Two weeks into the new year, economic conclusions are still in a kind of suspended animation.

This week’s data tilted against "self-sustaining recovery," and so the 10-year T-note survived the newest wave of Treasury bond sales, its 3.3 percent yield near the 2011 low, and mortgages are holding nicely in the high fours.

On the bright side, December industrial production beat the 0.5 percent forecast and gained 0.8 percent, and capacity in use touched 76 percent, the highest since 2008.

Bright but not pink: A lot of capacity has been permanently removed from service, and actual production is now similar to the worst of the last five recessions — up that far. Retail sales rose in December, but take out autos and gasoline and the increase was only 0.4 percent, about half of expectation.

December CPI jumped 0.5 percent, however, all but 0.1 percent was due to oil prices — the core rate very much under control, the overall rate chewing into consumer wallets. Perhaps for that reason, the University of Michigan consumer sentiment index clunked down to 72.7, failing expectation for better and below prior level.

The areas of strength seem to be consumer durables: stuff whose replacement we deferred, but which ultimately wears out. Cars and clothes. We are also drawing some strength from exports to a red-hot emerging world. Two stories there.

I took our Volvo in for service, and asked a bright senior manager the usual questions (ask everyone you meet, and you may get a better picture than the media offers): How’s business? "Terrific. Only one problem: Can’t get cars. Might have to wait six weeks to get one off a boat."

Huh? New Chinese owners crimping supply? "Nope. Demand in Russia and China sucks ’em up, and our margins are better there. Going to build two new factories, but it’s going to take a while." How about the Ford side of the business? "Same. Re-opening closed factories. But, credit is tighter than ever."

As in any business today, if your product is good and you’re paying attention, conditions are OK. Car sales bottomed at 9 million annual in 2009, and have crept back to 12 million, a tad short of the 16 million average in the prior decade. "Hot" is relative to the panicked shutdown of supply, which overshot shutdown of demand.

Exports … in November we sold $159.6 billion overseas, but we bought $198 billion. Were it not for $27.2 billion in petroleum imports… oh, well. We’re on track for a $500 billion trade deficit, larger than all other national deficits in the world combined.

Slice trade another way: Our imports from China in November were $35.1 billion. Our gracious trading partners bought $9.5 billion from us. Of our total $500 billion deficit, including our oil habit, China alone will account for $275 billion this year.

Tim Geithner this week gave another a stern speech about China.

Source: Calculated Risk blog

Given an economy short of self-sustenance, still in the ICU, public policy decisions are more important than markets.

The ICU: We are borrowing and spending more than $100 billion per month. Total Treasury debt in the market: $9.83 trillion (last Wednesday). Springtime tax collections will slow its growth, but next January we’ll owe about $11 trillion (doubled since 2007). Until June the Fed will buy the equivalent of all the Treasury bonds we’re selling.

Like a patient on a ventilator, stay on it too long and you can’t come off. But we must. By the end of 2012, 2013 at the latest, we either slow this borrowing ourselves, dramatically — half or more — or the markets will do it for us.

The same situation has the states in chaos. Illinois’ lame-duck Legislature could not bear to cut spending and bolted to a massive tax increase, $1,050 for a family of four with a $60,000 income, and jumped its corporate tax rate 50 percent, joining the top-10 states. The Legislature’s Democratic majority was re-elected in November, but I wouldn’t bet on next year. Nearly every state will experience similar lurches.

The surface stability in markets since mid-December is an illusion. From stocks to Treasurys, balance is unsteady. And the two largest markets in the nation by dollar volume — mortgages and housing — are most deeply dependent on policy outcome.

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