by the Senate, and Congress has instead relied on short-term measures called "continuing resolutions" in order to fund the government. 

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Chintzy T-shirts and fake pockets hot in 2011

Some companies are taking creative approaches to use less cotton.

"T-shirts may get thinner," said Chris Callieri, principal with A.T. Kearney's retail and consumer practice.

Callieri said some of his clients are playing around with the "density" of cotton fabric, to see how they can use less of it. "But you have to be careful with that approach so that it doesn't affect the quality of the garment," he said.

Another creative tweak is using "fake" pockets.

"You can reduce the size of a garment, but add embroidery and buttons. This can reduce cotton costs as well," Callieri said.

The cotton crunch is also bringing back the go-to fabric of the 70s, polyester.

But before you break into a sweat at the idea of shiny disco shirts and skin-tight trousers hanging at your neighborhood Macy's (M, Fortune 500) this summer, Callieri said retailers are experimenting with blended fabric, such as a poly-cotton mix, to replace pure-cotton offerings.

The cotton crunch is hitting the bedding and linen industry particularly hard since consumers generally favor 100%-cotton sheets.

"What has more cotton than the bedsheet that you slept on last night?" said Andrew Tananbaum, CEO of Capital Business Credit, which provides financing to suppliers who cater to bedding and clothing retailers in the U.S.

0:00/2:14Rising cotton trims rag trade

But companies are now warming up to using blended fabric.

Tananbaum said high thread count poly-cotton blended sheets are about 30% cheaper than comparable all-cotton sheets. The lower price could convince cotton purists to at least try the product and save some money.

"Instead of paying $100 for an 800-thread count all-cotton sheet set, you pay $70 for the same thread count." he said. "So it's cheaper, but the quality is still the same."

Another subtle way retailers will look to keep prices steady is by repackaging cotton products differently. While it won't seem like consumers are paying more, the repackaging will still come at some cost to them.

The most obvious example is with multipacks of cotton undershirts and socks that could shrink from five a pack to three a pack, said Marshal Cohen, chief retail analyst with NPD Group.

Ultimately, Cohen said the bottom line for consumers is that retailers can try to shield them from price increases through these methods but they won't be able to do it forever.

"No one knows when this trend is going to stop. Maybe the only thing that will stop it is if consumer demand for cotton items cools." said Phil Flynn, senior market and commodities analyst with PFG Best.  

Big retailers tailor outlets to shoppers’ frugal tastesRetail Sales

Debt deal: 'History will condemn us' if U.S. punts

Conrad liked some elements. He made clear that he likes how the president's budget would get annual deficits down to 3% of the economy by 2017, down from 10% today.

At that level, the nation's total debt level is considered "stable," provided the economy grows by at least 3% every year.

The problem, Conrad said, is that the president's budget would do nothing to bring gross debt down below 100% of GDP, above which it will be for the next decade.

Gross debt includes both Treasury bonds and money owed to government trust funds, such as those for Social Security and Medicare. As debt mounts above 90%, it impedes economic growth, according to some research.

Lew, under whom the country booked annual surpluses when he was President Clinton's budget director, knows very well the perils of too much debt and is respected for his fiscal acumen.

But he stressed during the hearing that the president's budget is intended as a down payment on debt reduction.

Running the government on 8 cents

Indeed, both the president and Lew have said that they don't believe it would have moved the ball forward if Obama had actually included in his budget a hard-and-fast plan for comprehensive debt reduction, including Medicare and Social Security reform.

"If you look at the last 20, 30 years, sometimes putting out a proposal slows things down because it polarizes the sides as they dug in. We need to figure out a way to have a conversation that gets the parties talking together," Lew said. But, he added, "I can't give you a date or a time."

That answer did not sit well with Conrad.

"I hear the reasons for doing the budget proposal that is out there. ... But I can't accept it if I don't hear a way forward ... because it cannot be the answer that we're going to have debt over 100% of GDP ... That cannot be the answer for this country's fiscal future," he said.

0:00/8:30Who feels the pain in Obama's budget

Conrad, who sat on the president's bipartisan debt commission and has endorsed that group's proposals to reduce deficits by $4 trillion by 2021, has been calling for a fiscal summit to hammer out a long-term plan for debt reduction. He wants the summit to occur before Congress faces a vote to increase the country's legal debt limit, which likely will occur by May.

He's also mindful that the window for earnest negotiations will close quickly in the run-up to the 2012 presidential election.

"The administration has a big responsibility to help us understand their vision of how this process comes together. Sometime very soon there is going to have to be a negotiation that involves the leadership of the House and the Senate and the White House," Conrad said.

Meanwhile, there were a lot of references early this week to the prospect for closed-door negotiations. The president in a press conference said "we're going to be in discussions over the next several months." Senate Republican Leader Mitch McConnell said, " we all understand there are some limitations to negotiating significant agreement in public."

And former senator Alan Simpson, who co-chaired the president's debt commission, said on CNN Monday that when it comes to a debt-reduction deal, "they'll do it in a way that's unseen by the American public." 

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Home construction rises in January

While that was better than the 540,000 housing starts economists had expected for the month, it was "all due to apartment building," said David Crowe, chief economist with the National Association of Home Builders.

Construction of buildings with five units or more, which tends to be volatile month-to-month -- gave the overall number a big boost when that category alone surged 80% in January.

Meanwhile, construction of single-family homes -- which is viewed as a more stable indicator of new homebuilding activity -- was flat. Given fierce winter storms across much of the country, it's an encouraging sign that category did not actually decline, Crowe said.

Meanwhile, the number of permits for future housing construction fell to an annual rate of 562,000 last month, down 10.4% from 627,000 in December, the Commerce Department said.

The reading fell short of forecasts, with economists surveyed by Briefing.com looking for 575,000 permits.

The decline comes after a very strong December, when permits reached their strongest level since last March.

"We had strong increases in December as builders pulled permits to avoid some oenerous regulations being imposed at the first of the year," Crowe said. "In January, we had an adjustment to that."

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Builders made a big push to get permits filed before the end of the year, to get ahead of new regulations in California and Pennsylvania that now require new homes to have fire sprinklers installed.

Crowe said he expects those laws to have only a temporary effect, with new home construction heading upward 17% by the end of 2011.  

Nashville area’s median home price is highest in 2 yearsNew home sales jump to 8-month high

Home prices

"With these numbers, more analysts will be calling for a double-dip in home prices," said David Blitzer, spokesman for Standard & Poor's.

The worst-hit market during the month was Detroit, where prices fell another 2.7%. That was especially troubling considering how low that city's prices already were. In Washington D.C. prices inched down only 0.1%, making it the second-best performing city behind San Diego.

Where to rent vs. buy

The bleeding in some of the bubble markets seems to have slowed, with Las Vegas (-0.4%), Miami (-0.2%) and Tampa (-0.8) all recording losses of under 1%. But nine markets -- Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, Portland, Ore., Seattle and Tampa, Fla. -- are all at their lowest levels since they peaked during the boom.

The latest downturn put prices 1.6% lower than 12 months ago, slightly worse than industry expectations. A panel of analysts put together by Briefing.com had forecast a 1.5% annual decline.

The loss was "bigger than I expected," said Pat Newport, a real estate market analyst for IHS Global Insight. "I think it's still a response to the [home buyer] tax credit going away."

The credit, which paid homebuyers up to 10% of the purchase price up to $8,000, expired in September 2010. Analysts say it pushed a lot of homebuying forward, as many people rushed to buy to get in under the wire.

Despite the bad report, Newport said there are still a couple of reasons for optimism. He pointed out that existing home sales have been on the rise recently, topping an annual rate of 5 million sales in December. He added that home prices calculated by the Federal Housing Finance Agency have shown less decline than Case-Shiller. The FHFA index was unchanged in November after dropping 0.2% in October.

The FHFA index covers the entire national market and not just 20 cities, but it only includes data from homes sold that had mortgages guaranteed by Fannie Mae and Freddie Mac, the government run mortgage companies.

Record 1 million homes repossessed in 2010

That means Case-Shiller's calculations include a higher percentage of distressed properties -- foreclosures and short sales -- since Fannie and Freddie would not guarantee the exotic types of mortgages that generally go bad.

Barclay's Bank analyst Theresa Chen doesn't expect a reversal in housing market trends any time soon, since there is no end in sight to the foreclosure crisis.

"We expect softness to persist," she said, "as home prices continue to face headwinds from the large pipeline of foreclosures entering the market." 

Home pricesNashville area’s median home price is highest in 2 years

College students socked by budget cuts

While administrators say they're trimming less popular areas that will have a smaller impact, some students are reeling from the changes. The cuts are forcing many to alter plans, change majors or even switch schools, and some worry that the elimination of their degrees will hurt their job searches after graduation.

"I'm hoping that when I apply for jobs, they'll be able to look past the fact that my university cut my program," said Victoria Sheehan, a French major at the University at Albany, State University of New York, whose program is a potential target.

Last October when the university announced that her program was under consideration for closure, the sophomore put her plans to study abroad on hold, and loaded up with French classes to finish her requirements as quickly as possible.

While the school assured students it would allow current majors to complete their studies, she's worried that administrators might pull the plug early.

Jens Schubert had done all but his dissertation in resource economics when the University of Nevada, Reno, announced his program would be phased out. He transferred to the University of Tennessee rather than complete his program at UNR.

Because he has to repeat classes, he said the move has delayed his graduation by at least a year. But he thinks it's better than a diploma from a defunct program, which could be a strike against him in the eyes of potential employers.

"If they find out the department doesn't exist anymore it might send the wrong impression," he said. "You can't explain that because you might not get the chance."

Cutting deep

Since 2008, at least 43 states have cut budgets for public higher education, according to a 2010 report by the Center on Budget and Policy Priorities, a left-leaning think tank. State higher education spending nationwide dropped $3.5 billion in fiscal 2010 from the year earlier, according to a report from the Center for the Study of Education Policy at Illinois State University.

The University at Albany, was forced to make cuts after losing $12 million in state funding last year. Administrators looked at factors like enrollment trends, said Edelgard Wulfert, dean of the College of Arts and Sciences.

For example, the French department has had a steady decline in majors over the years and Wulfert expects that will continue. It has seven full-time professors teaching 35 to 40 student majors each year. By contrast, the communications program has the same number of faculty and 550 majors.

0:00/1:21Why college tuition keeps rising

Provost Marc Johnson of the University of Nevada, Reno, used a similar philosophy to explain his decision to eliminate 23 programs and sharply reduce six others. Some 350 students, including Schubert, were affected by the reorganization, but the changes helped insulate the rest of the school, he said.

"Are we narrower? Yes," he said. "But by cutting some areas strategically, we are able to maintain the current quality and size of other programs."

More pain ahead

Governors are now introducing their budgets for fiscal 2012, bringing new rounds of cuts for higher education.

In New York, Gov. Andrew Cuomo's proposed budget would reduce state funding for community colleges and universities by 10%. Gov. Brian Sandoval of Nevada proposed cutting $162 million from higher education.

And Gov. Bobby Jindal of Louisiana asked the state's Board of Regents to assess the possibility of merging the State University of New Orleans and Southern University at New Orleans, eliminating duplicate departments.

Louisiana's Board of Regents is already considering 450 degree programs for elimination across the state's 19 public colleges, universities and professional schools. That's one-third of all programs offered.

In the past high-demand programs like teaching were excluded from cuts, said Meg Casper, a spokeswoman for the board. "This go-around we have not excluded any programs." 

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TARP Inspector General resigns

Barofsky said he has fulfilled his goals related to TARP since his nomination by former President Bush on Dec. 8, 2008. These goals, he said, were "to build a robust law enforcement agency to bring to justice to those who sought to profit criminally from TARP" and "to ensure transparency in the operation of TARP."

He said he also achieved the goal of providing "effective oversight over the government's decision-making process to minimize instances of waste, fraud and abuse."

He said that he had only one co-worker when he started the "SIGTARP" job and was "working out of a small office in the basement of the Main Treasury building." Since then, he said the position has grown to 140 auditors, investigators and attorneys, with offices in Washington, New York, San Francisco, Los Angeles and Atlanta.

The team is now being led by Deputy Special Inspector General Christy Romero who will continue its mission.

The White House issued a statement that it was "grateful for Mr. Barofsky's service," noting that he had "provided strong oversight of the TARP program for the past two years."

0:00/5:12How TARP failed Main Street

Rep. Darrell Issa of California praised Barofsky for his "extraordinary commitment to public service" but he said the work that he began is not finished.

Issa said the next Inspector General needs to demonstrate Barofsky-style "vigilance, courage and commitment" in dealing with the 150-plus TARP recipient banks that have missed their regulator dividend payments.

Issa also said the next Inspector General needs to deal with the Home Affordable Modification Program, which "has fallen short of its goal to preserve home ownership."

Barofsky did not say what he plans to do next. 

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Inflation (CPI)

While the increase is a sign that the economy is picking up steam, higher prices can eat into the purchasing power of Americans at a time when unemployment is still high and wages are barely growing.

"It is disconcerting that inflation is starting to accelerate, and you have to wonder, with gas prices moving above $3 a gallon, whether the rate of inflation will continue to escalate," said Bernard Baumohl, chief global economist with The Economic Outlook Group.

Even though American consumers are beginning to feel the pain of surging commodity prices at the gas station, they're still not feeling it at the grocery store, where prices ticked up a mere 0.1% during the month.

Sooner or later, economists argue, producers will have to pass on the cost of rapidly rising agricultural prices, which surged more than 60% in the second half of 2010.

Core CPI, which strips out volatile food and energy prices, is still at a historic low, after rising a mere 0.8% for the entire year, and only 0.1% for the month.

Rising prices around the globe

While prices are increasing worldwide, U.S. inflation still lags behind that of its major trading partners.

The euro zone recently reported its CPI rose 2.2% in 2010, while China's CPI rose 5.1% in the 12 months ending in November.

Stripping out some of the volatile components, the three are much closer in line, with Europe reporting a 1.1% increase in core inflation for the year, and China reporting a 1.9% increase in inflation, minus food prices.

"In general, what you're seeing is the U.S. has the lowest rate of inflation, although not way out of line," said Jay Bryson, global economist with Wells Fargo.

Meanwhile, central banks around the world are pursing different policies to combat inflation.

In November, fears of sluggish inflation led the U.S. Federal Reserve to initiate a controversial $600 billion bond-buying program to stimulate the economy. Critics have argued that the move, referred to as quantitative easing, may cause inflation to rise too rapidly.

"If the economy is growing on its own, is it really a good idea for the Fed to continue to pursue quantitative easing?" Baumohl said. "The concern is now, the Fed may be behind the curve, as far as controlling inflation down the road."

China's economy, on the other hand, is hurling ahead so rapidly that its central bank is trying to ease on the brakes. After hiking interest rates twice last year, the People's Bank of China raised the level of reserves banks are required to hold to a record high on Friday.

It marked the seventh time in the last year that the bank has used higher reserve standards to try to pull money out of the economy and tame rising prices.

0:00/05:08The Fed's inflation hawk

Europe, on the other hand, is struggling with a debt crisis and a much slower economy than the emerging markets. But its inflation numbers came in greater than expected in 2010, leading European Central Bank President Jean-Claude Trichet to turn slightly more hawkish on global inflation on Thursday.

Noting the rapid growth in emerging markets, he indicated rising inflation could be a worldwide threat going forward.

"Inflationary threats present some kind of general feature in the emerging world; it's something you don't see necessarily in advanced economies," Trichet said. "It's clear that it is extremely important that we all keep control of inflation expectations, and that calls for appropriate decisions."

The comments led some traders to forecast an ECB interest rate hike sooner than originally expected. 

Inflation (CPI)Fed’s hand strengthens on tame inflation data

Retail Sales

The sales outperformed the federation's forecast of a 3.3% increase, and was the largest percentage increase since 2004, when holiday sales jumped 5.9%.

"Retailers did a tremendous job planning for the season by managing inventory and hitting the right price points that helped them tap into pent-up demand," said Matthew Shay, president of the National Retail Federation.

Strong sales in December of clothing, sporting goods, books and music helped lift retailers in the holiday season, according to the federation.

The National Retail Federation reported an increase of 8.4% in December sales at clothing and clothing accessory stores, and an increase of 8.2% at sporting goods, hobby, book and music stores, compared to the same month in 2009.

After holiday splurge, taste for spending returns

Also, the federation said that stores selling building material and garden equipment reported a 12% increase in December sales, compared to 2009.

This is a big deal for both retailers and the economy. For retailers, year-end holiday sales can account for as much as 50% of their sales and profits for the full year.

Since consumer spending also fuels more than two-thirds of the economy, the hope is that a pick-up in spending means that Americans are feeling more secure about their jobs and spending ability.

Earlier Friday, government statistics showed that sales increased in December, although they fell just shy of economists' expectations.

Overall sales rose 0.6% last month to $380.9 billion, the Commerce Department said. Sales were expected to have gained 0.7%, after rising 0.8% in November, according to a consensus of economists surveyed by Briefing.com.

Month-to-month sales, excluding autos, rose 0.5% in December, falling short of the forecast for an increase of 0.6%.

0:00/2:39Stores of the future

Retail sales rose 7.9% in December, compared to the year-ago month, according to the government. Retail sales rose 6.6% for all of 2010 compared with the prior year.

Non-store sales, which are primarily online sales, rose 2.6% month over month in December, the biggest percentage gain for any sector in the report. Other strength was reported among building supply merchants, health care retailers and gasoline stations.

Dragging on the report were sales at miscellaneous merchants such as florists and gift stores, down 1.3%. Also lower were sales at general merchandise stores, as well as electronics stores and food stores.

-- CNNMoney senior writer Parija Kavilanz contributed to this story  

Retail SalesMeager increase forecast for holiday retail sales

Manufacturing (ISM)

Any reading above 50 indicates expansion, and the index has remained above that level for 18 consecutive months.

While January's index is at the strongest level since May 2004, one of its components could foreshadow inflation as a threat to the economy down the road.

The ISM Prices Index, which measures the cost of raw materials used in the manufacturing process, surged ahead to 81.5, up from 72.5 in December.

"There is inflation in the pipeline -- not double digits but enough to keep buyers on their toes," John Silvia, Wells Fargo chief economist said in a research note. "There is very long list of price increases for commodities and corn, soybean oil and sugar are in there -- not wheat."

0:00/6:04Where to invest in 2011

Improved employment conditions and stronger demand helped drive the overall index higher.

The employment index reached 61.7, the first time it has ticked above 60 since May 2004. The new orders component also ticked up to 67.8 from 62 in December.

Has your income fallen over the last few years? Did you take a pay cut, or have to find a new job that pays less than your old one? Tell us about it and you could be included in an upcoming story on CNNMoney. For the CNNMoney Comment Policy, click here .  

Manufacturing (ISM)Fed’s hand strengthens on tame inflation data

Island of calm in state budget storms

With a gap in the next budget estimated to be just under $300 million -- or roughly 2% of fiscal 2011-- Indiana's shortfall is far below the overall average of 20% for the 45 states that are facing deficits in 2012, according to the Center on Budget and Policy Priorities.

Indiana largely avoided the housing boom and bust, but it was hit harder than most states by the economic downturn. With its dependence on manufacturing jobs, its unemployment rate has been above the national rate in most months since the financial meltdown.

There's nothing magical about Indiana's ability to avoid the crisis now facing many other states. The secret was making deep cuts in spending early in the process, rather than pushing the problems down the road.

Unlike many other states, Indiana's governor has the power to spend less than the legislature appropriates. Indiana's current governor, Mitch Daniels, exercised that power, and ordered deep cuts in late 2009 when revenue forecasts dropped.

"There's nothing mysterious about it. We've lowered the base of state spending to match the revenue reality," said Daniels.

0:00/4:59States in peril must cut to the bone

That included a 20% cut in state government, outside of big-ticket items such as primary and secondary education and Medicaid. State employee headcount outside of education was reduced by roughly 3,000 workers, or about 10% of staff.

The state also made more modest trims in the money sent to local schools and state universities.

In total, the cuts saved $800 million from the amount that had been appropriated less than six months earlier by the Indiana General Assembly.

"Politically, the legislature was insulated from the pain of the cuts and the governor had the power to do it," said John Ketzenberger, president of the Indiana Fiscal Policy Institute, a nonpartisan think tank that studies government finances in the state.

Indiana's current budget is being squeezed by the disappearance of federal stimulus money, which had helped the state avoid being forced to make even deeper cuts over the last two years.

But a rebound in revenue from an improving economy, especially a pickup in the auto industry that still has a major presence in Indiana, is helping.

"We're in better shape than a lot of states," said Larry DeBoer, a Purdue University professor who's an expert on state budgeting, especially Indiana's. "It doesn't mean things aren't tough, but it means we'll get through this thing without any general tax increase."

What's good for Indiana...?

Daniels and his budgets are getting particular attention now because he is weighing a run for president in 2012. A former head of the Office of Management and Budget in the Bush administration, he believes that other states could learn from Indiana's budget-cutting ways.

"You'd be amazed by how much government you never miss when it goes away," he said.

But Daniels admits that the lessons of Indiana aren't as easy to apply to the federal budget deficit, especially with entitlements and interest payments making up such a large part of federal spending.

"I think there's limited application. I wish I could tell you otherwise," he said.

Making a deep reduction in the federal deficit is crucial to the nation's economic health, he said, but it will be a much tougher process than fixing a hole in the state budget.

"The huge changes we need for the nation to get out of its fiscal ditch are not going to be achieved in this way," he said, referring to his state budgeting process.

"They'll be achieved through a fundamental restructuring of social welfare programs and a look at every major category of the budget, defense included." 

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The American mall: Back from the dead

"Even though it was only a tenth of a share point, for department stores, that is a huge change," says Craig Johnson, president of Consumer Growth Partners. "This is a real turn in the market. We're optimistic that the momentum is just gathering."

It's happening for a couple of reasons. Across the board, consumer spending is picking up since the recession. For decades, consumer spending had been shifting towards off-mall stores. Now, big department stores are doing better, and their success is helping boost the developers who build the malls themselves.So how did they break the cycle?

For one, the retail outlets doing well aren't following the traditional growth strategy of building more and more: "The country is kind of over-malled and over square footed," Johnson says. A couple of other factors are changing to make malls more profitable:

Department stores are making a comeback.

Namely, Macy's (M, Fortune 500) and Nordstrom (JWN, Fortune 500), both anchor department stores for malls, are doing well. Revenue at Macy's was up to $25 billion for 2010, which is up 6.5% from the previous year. Nordstrom, another key department store for malls, increased total retail sales by 12.7% for 2010 compared to 2009. Part of that is due to the success of their outlet stores, Johnson says, but these retailers are also sharpening their anchor-store inventory to capitalize on consumer spending.

Stores that aren't doing well are on the outs.

Department stores like clothing store Mervyns and home dйcor retail outlet Montgomery Ward used to take up lots of square feet in malls. But post-recession, they have had to consolidate, which has meant that many of them have had to move out of malls. That led to the highest mall vacancy rates in decades during 2008 and 2009, according to the Consumer Growth Partners report.

But the exodus had an upside. It cleaned out struggling stores, enabling a fresh cadre of retailers to move in. U.S. retailers including Aeropostale, Forever 21, Love Culture and Vera Bradley started leasing anchor-store sized space in malls as the failing department stores vacated them. So did foreign companies including H&M, Pandora and Sephora. The influx of newer stores keeps malls fresh for consumers, and appears to be keeping them coming back.

More and more, major mall developers including Simon (SPG), Tanger (SKT) and Westfield are seeing vacant spaces fill back up. The turnoverover is providing a good opportunity to renovate and freshen up interiors, another tactic that is helping to keep malls at the forefront of shoppers' minds.

There's a new, more inclusive mall mentality.

Malls are also opening their arms to stores traditionally considered off-mall. For example, Australia-based mall developer Westfield is welcoming stores onto its mall properties that tap into a lower price range. Westfield will bring 9 new Target (TGT, Fortune 500) stores into buildings this year. (And some retailers, Fortune recently noted, are creating "stores within stores" to earn rent on their unused square footage.)

The company has also been renovating its property by installing movie theaters, gyms, grocery stores and even hotels next to the lineup of fashion retailers. That's an industry trend, Johnson says.

Customers don't actually see a conflict between shopping at a high end clothing store and a Target in the same space, says Westfield spokeswoman Katy Dickey -- rather, they want it all. They also want to access stores easily. That means making changes down to the architectural level. For instance, developers are turning malls built like customer-trapping chutes into more open places with access to all major stores from multiple entrances.

Some of the most promising new developments by successful mall builders in mild climates are completely open-air, says Johnson. They don't feel very mall-like in the traditional sense.

Not that the mall model isn't sound, says Dickey. "I think the bones are still good. There's convenient parking and a wide range of goods and services -- those are the bones. They need to be well dressed. Not expensively dressed, but appealingly dressed."

The new generation of malls needs to be built with every kind of store, all of them as easy to access as a Safeway (SWY, Fortune 500). Then, she says, as the positive results from Westfield's renovations show, customers will stay longer and spend more. 

Retail SalesShoppers crowd stores as season winds down

Obama may limit tax breaks for rich

The proposals went nowhere -- in part because charities claimed that their funding, already hurt by the recession, would suffer even more. And the lobbyist-heavy real estate industry spoke out against it as well.

But this time, the proposal might be better received given the increased political and public awareness of U.S. debt and an improved economic climate, said Sean West, a U.S. policy analyst at the Eurasia Group.

"He's always called for it, but now there's a new narrative," West said.

In particular, West said, the president's bipartisan debt commission raised awareness that the country gives up more than $1 trillion a year in revenue because of hundreds of tax breaks, many of which benefit some investments and taxpayers more than others.

U.S. spending crunch ahead

Take the mortgage interest deduction: It is seen as a big spur to housing sales, which in turn can bolster big swaths of the economy. But some argue the generous deduction contributed to an unstable rise in home prices, and tax statistics show that the wealthiest households disproportionately benefit.

For example, 32% of the revenue lost in 2008 because of the deduction went to households with incomes over $200,000, even though they accounted for only 11% of the returns claiming the deduction.

In the past, Obama has proposed reducing itemized deductions for high-income taxpayers - by limiting their value to 28% of every dollar that is deductible.

0:00/1:59State of the Economy (in 2 mins)

Currently, those in the top two tax brackets (33% and 35%) have taxable income of at least $172,000 if they're single or $209,000 if they're married filing jointly. These filers can save either 33% or 35% of every itemized deductible dollar. But under Obama's proposal they would only be able to save 28%.

The Congressional Budget Office last year estimated that such a proposal could raise nearly $300 billion over 10 years.

If the same proposal is included in the president's 2012 budget request, that will make it easier to show that his blueprint for the next decade is fiscally responsible because the additional revenue could be used to reduce the deficit or pay for new investments.

--An earlier version of this story incorrectly stated that those in the top two tax brackets have taxable income of at least $374,000 if they're married filing jointly. Their correct taxable income is $209,000.  

Blowing up the tax codeTractor Supply income soars

Obama budget to cut $1.1 trillion in deficits

Full details on the budget will be released on Monday morning.

So it's not clear yet where all of the estimated $1.1 trillion in deficit reduction will come from, or exactly how significant a swipe it makes at long-term deficit reduction.

But one chunk -- $400 billion in savings -- would result from the president's call for a five-year freeze on non-security discretionary spending.

Non-security discretionary spending only makes up about 10% of all federal spending. Deficit hawks lament that both the White House and Republicans have focused all of their attention in this area rather than address the country's big debt drivers -- spending on the entitlement programs and defense.

Nevertheless, this piece of the president's budget is certain to generate some of the biggest outcry since it includes cuts to programs that Democrats fiercely defend, such as heating assistance to low-income people.

Lew said it was a "very difficult" budget. "We have to make tough trade-offs."

Obama may limit tax breaks for rich

Even where the president will propose investments in areas he deems important, such as education, there would also be cutbacks, Lew said.

For instance, Obama's budget will boost the Pell Grant program to ensure that 9 million students will be able to afford college, Lew said. But to pay for those proposals, Obama will call for eliminating the grants for summer school and limit their use to the regular school year.

He will also propose that interest on federal loans for graduate students accrue during school; currently, the interest tab doesn't start running until after graduation.

The changes would save $9 billion in the first year, Lew told CNN's Candy Crowley.

0:00/1:59State of the Economy (in 2 mins)

Lew defended the administration from turning its back on its own fiscal commission, which in December proposed $4 trillion in cuts. He listed three items that will appear in the budget that echo recommendations from the commission: a call for corporate tax reform, changes to rein in malpractice lawsuits against doctors and a freeze in pay on federal workers.

Nevertheless, such proposals will not save a significant amount of money relative to the deficits set to accrue. And from all indications, the president's budget will not address key elements needed to control long-term spending in the major entitlement programs: Medicare, Medicaid and Social Security.

Obama's budget request is essentially a blueprint of his fiscal policy priorities -- the programs he would like to fund or cut, the new investments he would make and how he would pay for it all.

Congress can accept, reject or modify the president's budget. And Republicans may well reject much of it out of hand, since its cuts are not nearly as deep as many conservatives have been demanding. 

Conservative GOP group wants to cut $2.5 trillionAfter election, market faces rare trifecta

Home prices

"With these numbers, more analysts will be calling for a double-dip in home prices," said David Blitzer, spokesman for Standard & Poor's.

The worst-hit market during the month was Detroit, where prices fell another 2.7%. That was especially troubling considering how low that city's prices already were. In Washington D.C. prices inched down only 0.1%, making it the second-best performing city behind San Diego.

Where to rent vs. buy

The bleeding in some of the bubble markets seems to have slowed, with Las Vegas (-0.4%), Miami (-0.2%) and Tampa (-0.8) all recording losses of under 1%. But nine markets -- Atlanta, Charlotte, Chicago, Detroit, Las Vegas, Miami, Portland, Ore., Seattle and Tampa, Fla. -- are all at their lowest levels since they peaked during the boom.

The latest downturn put prices 1.6% lower than 12 months ago, slightly worse than industry expectations. A panel of analysts put together by Briefing.com had forecast a 1.5% annual decline.

The loss was "bigger than I expected," said Pat Newport, a real estate market analyst for IHS Global Insight. "I think it's still a response to the [home buyer] tax credit going away."

The credit, which paid homebuyers up to 10% of the purchase price up to $8,000, expired in September 2010. Analysts say it pushed a lot of homebuying forward, as many people rushed to buy to get in under the wire.

Despite the bad report, Newport said there are still a couple of reasons for optimism. He pointed out that existing home sales have been on the rise recently, topping an annual rate of 5 million sales in December. He added that home prices calculated by the Federal Housing Finance Agency have shown less decline than Case-Shiller. The FHFA index was unchanged in November after dropping 0.2% in October.

The FHFA index covers the entire national market and not just 20 cities, but it only includes data from homes sold that had mortgages guaranteed by Fannie Mae and Freddie Mac, the government run mortgage companies.

Record 1 million homes repossessed in 2010

That means Case-Shiller's calculations include a higher percentage of distressed properties -- foreclosures and short sales -- since Fannie and Freddie would not guarantee the exotic types of mortgages that generally go bad.

Barclay's Bank analyst Theresa Chen doesn't expect a reversal in housing market trends any time soon, since there is no end in sight to the foreclosure crisis.

"We expect softness to persist," she said, "as home prices continue to face headwinds from the large pipeline of foreclosures entering the market." 

Nashville area’s median home price is highest in 2 yearsHome prices

Obama's budget to target education Pell grants

The proposal calls for the end to the policy where students could qualify for two grants in one year -- one for the regular academic year and a second for summer school. Only one Pell grant per year would be awarded.

According to an Obama administration source, the savings would be $8 billion dollars next year, and $60 billion dollars over 10 years.

Lew said the second change would affect graduate and professional school students, reducing loan subsidies for these students.

Currently the government pays the interest on loans for some graduate and professional school students as long as they remain in school. Under the proposal, interest would build up while students were in school, though students wouldn't have to start paying back loans until after graduation.

By ending this program, the government would save $2 billion next year and $29 billion dollars over 10 years, according to an administration source.

"In education, we invest very seriously to make sure that 9 million students can go to college using Pell grant, to make sure that K-12 education -- we have 100,000 new teachers who are trained and experienced in science, technology, engineering and math," Lew said on State of the Union. "But we also have cutbacks."

0:00/6:20Meet our country's budget master

In a conference call Friday, Education Secretary Arne Duncan was asked about cuts in discretionary spending and how that could affect Pell grants. Duncan said the administration is "committed to maintain Pell."

Duncan said the budget would be "responsible" and "makes important investments in education reforms" including early learning, reforms in education and making college affordable.

When asked if more money for race to the top and new initiatives for early learning was realistic, he said he hoped it is. He continued: " The president is making very tough cuts, painful cuts. Pieces of our budget is being hit hard but we have to continue to invest" in education for this country's children. 

Mass. budget cuts: Biggest in 20 yearsGM raises share price

Run your car on compost

E-Fuel is the brainchild of Thomas Quinn, a former president of the networking giant Novell (NOVL), whose last company, Gyration, developed and patented the motion controller for the Nintendo Wii. So how does his fuel system work?

It's based on two primary units, each about the size of a washing machine. The first component, called the MicroFusion Reactor, reduces organic waste to sugar water, then ferments it into a soup of alcohol, water and bacteria. The second part, called the MicroFueler, processes this beery mixture into ethanol.

To make one gallon of ethanol, the system requires about 3 kWh of electricity. Each gallon of ethanol produced contains 23kWh of energy. To put that in perspective: The average American home uses about 30kWh of electricity each day.

E-Fuel has also released a third component, a portable generator called the GridBuster, powered by a combustion engine. The heat exiting the GridBuster can be recaptured and used to power the reactor and fueler. Using that heat provides 80% to 90% of the power needed to run E-Fuel's system.

Quinn became interested in the idea of an all-organic, renewable energy solution in 2006, when he saw the world's fuel consumption hitting record, unsustainable levels. "I could see this future disruption coming in the energy market," he says.

To bring his system to life, Quinn enlisted Floyd Butterfield, a celebrity in the world of ethanol. In 1982 Butterfield won the California Fuel Alcohol Plant Design Competition for his ethanol still, known as The Butterfield Still.

Each of E-Fuel's components costs about $10,000. E-Fuel is already shipping its MicroFueler and GridBuster, largely to universities and the government, but also to breweries and some individuals. The company is fielding presales for its the MicroFusion Reactor, with plans to start shipping it in the second quarter of this year.

Most consumers aren't going to shell out five figures to construct their own personal ethanol processing plant -- but E-Fuel thinks they might lease units from local distributors. Those who opt to lease or buy only a MicroFueler will get deliveries of the beery, pre-ethanol liquid from their distributor.

So far, sales are between $5 million and $10 million, according to Quinn. That figure includes the sale of more than 70 units and an undisclosed number of distributorships, both in the U.S. and overseas.

Chris Ursitti runs the distributorship for Southern California through his company GreenHouse Holdings, in San Diego. Using a MicroFueler, he's been making ethanol with waste wine from local wineries and putting it in his hybrid Lexus RX 400H, which he converted to a flex fuel vehicle. While all cars can run on gasoline that uses ethanol as an additive, cars that run on flex fuel -- which is up to 85% ethanol -- can make the move to E-Fuel's ethanol without a hitch. Cars that don't run on flex fuel require the installation of an adapter.

"You actually get better performance out of the car because it's higher octane," Ursitti says. "It's peppier."

This summer, Foodlink, a food bank in Rochester, N.Y., launched a pilot program with E-Fuel's system. Two of Foodlink's top five recurring expenses are waste disposal and fuel. Now Foodlink takes its waste -- everything from pineapple tops and damaged produce to expired milk -- and turns several tons of it into ethanol each day, generating 100 gallons of fuel each week.

The food bank partnered with Graham Fennie, the founder of an E-Fuel distributor called Epiphergy. Together, they plan to scale up and generate at least 500,000 gallons of fuel a year.

"E-Fuel's machines aren't cheap, but for early adopters of new technology like this, I think cost really isn't the issue," says ethanol expert David Blume, executive director of The International Institute for Ecological Agriculture and author of Alcohol Can Be A Gas! Blume believes E-Fuel's products will fill a market niche, appealing to those consumers who are determined to find an alternative to gasoline, no matter what the cost.

But he also predicts that E-Fuel will face competition from ethanol entrepreneurs. "I think there will be slightly bigger stills coming onto the scene," he says. "Those who can make 50,000 to 100,000 gallons a year will start their own ethanol businesses, selling to their neighbors and the community."

E-Fuel currently has a backlog of orders from distributors and individuals waiting to be filled. Quinn expects sales to double in 2011 because of rising oil and gas prices.

The company's biggest challenge is finding enough cash to fund its growth. E-Fuel has already taken in $10 million in startup capital, running on money from Quinn's own coffers, investments from distributors and government loans, but is now trying to raise $25 million from investors.

"In this economy, finding capital is impossible," Quinn says. "Banks aren't taking any risks and we're facing a green tech bubble that's popping, because investors have dumped so much money into solar and wind and haven't seen returns," he says. As a result, E-Fuel has grown much more slowly than Quinn would like.

But as a longtime believer in disruptive technologies, he's optimistic about the future.

"Paradigm shifts like this take a while to get traction," he says. "But then all of sudden, it will just take off." 

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Inflation (CPI)

While the increase is a sign that the economy is picking up steam, higher prices can eat into the purchasing power of Americans at a time when unemployment is still high and wages are barely growing.

"It is disconcerting that inflation is starting to accelerate, and you have to wonder, with gas prices moving above $3 a gallon, whether the rate of inflation will continue to escalate," said Bernard Baumohl, chief global economist with The Economic Outlook Group.

Even though American consumers are beginning to feel the pain of surging commodity prices at the gas station, they're still not feeling it at the grocery store, where prices ticked up a mere 0.1% during the month.

Sooner or later, economists argue, producers will have to pass on the cost of rapidly rising agricultural prices, which surged more than 60% in the second half of 2010.

Core CPI, which strips out volatile food and energy prices, is still at a historic low, after rising a mere 0.8% for the entire year, and only 0.1% for the month.

Rising prices around the globe

While prices are increasing worldwide, U.S. inflation still lags behind that of its major trading partners.

The euro zone recently reported its CPI rose 2.2% in 2010, while China's CPI rose 5.1% in the 12 months ending in November.

Stripping out some of the volatile components, the three are much closer in line, with Europe reporting a 1.1% increase in core inflation for the year, and China reporting a 1.9% increase in inflation, minus food prices.

"In general, what you're seeing is the U.S. has the lowest rate of inflation, although not way out of line," said Jay Bryson, global economist with Wells Fargo.

Meanwhile, central banks around the world are pursing different policies to combat inflation.

In November, fears of sluggish inflation led the U.S. Federal Reserve to initiate a controversial $600 billion bond-buying program to stimulate the economy. Critics have argued that the move, referred to as quantitative easing, may cause inflation to rise too rapidly.

"If the economy is growing on its own, is it really a good idea for the Fed to continue to pursue quantitative easing?" Baumohl said. "The concern is now, the Fed may be behind the curve, as far as controlling inflation down the road."

China's economy, on the other hand, is hurling ahead so rapidly that its central bank is trying to ease on the brakes. After hiking interest rates twice last year, the People's Bank of China raised the level of reserves banks are required to hold to a record high on Friday.

It marked the seventh time in the last year that the bank has used higher reserve standards to try to pull money out of the economy and tame rising prices.

0:00/05:08The Fed's inflation hawk

Europe, on the other hand, is struggling with a debt crisis and a much slower economy than the emerging markets. But its inflation numbers came in greater than expected in 2010, leading European Central Bank President Jean-Claude Trichet to turn slightly more hawkish on global inflation on Thursday.

Noting the rapid growth in emerging markets, he indicated rising inflation could be a worldwide threat going forward.

"Inflationary threats present some kind of general feature in the emerging world; it's something you don't see necessarily in advanced economies," Trichet said. "It's clear that it is extremely important that we all keep control of inflation expectations, and that calls for appropriate decisions."

The comments led some traders to forecast an ECB interest rate hike sooner than originally expected. 

Fed’s hand strengthens on tame inflation dataInflation (CPI)

Consumer Confidence

The jump far exceeded forecasts. Economists surveyed by Briefing.com were expecting the index to increase to 53.5.

"Consumers have begun the year in better spirits," said Lynn Franco, director of The Conference Board Consumer Research Center. "Consumers rated business and labor market conditions more favorably and expressed greater confidence that the economy will continue to expand and generate more jobs in the months ahead."

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.

Still a long way to go

The index is still well below a healthy reading. An overall reading above 90 indicates the economy is solid, and 100 or above indicates strong growth.

And while a higher number is a positive sign, the index has been volatile and economists are still waiting for a clear trend to emerge.

"The bottom line is, it's pretty good news," said Mike Schenk, senior economist with the Credit Union National Association. "On the other hand, we're a long way from feeling like happy days are here again."

Consumer confidence wavered throughout last year, plunging to a 17-month low of 48.6 in September.

Since then, end of the year stock market gains have helped fuel optimism, as have slight improvements in the job market, Schenk said. Workers were also happy to receive a 2% raise after President Obama signed a payroll tax holiday into effect at the end of the year, he said. 

Consumer ConfidenceValue remains important for Christmas shoppers

Home sales grow, aided by more stable prices

Prices of single-family homes stabilized, rising 0.2% compared with 12 months earlier. The national median for homes sold during the period was $170,600.

"Home sales clearly recovered in the latter part of 2010, and are helping to absorb the inventory, including many distressed properties," said Lawrence Yun, chief economist of the Realtors' group.

Sales volume was particularly strong in the West region, up nearly 20% compared with the three months ended Sept. 30.

"A good portion of the sales activity in the West has been driven by investors taking advantage of discounted foreclosures, with high levels of all-cash transactions," said Yun.

Home prices: Your local forecast

The number of sales fell nearly 20% nationally, however, compared with the same period in 2009, when the homebuyer's tax credit was in effect.

"The tax credit clearly poached demand from the second half of 2010," said Jonathan Miller, CEO of Miller Samuel, a New York-based appraiser. "It artificially stimulated sales in the first half and artificially lowered it in the second."

Many housing market factors were favorable through the end of the year. Prices are very affordable for working families in most markets, interest rates are extremely low and bloated inventories offer a wide choice of properties.

The missing ingredient is a positive economic environment, specifically when it comes to hiring.

"An improving housing market and job growth will go hand in hand," said Yun. "The housing recovery will mean faster job growth."

He projects than a 300,000 increase in 2011 home sales will lead to the creation of about 150,000 to 200,000 jobs to the overall economy.

The survey revealed that single-family home prices held up better than those of condos. The national median for condos fell 6.4% compared with 12 months earlier, to $164,200. In some markets, condo prices have rarely been so affordable.

The median condo price in the Las Vegas metro area, for example, was just $60,700; in Phoenix, $68,900; and in Miami, $81,900. Reno, Nev., had the lowest condo prices in the nation, a median of $60,300.

As for single-family homes, Youngstown, Ohio, the old steel town struggling to find its way back into the modern economy, recorded a median of just $62,800 during the fourth quarter. That was a decline of nearly 14% from already bargain-basement prices a year earlier.

Toledo, Ohio at $74,500, Lansing, Mich. at $79,500, and South Bend, Ind. at $76,800 also recorded very low prices. Outside the Rust Belt, Ocala, Fla., was the lowest priced metro area at $80,200.

Honolulu had the highest single family home prices during the quarter, a median of $598,200. San Jose, Calif.'s median was $591,000 and San Francisco's was $558,200. 

Home PricesHome sales fall 19 percent; but Wiliamson County shows strength

Pentagon cuts are not what they seem

Unfortunately, there's a lot more to the story.

First of all, the cuts might prove illusory. The federal government appropriates money one year at a time, and the vast majority of that $78 billion reduction would take place in 2014 and 2015, when there will be a new Secretary of Defense and possibly a new president.

In fact, Obama's expected 2012 request of $553 billion would be 5% higher than what the Defense Department plans to spend this year. In inflation-adjusted dollars, this figure is higher than at any time during the Bush years or during the Cold War.

And that's just the Defense Department part of the budget. There's another $30 billion that agencies outside the defense spend to support the Pentagon. The largest share come from the Department of Energy, which uses the money to operate and maintain the several thousands nuclear weapons in the Pentagon's arsenal.

Furthermore, the Defense Department request excludes at least another $100 billion that will most likely be spent next year on the wars in Afghanistan and Iraq. Yes, the government funds the wars separately from the main Pentagon budget.

This year, the Pentagon will spend about $150 billion on these two conflicts. The exact amount it spends in 2012 will depend on how many troops the Pentagon withdraws from Afghanistan and Iraq this year.

0:00/1:59State of the Economy (in 2 mins)

Right now, we have about 100,000 troops in Afghanistan and 40,000 in Iraq, at a cost of about $1 million per person in Afghanistan and about half that amount in Iraq.

Adding it all up, total defense spending in 2012 will be in the neighborhood of $700 billion -- not just the $553 billion that Obama is likely to request for the Pentagon alone. Here's another way to look at it: That is more than half of the discretionary budget and about 20% of the entire federal budget.

Korb: How to cut $1 trillion from Pentagon

Finally, the proposed Pentagon cuts would be a drop in the bucket compared to those identified by President Obama's fiscal commission. The commission recommended cutting the projected level of defense spending over the 2012 through 2015 period by $282 billion, or almost four times the amount the Pentagon leadership wants.

Defense Secretary Robert Gates called such proposed reductions catastrophic and Admiral Michael Mullen, the chairman of the Joint Chiefs of Staff, dubbed them massive and dangerous. However, they failed to note that in constant dollars such reductions would still leave the Pentagon budget in 2015 about $100 billion larger than the Bush years and about $50 billion more than the Reagan years.

If Congress opts to make the Pentagon a real partner in tackling the national debt, there are a number of sensible steps it can take to realize further savings from the Defense Department's 2012 and future budget requests. These include reducing or eliminating funding for a number of unnecessary weapons programs, such as V-22 Osprey, rolling back the post-Sept. 11 growth in the ground forces and reducing the number of American forces deployed abroad outside of Iraq and Afghanistan.

Given the gravity of the economic situation facing the United States right now, these and other defense spending cuts cannot and should not be taken off the table. 

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Obama to business: We must work together

Obama spoke before 200 members of the U.S. Chamber of Commerce, a group that hasn't always been on friendly terms with the administration, and remains fiercely opposed to the health care and Wall Street reform laws championed by the White House.

The president acknowledged the tensions, telling members of Washington's most powerful business lobby that "we've had some pretty strong disagreements."

But the president also sought common ground, noting that the Chamber supported the 2009 Recovery Act.

"I'm here today because I'm convinced we can and must work together," Obama said, before laying out exactly what he plans to do to help American businesses compete on the global stage.

The federal government will work to improve transportation and communications networks, invest in education, provide research incentives, rebuild crumbling infrastructure and reform the corporate tax code, Obama said.

Pressure builds for debt reduction

At the same time, Obama said Washington will keep spending under control, and that he will work with both parties to "take additional steps across the budget to put our nation on sounder fiscal footing."

Obama also said the government needs to reform its own structure, starting with the 12 different agencies that deal with America's exports.

"In the coming months, my administration will develop a proposal to merge, consolidate and reorganize the federal government in a way that best serves the goal of a more competitive America," Obama said.

Monday's meeting is seen as another sign of the thawing relationship between the Obama administration and the business community. It took months to materialize after first being floated by the administration in November.

"I'm here in the interest of being more neighborly," Obama said. "Maybe we would have gotten off on a better foot if I had brought over a fruitcake when we first moved in."

0:00/1:59State of the Economy (in 2 mins)

For Obama, it means playing nice with a group that opposed many of his signature policies, and supported Republican candidates with gobs of cash during the midterm elections.

Part of the softer tone struck by Obama was evident in his remarks on the health care reform law.

Obama said he knows the Chamber has concerns about the law, and that he is working to repeal the so-called 1099 provision, a hated IRS rule that imposes new paperwork burdens on businesses.

"I'm also willing to look at other ideas to improve the law, including incentives to improve patient safety and medical malpractice reforms," he added.

At the same time, Obama called out American executives for sitting on cash. He urged corporations to invest the nearly $2 trillion sitting on their balance sheets.

Monday's speech focused on policy, but campaign politics drives many of the differences between Obama and the Chamber.

In 2010, the Chamber bankrolled Republican candidates for Congress. And in the final days of the campaign, Obama accused the Chamber of funneling money from overseas to support GOP candidates.

But shortly after the election, both sides began to sing a different tune. Obama invited 20 CEOs to the White House for a conversation about the economy.  

Obama to address business lobbyChina currency report delayed

Manufacturing (ISM)

The reading came in slightly lower than the 57.3 level expected by a Briefing.com consensus of economists. Any reading of more than 50 indicates expansion in the sector, and the index has remained above this mark for 17 consecutive months.

"We saw significant recovery for much of the U.S. manufacturing sector in 2010," said Norbert Ore, chairman of the ISM Manufacturing Business Survey Committee, in a statement. "The recovery centered on strength in autos, metals, food, machinery, computers and electronics, while those industries tied primarily to housing continue to struggle."

Strong global demand and a weaker dollar has also helped boost manufacturing activity, said Ore.

New orders and production were bright spots in the latest report, and these components are likely to push the index higher in the first quarter of 2011, he said.

The component for new orders rose to 60.9 from 56.6 in November, while the production measure picked up to 60.7 from 55.

The employment component slowed to 55.7 from 57.5. 

Manufacturing (ISM)Hemlock job fair in Clarksville draws 400 applicants

For Apache in Egypt, the oil keeps flowing

One independent, Apache Corp (APA, Fortune 500), has a large stake in Egypt -- about 21% of the company's total assets are there, according to an analyst report by HSBC Global Research. Apache's stock took a hit on Thursday dropping by about 4.7% based on news about the conflict, paired with the company's decision to shut down its Australian oil fields because of hurricanes there.

The conflict in Egypt could of course hurt Apache, but it probably won't. If it does, it's unlikely to damage the company in any lasting way. Apache is still producing from its assets in Egypt, and therefore still raking in a profit from them. While that could change, there's a good chance that the independent oil company will continue production during the upheaval and emerge relatively unscathed.

In fact, as is typical in equities, one investor's panic is another's opportunity: Several analysts claim that the drop in Apache's stock price due to concern over Apache's large stake in Egypt created an opportunity to buy newly undervalued Apache stock.

Apache has over 11 million acres in Egypt that produced over 150,000 barrels of oil equivalent per day during 2009. Most of the Apache's oil fields are in Egypt's Western Desert, many, over a hundred miles from the conflict in Cairo. While national conflict can spread anywhere, the biggest threat to Apache depends on the government.

Apache has ties to the government that's currently getting overthrown, since its partner in Egyptian projects is a company called the Egyptian General Petroleum Corporation, is a national oil company. That does create some risk for the company. Experts say that Apache's worst-case scenario would be that the current government gets overthrown and the new regime would nationlize all of Apache's assets.

But that probably won't happen.

In times of conflict, "generally speaking, one of the things most nations want to do is keep the energy flowing, in order to meet its demand," says John Kollar, an analyst with HSBC.

Apache is crucial to Egypt, according to a UBS Investment Research report. The company drills half of the wells in the country, employs between 4,000 and 5,000 Egyptians and pays over $11 million per day to the national treasury. Whoever takes charge of the country probably wouldn't want to put the brakes on such a key source of energy and income.

It's a basic point, but oil, in general, is extremely profitable. Right now, Egyptian oil is still coming out of the ground, which means that Apache will profit. In fact, Apache would have to shut down all production in Egypt for a full three months before seeing any negative impact on its credit quality, says Kollar, which doesn't appear likely.

He takes a longer-term approach to evaluating a company's stability. "I'm not all that worried about the next penny per share, I'm looking at ten and twenty-year bonds and the company's ability to pay interest and its level of credit-worthiness."

In that respect, he says, "Apache is one of the best independent exploration and production companies from credit-worthiness point of view."

Most big oil companies, in fact, are more resilient than the market would reflect. Companies such as Apache and certainly the major energy companies have a plethora of assets all over the globe. If they need to, they can sell them and spend expend less capital and stay financially solvent.

"The market's reaction is always to shoot first and ask questions later," Kollar says. But that's not the best reflection of the health of energy companies with such long-term contracts that encounter may encounter obstacles but ultimately generate a big profit. Apache's stock has started to creep back since it plummeted last week and has kept producing throughout the turmoil.

Energy plays everywhere are becoming increasingly risky. Exploration and production companies are partnering with government-linked oil companies where volatile tax and export rules, if not political conflict, are real possibilities. If the market continues to overreact, then recover, it'll keep providing investors an opportunity to buy shares of certain energy companies with short-term obstacles and long-term profit plans. 

Oil prices rise as investors watch EgyptNo money, no nukes

GDP

But that's still weaker than expectations. A group of 27 economists surveyed by CNNMoney had predicted GDP growth of 3.5%.

"The U.S. economy is finally, after three years, producing as much as it did before the Great Recession hit. But this is by no means 'mission accomplished,'" Economic Policy Institute economist Josh Bivens said in a research note.

"The 3.2% growth registered in the last quarter of 2010 would, if sustained over the next year, provide almost no downward push to the unemployment rate," he said.

The faster pace came mainly on the backs of American consumers, who headed back to the shopping malls during the holiday season. Personal consumption, a measure of consumer spending, jumped by 4.4% in the fourth quarter -- the strongest increase in that reading in at least four years.

"Consumer spending had an outstanding quarter," said Scott Brown, chief economist with Raymond James. "While some of that is due to a drop in the savings rate -- which isn't really sustainable -- it could also be a sign that consumers are less worried about losing their jobs."

Spending on so-called durable goods like cars and furniture rose a whopping 21.6%. Spending on nondurable goods like food and clothing was up 5%.

While the U.S. is struggling with a massive trade deficit, it improved slightly in the fourth quarter, lifting the overall GDP number. Exports increased at a rate of 8.5%, while imports decreased by 13.6% -- slightly narrowing the trade gap.

Not all cylinders of the economy were firing away though.

0:00/1:59State of the Economy (in 2 mins)

A slower pace of business inventories was the main drag on the overall number. Private businesses increased inventories by $7.2 billion in the fourth quarter, a stark contrast to $121.4 billion in the third quarter and $68.8 billion in the second.

Commercial and residential construction activity also decelerated significantly.

The government calculates GDP as a measure of goods and services produced in the United States. The number is backward looking and is often revised multiple times. This is the first reading for the fourth quarter.

For the year as a whole, real GDP was up 2.9%, a complete turnaround from the 2.6% decrease seen in 2009.  

Car sales indicate a strong OctoberGDP

White House: Innovate! Educate! Win!

In that speech, Obama called for revamping education policy and adding 100,000 more math, science, technology and engineering teachers by the end of the decade; extending wireless Internet coverage to 98% of the population; having 80% of the nation's electricity coming from clean energy sources by 2035; and 1 million electric vehicles on the road by 2015.

The full report, titled "A Strategy for American Innovation: Securing Our Economic Growth and Prosperity," is an update to a similar report from September 2009. But this version lays out the administration's priorities in detail.

Gene Sperling, director of the National Economic Council, said the report represents Obama's "comprehensive innovation strategy" and is "a critical part of his economic vision to win the future."

Among the administration's top priorities is increasing efficiency within the patent office, which currently suffers from an enormous backlog.

White House puts Startup America on the whiteboard

If implemented, the administration said the plan will reduce the average delay in patent processing from 35 months to 20 months, and to less than 12 months for priority applications.

The report also elaborates on Obama's plans for increasing investments in key areas, such as education and clean energy.

Earlier this week, the White House launched its "Startup America" initiative, which is designed to spur the growth of small businesses and startups.

And on Thursday, Obama proposed a "Better Buildings Initiative." That program is designed to improve energy efficiency in commercial buildings.

Of course, all these initiatives will need funding, something Sperling said the president is committed to including in his fiscal 2012 budget, which will be released in 10 days.

"These are the priorities that we are still making room for because it's part of [Obama's] vision for growth and competitiveness for our country going forward," Sperling said. 

China currency report delayedObama to address business lobby

First-time unemployment claims fall

Continuing claims -- which include people filing for the second week of benefits or more -- fell to 3,925,000 in the week ended Jan. 22, a decline of 84,000 from the week before.

While the latest report shows an improvement, jobless claim figures have been jumping around recently, so economists haven't been reading too much into the weekly figures, said Robert Dye, a senior economist at PNC Financial Services.

"They've been in a saw-tooth pattern for the last six weeks," said Dye, adding that seasonal factors like the timing of holidays and severe snowstorms have sent the numbers on a roller coaster ride.

"You have to take this labor indicator along with other broad indicators we have like ADP and the payroll numbers coming out tomorrow -- which, taken as a complete basket, all point to improving labor market conditions," he added.

0:00/5:25World Bank: U.S. jobs will come back

The 4-week moving average of initial claims -- a measurement used to smooth out week-to-week volatility -- is viewed as a more accurate representation of job market conditions. While that number rose by 1,000 to 430,500, Dye said this is still well below the high levels seen in 2010.

"I think we're on an improving trend here and in the next couple of weeks we're likely to see even more improvement, indicating that labor conditions are starting to turn the corner and that we should see more hiring in 2011," he said.

The report comes a day before the government releases its widely anticipated monthly jobs report. Economists surveyed by CNNMoney expect the report to show that the economy added 149,000 jobs in December and that the unemployment rate rose to 9.5%. 

Jobless claims surge to 457,000Layoffs are slowing but jobs growth still weak

Consumer Confidence

The jump far exceeded forecasts. Economists surveyed by Briefing.com were expecting the index to increase to 53.5.

"Consumers have begun the year in better spirits," said Lynn Franco, director of The Conference Board Consumer Research Center. "Consumers rated business and labor market conditions more favorably and expressed greater confidence that the economy will continue to expand and generate more jobs in the months ahead."

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.

Still a long way to go

The index is still well below a healthy reading. An overall reading above 90 indicates the economy is solid, and 100 or above indicates strong growth.

And while a higher number is a positive sign, the index has been volatile and economists are still waiting for a clear trend to emerge.

"The bottom line is, it's pretty good news," said Mike Schenk, senior economist with the Credit Union National Association. "On the other hand, we're a long way from feeling like happy days are here again."

Consumer confidence wavered throughout last year, plunging to a 17-month low of 48.6 in September.

Since then, end of the year stock market gains have helped fuel optimism, as have slight improvements in the job market, Schenk said. Workers were also happy to receive a 2% raise after President Obama signed a payroll tax holiday into effect at the end of the year, he said. 

Consumer ConfidenceValue remains important for Christmas shoppers

Retail Sales

The sales outperformed the federation's forecast of a 3.3% increase, and was the largest percentage increase since 2004, when holiday sales jumped 5.9%.

"Retailers did a tremendous job planning for the season by managing inventory and hitting the right price points that helped them tap into pent-up demand," said Matthew Shay, president of the National Retail Federation.

Strong sales in December of clothing, sporting goods, books and music helped lift retailers in the holiday season, according to the federation.

The National Retail Federation reported an increase of 8.4% in December sales at clothing and clothing accessory stores, and an increase of 8.2% at sporting goods, hobby, book and music stores, compared to the same month in 2009.

After holiday splurge, taste for spending returns

Also, the federation said that stores selling building material and garden equipment reported a 12% increase in December sales, compared to 2009.

This is a big deal for both retailers and the economy. For retailers, year-end holiday sales can account for as much as 50% of their sales and profits for the full year.

Since consumer spending also fuels more than two-thirds of the economy, the hope is that a pick-up in spending means that Americans are feeling more secure about their jobs and spending ability.

Earlier Friday, government statistics showed that sales increased in December, although they fell just shy of economists' expectations.

Overall sales rose 0.6% last month to $380.9 billion, the Commerce Department said. Sales were expected to have gained 0.7%, after rising 0.8% in November, according to a consensus of economists surveyed by Briefing.com.

Month-to-month sales, excluding autos, rose 0.5% in December, falling short of the forecast for an increase of 0.6%.

0:00/2:39Stores of the future

Retail sales rose 7.9% in December, compared to the year-ago month, according to the government. Retail sales rose 6.6% for all of 2010 compared with the prior year.

Non-store sales, which are primarily online sales, rose 2.6% month over month in December, the biggest percentage gain for any sector in the report. Other strength was reported among building supply merchants, health care retailers and gasoline stations.

Dragging on the report were sales at miscellaneous merchants such as florists and gift stores, down 1.3%. Also lower were sales at general merchandise stores, as well as electronics stores and food stores.

-- CNNMoney senior writer Parija Kavilanz contributed to this story  

Retail SalesMeager increase forecast for holiday retail sales

January jobs report disappoints

Economists surveyed by CNNMoney were expecting the economy to add 149,000 jobs during the month, and the unemployment rate to rise to 9.5%.

After the report was released, economists weren't quite sure what to make of the numbers, and used a mix of colorful adjectives like "lousy," "mysterious," and "confounding."

But one thing was clear -- weather played a large role in January.

"It's a disappointing employment report, with a touch of skepticism because of the weather's impact on the overall number," said John Silvia, chief economist with Wells Fargo.

Major storms across large swaths of the country had a huge impact on businesses. According to the Labor Department's household survey, which calculates the unemployment rate, severe winter weather kept 886,000 people from going to work during the week of January 9.

All those snow days kept a lot of companies from hiring, said economist John Canally with LPL Financial. It's possible that nasty weather could have reduced the overall payroll number by about 100,000, he said.

The Labor Department also announced that job growth last year was weaker than originally stated. After 2010 revisions, there were about 900,000 jobs created during the year -- 215,000 fewer than previously reported.

The labor market typically needs at least 300,000 job gains each month to make a difference in the unemployment rate, economists say, and at least 150,000 to keep pace with population growth.

Headed in the right direction?

While the sluggish growth to payrolls was disappointing, the drop in unemployment was interpreted in different ways.

Some economists thought it was a result of people dropping out of the labor force, though others pointed to a once-a-year population adjustment based on census data that skewed the numbers.

Almost all of the drop was due to unemployed people finding jobs again, said Zach Pandl, an economist with Nomura Securities.

"This part of the report deserves a positive interpretation," he said.

Overall, the unemployment rate has had its largest two-month decline since 1958, he said.

0:00/04:30Labor Secretary explains jobs report

The two parts of the report sometimes differ, because they're derived from separate surveys. While the payroll number stems from a survey of employers, the unemployment rate comes from a different survey of American households.

Canally said he expects the job market to show a spike in payrolls in February, and then resume a gradually improving trend. Any improvements though, are still likely to be at a very slow pace.

"People should not be too fearful of losing a job they have," Canally said. "But if they don't already have a job, it's still tough. Companies are still reluctant to hire." 

Job GrowthGood jobs vanish, may never return