The war over spending

The fight over spending is likely to come to a head by March. That's when temporary funding for the government expires and when the country's debt load will be very close to surpassing the legal debt limit. (Senators: 'Put up or shut up on debt')

The 2011 and 2012 budgets

President Obama, who said he expects "tough fights ahead," has promised that his fiscal year 2012 budget proposal would challenge lawmakers who are "hollering about deficits and debt" to step up because he was going to "call their bluff."

His proposal is likely to be previewed in his State of the Union address before being submitted to Congress around Feb. 14.

But fiscal policy experts whom CNNMoney contacted are not expecting the president to knock their socks off with his deficit reduction proposals.

They expect he will call for general entitlement reform but offer few specifics on how to address the biggest long-term debt drivers -- health care costs and the aging of the baby boom.

They do believe he will propose some important deficit-reduction measures, but modest ones such as a multi-year freeze on discretionary spending, which is one third of the federal budget.

"I expect [his proposal] to do more to reinin future budget deficits. Not sure if that will constitute bluff-calling though," said Donald Marron, a former acting director of the Congressional Budget Office.

Et tu, Congress?

Even if the president's budget proposals happily surprise deficit hawks, there's no guarantee Congress will adopt them. Or even pass a budget for the 2012 fiscal year.

Witness fiscal year 2011, which began three months ago.

Failing to agree on a full-year budget, Congress passed four stop-gap measures to keep the government funded temporarily. The fourth one expires March 4.

That means in addition to figuring out what they want in a budget for 2012, lawmakers will burn up legislative time and energy figuring out what kind of spending plan they want for the remaining seven months of fiscal year 2011.

The Republican pledge

Republicans have pledged to cut federal spending to 2008 levels. They haven't said how they'd do it.

Budget experts told CNNMoney they are dubious that Republicans can achieve that goal.

"I'm not even sure they know what they mean by that," said Robert Bixby, executive director of the Concord Coalition, a deficit watchdog group. "This is one where the fine print will need examination to see if it supports the rhetoric."

0:00/2:29GOP: $100 billion budget cut

Even if Republicans succeed in passing a bill to knock spending back to 2008 levels, some budget experts doubt the president would sign such steep cuts if they go into effect immediately given the fragile economic recovery.

The debt ceiling

Perhaps the crucible in the budget fight will be a vote over whether to raise the country's debt limit -- currently $14.294 trillion. The last time it was raised was in February 2010.

If the ceiling were ever breached, the country would effectively be in default. That would slam bonds, the dollar and creditors' portfolios.

Fiscally conservative lawmakers may use the opportunity of the upcoming debt ceiling vote to demand spending cuts in exchange for their support.

The budget experts CNNMoney contacted were divided on just how "meaningful" any quid pro quo spending cuts would be. But many believe a deal could include budget process reforms along with a cap on discretionary spending or a spending freeze.

And some are a little concerned that the public sparring over the issue could spook markets.

"I expect the debt ceiling [debate] to be all-out war," said Len Burman, a professorat the Maxwell School at Syracuse University.

Tax reform and debt reduction

No one CNNMoney contacted expected an overhaul of the federal income tax code to be enacted in 2011. Many said enactment in 2013 is more likely.

But they all expect that a tax overhaul will be debated in 2011, given that the president, the president's debt commission, the Federal Reserve chairman, a bipartisan group of 18 senators and the incoming chairman of the House tax-writing committee have been calling for it.

What proponents of tax reform appear to agree on: Income rates can be greatly lowered if the hundreds of tax breaks in the code are streamlined -- with some being reduced in value and many being eliminated altogether.

What proponents will tussle over is just how low those rates should go, which tax breaks should be curbed or eliminated, and whether tax reform should aim to raise more revenue than the current system or the same amount.

The bipartisan group of senators angling for tax reform wants it to be part of a comprehensive debt-reduction package. And they want the Senate to pass such a package by the end of 2011. The leaders of the group said they will introduce as legislation the president's debt commission plan to get the conversation started.

Meanwhile in the House, incoming Budget Committee Chairman Paul Ryan was a member of that commission but voted against the plan. Nevertheless, he has said he plans to incorporate 85% of it into the 2012 budget proposed by his committee.

Round 1 of the fight starts on Jan. 5. 

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Why gas costs more--and is more profitable--out West

For example, Fortune rated one company, Western Refining (WNR, Fortune 500), which has access to the Western gasoline market, one of the best performing stocks in 2010. Western Refining reported a third-quarter net income of $6.9 million for 2010, compared to its net loss of $4.8 million in the same period of 2009.

The company succeeded for several reasons. It shed underperforming facilities in the East. Out West, "we had two of the most profitable refineries on a gross margin basis," Western Refining CEO Jeff Stevens explained at a symposium in December. That's partially because the company fine-tuned its cost structure at those refineries and because the cost of oil is increasing again. But the high premium for gasoline out West certainly helped.

Western Refining is one of a limited number of refineries have the capacity to make the specific mixture required for clean fuel. That means that these refineries can charge more for their product. "You're essentially creating a segmented market-you're limiting the amount of suppliers that can compete," says Frank Wolak, a Professor of Commodity Price Studies in Stanford's Economics Department.

Californians have been buying expensive gas for decades. The state had terrible smog problems in the 1990's and was forced to reduce air pollution after the Environmental Protection Agency passed the Clean Air Act. Since then, California has had to buy gasoline that produces fewer pollutants than fuel sold in the rest of the country.

Only a small number of refineries switched to produce that kind of gasoline. In a report on the high price of California gasoline in 2004, Wolak wrote that six refiners own more than 90 percent of the refining capacity in the state. Now, he says the same set of refineries dictates the market.

Western Refining is one of them, and it's in a good position to benefit from new demand for clean-burning gasoline. The company has two major refineries: one in El Paso in west Texas, and the other in Gallup, New Mexico near the four corners. The Gallup refinery distributes to cities including Phoenix and Tucson that are starting to buy cleaner burning gasoline.

The cities are responding to the EPA, which declared back in 1997 that the Phoenix Metropolitan area fell short of the National Air Quality Standards, then demanded that the state come up with a plan to fix it. In 2004, the EPA approved Arizona's plan, called the Arizona Cleaner Burning Gasoline program.

Now, the Arizona gasoline market pulls in the same profits for refiners as California, Western Refining CEO Stevens says. He expects the trend to continue.

"Looking forward we're seeing that the West coast continues to remain-- particularly on the gasoline side--really the strongest market," Western Refining's Stevens said at the symposium.

The market will stay profitable for the foreseeable future, Wolak says, because the few refineries that produce the cleaner gasoline mixture will keep control without much competition. "If you had a national market among all the refineries, that would become much more difficult."

He also says that while it might make sense environmentally, a national market for clean burning gas won't happen for a while, if ever. Meanwhile, refiners can continue to meet the needs of state governments demanding cleaner-burning fuel, and keep pocketing the premium. 

Car regulators aim for higher fuel economyInflation (CPI)

50 million taxpayers must delay filing - IRS

The bill ensured that the federal income tax rates would not change, and itemized deductions will continue to be allowed in full for high-income taxpayers.

As a result, the 50 million taxpayers who itemize their deductions will have to hold off for a bit before they file. Of course, not everyone files early: only about 9 million of the 140 million U.S. tax filers filed in January or February of last year.

"The majority of taxpayers will be able to fill out their tax returns and file them as they normally do," said IRS Commissioner Doug Shulman in a statement. "The IRS will work through the holidays and into the New Year to get our systems reprogrammed and ensure taxpayers have a smooth tax season."

The delay affects both paper and electronic filers who itemize deductions on Form 1040 Schedule A. That includes those claiming the new Educator Expense Deduction, which credits grade school teachers for out-of-pocket expenses of up to $250.

It also includes those claiming deductions for college students, covering up to $4,000 of tuition, which is claimed on Form 8917, though the IRS said there will be no delays for those that claim other education tax credits.

Though itemizers can work on their tax returns before the IRS is ready to accept them, the government said people should not send them in before it is ready to process the returns.

The IRS hasn't yet said exactly what day it will be able to begin processing the impacted tax returns, but it expects to announce that date "in the near future."

Meanwhile, TurboTax said its customers can e-file with the company as early as Jan. 6, and it will hold onto the filings until the IRS is ready to process them. 

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Job Growth

"The overall pace of job growth is disappointing," said Wells Fargo Chief Economist John Silvia, who had forecast a gain of 130,000 jobs in the month.

While private businesses continued to hire for the eleventh month in a row, they also missed expectations. Companies added just 50,000 jobs to their payrolls in October, falling short ofthe 175,000 jobs economists had predicted for the sector.

Meanwhile, the government shed 11,000 jobs during the month.

The job market is still reeling from the longest recession since the Great Depression, with 15.1 million Americans still unemployed.

On the upside, revisions for September and October showed there were 38,000 additional job gains in those months than previously reported.

Holding pattern

Overall, employers are still reluctant to commit to full-time hires as they remain uncertain about tax increases, health care costs and new regulations, Silvia said.

While gains were primarily in the services industry, huge losses in retail came as the biggest surprise, Silvia said. The sector lost 28,000 jobs in November -- a figure that could partially be attributed to seasonal adjustments, he said.

Manufacturing also brought disappointing news. Despite other indicators that show the manufacturing sector is recovering, factories cut 13,000 jobs last month.

The construction sector, which some economists had thought already bottomed out with its job cuts, also shed another 5,000 positions.

But employers are at least getting their feet wet with temporary hires. The economy added 40,000 temporary jobs in November, and overall, temp jobs have been increasing since September of last year.

Temporary jobs are often considered a precursor to permanent job growth, although many experts say they should have translated into full-time positions months ago.

Hours worked and wages were essentially flat in November, boding poorly for Americans heading into the holidays, said Diane Swonk, chief economist from Mesirow Financial.

Deep Black Friday and Cyber Monday discounts recently kicked off the holiday shopping season and gave a strong boost to retailers in November.

"[This] makes one wonder how much consumers were dipping into their savings to take advantage of all the holiday promotions that we saw during the month," Swonk said in a research note.

Jobless recovery?

The unemployment rate, which is calculated in a separate survey, unexpectedly ticked up to 9.8% after holding at 9.6% for the prior three months, the government said.

While many economists had predicted the rate would stay the same, an uptick isn't completely surprising either, said Sal Guatieri, senior economist with BMO Capital Markets.

See full survey results

That's because the unemployment rate only includes people who are actively looking for jobs, and in this downturn, many Americans just give up.

When the job market started looking up in October, many of those so-called discouraged workers may have started looking again, and that makes the unemployment rate float higher, Guatieri said.

"Some discouraged job seekers were encouraged to come back into the labor search," he said. "In the end, they were greatly disappointed when they could not find work."

The number of discouraged workers rose to 1.3 million in November, up 63,000 from the previous month.

0:00/2:39Long-term unemployed can't find jobs

The jobless rate has remained above 9% for 19 straight months, the longest stretch on record since the Labor Department started tracking unemployment in 1949. That record "hammers home" the fact that Americans are stuck in a jobless recovery, Guatieri said.

"The economy is not growing fast enough to satisfy all the new job seekers," he said. "We're not even keeping up with population growth in generating jobs, let alone putting a dent in the sky-high unemployment rate."

Economists often say the labor market needs about 150,000 additional jobs per month just to keep pace with population growth, and at least 300,000 to make a difference in the unemployment rate.

Lawmakers point fingers

The jobs report barely moved stock markets Friday, but lawmakers were quick to jump up on their soap boxes to point fingers across the aisle. Both sides accuse each other of holding up the job recovery.

"My Republican colleagues have offered few ideas on how to create jobs, but have been vocal and steadfast in their opposition to unemployment benefits for those without jobs," said Rep. Carolyn Maloney, a Democrat from New York and chairwoman of the Joint Economic Committee.

Democrats say the disappointing jobs number supports their push for extending federal unemployment benefits. On Tuesday, the Senate failed to advance a Democrat-sponsored bill to extend federal unemployment benefits.

Meanwhile, Republicans say the jobs report supports their call to extend the Bush tax cuts which -- they argue -- stimulate the economy.

"All the while, [Democrats] have left a massive job-killing tax increase hanging over the heads of every single American family and small business, prolonging the existing economic uncertainty that has kept employers from hiring," Republican National Committee chairman Michael Steele said in prepared remarks. 

Layoffs are slowing but jobs growth still weakJob Growth

Federal lifeline to states dries up

State and local officials had hoped Congress would extend the program by a year or two, but federal lawmakers have not been feeling very generous to states recently. They did not include the bonds in the $858 billion tax-deal, as some had hoped.

Nearly $180 billion in debt has been issued under the program since its inception in April 2009, according to Thomson Reuters. Build America Bonds account for more than a quarter of this year's municipal bond issuance, helping boost the sector to a record level.

The Obama administration created the program last year to help state and local agencies regain access to the bond markets after the financial crisis made it tough for them to borrow. These agencies depend on issuing tax-exempt debt to finance capital projects, but investors were demanding high interest rates amid the global financial meltdown.

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Under the Build America Bonds program, the agencies issue taxable bonds with the federal government subsidizing 35% of the interest payments.

The money has been used to rebuild highways, shore up bridges, upgrade rail systems and put up college dormitories.

"In some cases, it allowed them to go ahead with vital infrastructure projects that they needed," said Daniel Berger, senior market strategist at Thomson Reuters Municipal Market Data. "This has given them access to capital to fund these projects."

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States and municipalities don't usually dabble in the taxable bond market. The Build America Bond program allowed them to tap into to a larger pool of investors, such as foreign buyers who aren't interested in tax-exempt debt because they wouldn't reap any advantages.

And the popularity of the bonds allowed the public agencies to lock in lower rates for the long-term debt, which saved them a bundle.

California loves Build America Bonds

Agencies within California were the top issuers of Build America Bonds, with $38.4 billion in offerings, according to Thomson Reuters.

The state alone issued about $14 billion, according to the Treasurer's Office. It saved well over $1 billion over the life of the bonds. The projects also provided tens of thousands of people with jobs, both in the construction industry and in support roles.

"That's a good chunk of change, especially for a state that's doing its best to get on an even keel," said Tom Dresslar, spokesman for the treasurer.

The University of California has been a "very active and very thankful" participant in the Build America Bonds program, said Peter Taylor, the university system's chief financial officer. The taxable debt is helping fund a new cancer hospital at the San Francisco campus, a gym at Berkeley and dorms at Merced.

The San Diego campus has restarted two major projects thanks to the program. It is constructing an engineering building with office and lab space for 50 faculty members, who will serve 1,100 students. And it is expanding the Rady School of Management to accommodate more classrooms, study space and faculty offices.

The university system estimates it will save a total of $600 million on the $3 billion of bonds issued. And it was able to charge forward with some projects it would not have started for another year or two.

"All of a sudden, it's a lot more affordable," Taylor said. The program "has allowed us to be a little of ahead of schedule from where we'd be otherwise.

Since they are taxable, the Build America Bonds initiative has also opened up the municipal bond market to a lot of new investors.

Illinois' Director of Capital Markets, John Sinsheimer, traveled to Europe and Asia to market the state's program, which has issued $3.2 billion.

The aggressive interest from overseas buyers allowed the state to reduce its interest rate by about 40 basis points, he said. Overall, Illinois expects to save $325 million.

The state is using the funding to improve schools, bridges, rail systems and to upgrade the Eisenhower Expressway, a major highway that runs into Chicago.

Life without Build America Bonds

Agency officials say they aren't quite sure what to expect in 2011 when they are forced to rely only on the tax-exempt bond market.

It's unclear whether the traditional investors in government debt will return with sufficient demand to compensate for the expiration of the Recovery Act program, said Erik Kriss, spokesman for the budget division in New York. That may force states and municipalities to offer high interest rates to lure them in.

Public agencies within the Empire State issued $19.6 billion worth of Build America Bonds, the second highest level.

Agencies nationwide may not turn to the bond market as often next year. The University of California already estimates it will issue only $300 million of debt in 2011, one-tenth what it issued in the 20 months of the Build America Program.

"They won't quite have all the access they had before," said Berger of Thomson Reuters. "They may have to defer some projects."

This could not only slow infrastructure improvements, but could also cost people their jobs. The Build America Bonds program helped spur growth in hiring of heavy and civil construction workers, the only category of builders not to shrink over the past year, according to Ken Simonson, chief economist of the Associated General Contractors of America.

The initiative, along with other Recovery Act funding for infrastructure, helped boost public construction spending by 2.2% over the past year, Simonson said. By comparison, private non-residential construction spending plummeted by 21%.

"Build America Bonds unquestionably helped states to do more construction than they would have been able to," he said. "I am worried public construction will take a hit in 2011." 

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Retail Sales

The Commerce Department said total retail sales rose 0.8% last month.

Economists surveyed by Briefing.com on average had forecast an increase of 0.5% for November, compared to a revised 1.7% jump in sales the prior month. October sales were originally reported to have increased 1.2%.

Sales excluding autos and auto parts rose 1.2%, compared to a revised 0.8% gain in ex-auto sales in October. Ex-auto sales were originally reported to have increased 0.4%.

Economists had forecast a rise of 0.6% in the measure for November, according to Briefing.com.

0:00/4:15Luxury toys for the holidays

After the report was released, the National Retail Federation bumped up its holiday sales forecast. The trade group now expects combined sales in November and December to increase 3.3% this year, up from its initial forecast for a 2.3% gain.

Holiday sales last year rose an anemic 0.4%

"The start to the holiday season has surpassed all expectations," NRF president Matthew Shay said in a statement.

"While employment data is still a concern, we are starting to see improvement in other economic indicators that support an increase to our forecast," he said. "In order to sustain this momentum for retailers and the U.S. economy, there must be a renewed focus on jobs as we enter the new year."

Black Friday: Where you spent

November's gain marked the fifth straight monthly gain in the measure -- an encouraging sign that, despite a tight job market, consumers are becoming more comfortable with spending on discretionary purchases.

For retailers, November marks the start of the year-end holiday shopping frenzy. Total November-December can account for as much as 50% of merchants' sales and profits for the full year.

Holiday sales this year got off to a robust start. Earlier this month, many large store chains also reported much better-than-expected monthly sales at their stores.

The government report showed sales at clothing stores rose 2.7%, were up 2.3% at sporting goods and hobby stores, increased 2.8% at department stores and climbed 1.3% at general merchandise sellers. Online sales rose 2.1%.

Higher gasoline prices fueled gas station sales to a 4% increase in November.

But there were a few weak pockets as well in last month's report. Electronics sales dipped 0.6%, a figure also reflected when Best Buy (BBY, Fortune 500), the No. 1 electronics seller, reported a miss on its sales and profit last quarter earlier Tuesday.

Furniture purchases slipped 0.5%. 

Retail SalesMeager increase forecast for holiday retail sales

Americans earn more - but save less

Income was expected to increase by 0.2% in the month, according to a consensus estimate of economists from Briefing.com. The economists expected that spending by individuals would rise 0.5% in November.

"This report is another indication that consumer spending is firming as we finish out the year," said Tim Quinlan, economic analyst at Wells Fargo. Consumer spending accounts for about two-thirds of the nation's economic activity, so signs of improvement bode well for the recovery.

Private sector wage and salaries were also up, increasing by $6.6 billion last month. But the increase wasn't as large as it was in October, when salaries jumped $31.2 billion.

While earnings and spending increased, the data showed that Americans did not save as much money in November as they did the prior month.

Americans saved $614.8 billion in November, compared with $622.8 billion the prior month. And personal savings as a percentage of disposable income slipped to 5.3% from 5.4% in October.

"The figures are seasonally adjusted, but the modest decline in the savings rate could be showing that the holiday shopping season will be much better than what we have seen over the last sever years," Quinlan said.

Quinlan's forecast calls for a 5% increase in holiday sales compared to last year, which would be the best year-over-year improvement since 2005, he said. 

Meager increase forecast for holiday retail salesPersonal income is up, and so is spending