Weekend reading: Real economy, not financial, the key for 2010

This last week saw some mixed economic data: Q4 GDP was revised upward from 5.7% to 5.9%, durable good order surged, but consumer confidence dropped, along with dismal new and existing home sales.

Growth in GDP is likely to slow after the big spurt.

Unlike past rebounds driven by the spending of shoppers, this one is hinging more on spending by businesses and foreigners. Businesses boosted spending on equipment and software at a sizzling 18.2 percent pace, the fastest in nine years.

And foreigners snapped up U.S.-made goods and services, which propelled exports to grow at 22.4 pace, the most in 13 years.

According to the GDP release from the commerce department, here is the broad makeup of the US economy:

Personal consumption expenditure 71%
Private domestic investment 11%
Government consumption and investment 20%
Net export -2%

Government has already stepped up its role, and may not be able to do much this year. Business investment can probably go up more. Technology sector is most promising. Foreign demand is likely to stay robust, as emerging market consumer spending has already overtaken US to become the largest spender in the world economy. But to grow, US will still need domestic consumers to open their wallets more. That hinges on jobs and assets (mostly home values and financial asset values). US needs both the income and wealth effects working.

All of these point to the essential need for interest rate to stay low, and US dollar to stay weak. In other words, the global rebalancing compells US to act more like China and vice versa.

The banking system is more or less stabilized. FDIC is still mopping up the mess and will continue to do so for the rest of the year. If the real economy improves, banks are likely to lend more, especially given the record yield spread. That's when the positive feedback loop will start working and growth will accelerate. Bet on that.