Key indicators suggest it is, and while this will be a slow-moving dissipation, top economists as well as the U.S. Federal Reserve now say the picture for the coming months looks a little less bleak.

Unemployment, considered to be one of the darkest spots of a recovery that has seen vast improvements in stock markets and marginal gains in housing and auto sales, is finally starting show signs of stabilization and in turn, has consumers loosening their iron grip on their wallets.

“Taken as a whole, the labor market data for the United States is suggesting we are in a gradual, steady improvement towards job growth at some point over the next three to six months and the decline in jobless claims is consistent with that,” said Zach Pandl, an economist at Nomura Global Economics (NYSE ADR: NMR) told The Wall Street Journal. “The trend has been very persistent since the end of August and we are expecting that to continue.”

The Labor Department said the four-week moving average for new jobless claims fell by 16,500 to 496,500, the 12th consecutive week there’s been such a decline. This is significant because the drop is seen by economists as a more accurate gauge since it irons out week-to-week volatility in the data.

Initial jobless claims for the week ended Nov. 21 fell to the lowest level since September 2008, with 466,000 claims, a decline of 35,000 from the previous week’s revised figure of 501,000.

The weekly report comes after other signs that this lagging indicator of the U.S. economy’s health is starting to catch up with the rest of the “green shoots,” including a panel of 48 economists polled by the National Association for Business Economics (NABE) that said job declines will swing back to growth in the second quarter next year.

“We have been losing jobs on the order of about 200,000 per month in the last couple of months,” NABE President Lynn Reaser said in an interview with National Public Radio (NPR . “We think a year from now, companies will be adding about 200,000 jobs per month.”

After the NABE survey results were published, minutes from the Fed’s meeting earlier this month revealed a slightly more optimistic picture for job creation by the end of 2010, revising a previous unemployment range of 9.5% to 9.8% to 9.3% to 9.7%.

Longer term, the Fed isn’t as optimistic for the end of 2012, when the NABE expects the unemployment rate to return to a normal level, which was 4.7% the month before the recession began in December 2007. Instead, the Fed expects the unemployment rate at the end of 2012 to hover between 6.8% and 7.5%.

Consumer Spending Picks Up Heading Into Holiday Season

Although the unemployment rate is still ticking up, more consumers made purchases in October on items excluding food and gas, which could bode well for retailers in a vicious fight for precious sales.

Consumer outlays, which account for two-thirds of the U.S. gross domestic product (GDP), gained 0.7% in October after falling 0.7 in September, according to Commerce Department data.

Call it feel-good spending, says Naroff Economic Advisors Inc. President and Chief Economist Joel Naroff.

“This was a very good report that provides some hope that the holiday shopping season will wind up not being the disaster so many had forecast,” Naroff wrote in a note to investors. “I have been making the point that consumers are starting to buy the little things that make their lives better and this report points to that possibility.”

In what probably isn’t a coincidence with the consumer spending data, disposable personal incomes gained 0.4% in October and personal savings dipped further in October to 4.4% of total after-tax income from September’s 4.6%.

Even though firms aren’t hiring, those who are employed may be seeing rewards for being a part of  the “doing more with less” movement amid the worst recession to grip the nation since the 1930s. Indeed, the productivity of U.S. workers rose at an annual rate of 9.5% in the third quarter, more than four times the average productivity in the past 25 years.

Confidence Remains Fragile

In spite of a strong rebound since the markets’ March 2009 lows and now signs of hope in the jobs market, consumers are now well aware that this recovery will be a lot slower than they would like as November’s consumer confidence slipped from the previous month.

The Reuters/University of Michigan Survey of Consumers fell to 67.4 in November from October’s 70.6 and 73.5 in September. While that’s still higher than the 55.3 in November 2008 that followed the market meltdown, it shows that consumers are still wary about bearing most of the responsibility for the United States’ economic recovery.

“The consumer is a long way from being a major contributor to the recovery,” said Nigel Gault, chief U.S. economist at IHS Global Insight Inc. “This recovery is going to be slower than normal.”

News and Related Story Links:

• The Wall Street Journal:
  Consumer Spending Rebounds, As Jobless Claims Fall
• Money Morning:
  U.S. Economy Will Grow Faster Than Expected, Jobs to Return to Growth Next Year, Economists Say
• NPR:
  Economist: Job Growth Will Resume “Within the Next Few Months”
• Reuters/University of Michigan Surveys of Consumers:
  Lackluster Recovery Due to Weak Consumer Finances

While FDIC-insured banks reported a net income of $2.8 billion in the third quarter, bank lending fell by 2.8%, the most since records were first kept in 1984 and the fifth consecutive quarter loan balances declined. The FDIC's Deposit Insurance Fund (DIF) went into the red at the end of September and the bank insurer today (Tuesday) revealed just how steep the loss it was when the quarter ended: $8.2 billion.

"A few very large banks are making a pile of money, and the rest of the industry is hurting," Westwood Capital LLC Managing Director Daniel Alpert said in an interview with The Associated Press. Alpert points to a variety of government subsidies, including capital injections, asset guarantees and low-cost borrowing that are costing taxpayers without improving the economy.

"We're creating riskless profits for the big banks," he said.

The number of banks on the FDIC's "problem list" in the United States grew to 552 in the third quarter, up from 416 in the previous period. That's the largest number of banks on the list since December 1993, when there were 575. For the first nine months of 2009, a total of 95 banks failed at a cost of $25 billion to the DIF.

Since the end of the third quarter, an additional 34 banks have failed, bringing the year's total to 124, almost five times more than the 25 banks that were deemed insolvent in 2008.

The FDIC's has set aside $38.9 billion in provisions for failures in 2010, and it will get an additional $45 billion by Dec. 30 from three years' worth of prepaid assessments, giving the DIF $83.9 billion.

However, FDIC officials anticipate bank failures will cost the DIF $100 billion in the next five years, leaving the FDIC with two options:

• Draw on its credit line of up to $500 billion from the Treasury.
• Levy a special assessment on banks.

Have Credit, Will Borrow

Although the FDIC won't need the full $500 billion in credit from Uncle Sam, any borrowing from this line will mean drawing funds the U.S. Federal Reserve doesn't have on its books. In other words, the Fed would need to print this money, which would put further pressure on inflation and correctly be perceived as another taxpayer bailout.

In his 2010 Outlook for the banking sector, Money Morning's Martin Hutchinson said soaring commodity and oil prices all but ensure the Fed will raise interest rates some time in 2010. But doing so will affect the very banks the FDIC insures, reducing the profitability of lending and undermine the prices of assets like houses and commercial real estate, thus causing larger bad debts.

Then there's the political firestorm that will result from the FDIC borrowing money from the very people that own the bank deposits it protects.

"Calling on taxpayers to bail out the FDIC's insurance fund is like asking your parents to support your crack habit," said Money Morning Contributing Editor Shah Gilani. "There's only one direction that moral compass will take you: down."

If the FDIC does tap its credit line with the Treasury, it wouldn't be the first time. It turned to the line during the savings-and-loan crisis of the early 1990s. But absent from that crisis was the $750 billion the U.S. government has already loaned to banks through the Troubled Asset Relief Program (TARP).

The American public, which struggled amid a credit crunch last fall, has already expressed rage at the Treasury's unwritten "too big to fail" policy for certain banks such as Bank of America Corp. (NYSE: BAC) and Citigroup Inc. (NYSE: C).

More Unforeseen Premiums Would Weigh Heavily on Troubled Banks

Should the FDIC's allotted $83.9 billion not be enough, it could once again impose more special assessments on banks as it did last spring, generating $6.2 billion for the DIF.

As the FDIC's list of "problem banks" continues to grow, some may not be able endure the sudden decline in earnings that would come from a special assessment by the FDIC.

Banks' income statements already have other pressures to contend with. Loan losses continued to gain in the third quarter, rising 80.5% to $50.8 billion, led by commercial real estate, the FDIC said.

Not only could a special assessment hurt banks, but it could also be counterproductive to the FDIC as it rescues the banks that can't afford any extra expenses. The hundreds of troubled banks on the FDIC's "problem list" won't be able to contribute any more to the insurance fund, says Money Morning's Gilani.

"Demanding that remaining problem banks pay higher premiums could easily force them over the brink," Gilani said, adding that although this scenario would be problematic, "at least it attaches a much-needed dose of reality into the risk formula banks all but have abandoned in years past."

News and Related Story Links:

• Money Morning:
  Banks Satisfied On FDIC Decision, but Will They Still Lend?
• The Associated Press:
  Banks Earn $2.8B in 3Q, FDIC Says Dangers Persist
• Money Morning Outlook 2010:
  Can U.S. Bank Stocks Double Again in 2010?
• FDIC:
  Quarterly Banking Profile

A panel of 48 economists surveyed by the National Association for Business Economics (NABE) showed gross domestic product (GDP) in the United States will grow by 3.2%, but job losses won't bottom until the first quarter of next year. A previous NABE forecast said employers would add 12,000 to payrolls in that quarter.

"While the recovery has been jobless so far, that should change," said Lynn Reaser, NABE president and chief economist at Point Loma Nazarene University in San Diego. "Within the next few months, companies should be adding instead of cutting jobs."

NABE's GDP forecast is one of the most optimistic forecasts for the United States. Money Morning's "Outlook 2010" series showed a range of U.S. growth between 1.0% and 2.0%.

The U.S. economy "will be lucky to do 2.0%" next year, Money Morning Chief Investment Strategist Keith Fitz-Gerald said. "The economy faces some very difficult challenges. There's a slight chance – depending on what happens with some outside factors – that the U.S. could do 2.5%, but I really doubt it. China could actually pull us along [to higher-than-expected growth], but those are some long odds."

NABE panelists still see "a relatively sluggish consumer upturn," but expect strong gains in housing, low inflation and a continuing rally of equities markets. Additionally, the majority of panelists believe the U.S. Federal Reserve's policies will keep inflation low, but are "extremely" concerned about the nation's high deficit, which will reach a record $1.6 trillion in 2009, the White House Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) said earlier this year.

Jobless Recovery

The current jobless recovery "will not remain jobless for long," the NABE said.

For the first time since 1983, unemployment cracked the psychologically important 10% barrier last month. Roughly 190,000 jobs in the United States were lost, surpassing economists' estimates of 175,000 payroll cuts.

NABE expects job growth in the fourth quarter of next year to match the number of losses the United States is currently experiencing.

"We have been losing jobs on the order of about 200,000 per month in the last couple of months," NABE's Reaser said in an interview with National Public Radio (NPR) . "We think a year from now, companies will be adding about 200,000 jobs per month."

Still, 61% of the economists polled by NABE say a complete recovery of more than 7.3 million jobs lost since the recession began in December 2007 won't happen until 2012. Although job growth will return next year, the average unemployment rate in the fourth quarter will be "stubbornly high" at 9.6%.

News and Related Story Links:

• National Association for Business Economics:
  NABE Panel: Recovery to Soon Lose "Jobless" Label
• Money Morning:
  Outlook 2010 Series
• Money Morning:
  U.S. Economy Will Dodge a Double-Dip Downturn, But Won't Escape Unemployment Woes During 2010 Jobless Recovery
• Money Morning:
  Jobless Recovery Category
• Money Morning:
  Unemployment Rate Cracks Double-Digit Barrier at 10.2%, Boosting the Odds of a "Jobless Recovery"
• NPR:
  Economists: Job Growth Will Resume "Within the Next Few Months"

At a news conference in Seoul, President Obama and Korean President Lee Myung-bak, both showed willingness to renegotiate elements of the deal and to have both countries ratify it as soon as possible.

"I am a strong believer that both countries can benefit from expanding our trade ties," President Obama said. "I have told President Lee and his team that I am committed to seeing the two countries work together to move this agreement forward."

That could be easier said than done, especially for Capitol Hill democrats that rely on support from labor unions.

"Before we move forward with the U.S.-Korea Free Trade Agreement, I feel it necessary to remind my colleagues in Congress that the draft agreement allows Korean discriminatory treatment of imported U.S. automobiles to perpetuate," said U.S. Rep. John Dingell, D-MI today (Friday).

Certain Korean cars are among the bestsellers here, he said, while U.S. automakers have "grave difficulties accessing the market."

Those difficulties can be attributed to an 8% duty on U.S. auto exports to Korea as well as taxes on engine displacement, both of which would be removed under the trade agreement.

Despite this, officials in both Washington and Detroit say the deal doesn't address certain non-tariff barriers, which are preventing more American cars from entering Korea, a report in The Korea Herald says.

Kim Do-hoon, an economist at the Korea Institute for Industrial Economics and Trade (KIET) argues the deal addresses all U.S. concerns, including Seoul's safety and environmental standards as well as the removal of the duty on autos.

The opposition to the deal stems from Korea's domestic auto tax laws on larger cars, which are typically American, Kim says. Korea's auto registration tax and special consumption tax are on the rise as a measure to contain the growing demand for bigger cars by Korean consumers.

"Our auto taxation system is of a domestic issue and not deliberately aimed at being a non-tariff barrier, so it could be that this is acting as a misunderstanding," Kim said. "This is a domestic issue, a policy-related measure aimed at encouraging consumption of smaller cars to reflect our national challenges, whether it be environmental or traffic-related. I don't think the U.S. should mistake our local taxation regulations as an intentional means by the Korean government to prevent American automakers from making business here."

When it comes to autos, there's a huge trade imbalance between the United States and Korea. In 2008, U.S. auto exports of 7,000 to Korea represented just 1% of Korean imports.

However, many analysts believe this imbalance is being dictated by the market not trade barriers.

"The Korean government has opened up the domestic car market to the fullest satisfaction of the U.S. in the FTA," KIET's Kim said. "There is no more to open up in this sector, so I think it is only fair to say that the auto issue is more of a subject of political rhetoric for the Obama administration aimed at catering to the sensitive labor group."

It is not clear whether further negotiation on autos is an option.

"If automobiles are a problem, we are in a position to discuss them again," President Lee said yesterday (Thursday) during a joint news conference with President Obama.

However, one official from the Korean president's office speaking to The Herald on the condition of the anonymity says a deal is a deal.

"If we rewrite the document, that is a renegotiation. It is the government's policy that the agreement not be changed."

Korean Trade Minister Kim Jong-hoon appeared to clarify the Korean president's remarks, saying "it just means if they say there are problems, we are willing to listen. But I believe most of the problems [the United States] prepare and bring to us, if they do, will be those that can be addressed by simple explanations," he added.

News and Related Story Links:

• Wikipedia:
  South Korea President Lee Myung-bak
• The New York Times:
  South Korea Trade Pact is Revived by Obama
• The Korea Herald:
  Seoul Rules Out U.S. FTA Revision
• Los Angeles Times:
  A "Grand Bargain" for North Korea

Comcast, the United States' largest cable television provider, is hoping to avoid becoming the next newspaper or record company by expanding its role from an entertainment medium to a content provider.

"The world of cable delivery is about to change," Forrester Research (Nasdaq: FORR) analyst James McQuivey told the Los Angeles Times. "Cable companies for years have made their living by selling consumers hundreds of television channels bundled together. But the future is going to be very different, and cable companies instead will be selling an 'entertainment experience.'"

While Comcast is now a major player in the Internet service provider (ISP) business as well as telephone service, more than half of its revenue comes from its cable TV customers. But factors working against Comcast include:

• More Competition: No longer limited to satellite TV providers, telephone companies continue to widen their reach through fiber-optic cable.
• Higher fees for content: The fees Comcast pays for programs from TV networks are on the rise.

The likely Comcast-NBC deal would give the cable provider a 51% stake in NBC, while GE would retain a 49% stake and contribute roughly $12 billion in debt to the new company, according to The New York Times. GE would eventually sell its ownership interest over a period of several years. The two companies agreed to value NBC at about $30 billion, Bloomberg News reported.

Paris-based Vivendi SA, which owns 20% of NBC, has no intention of being a part of the new entity, Vivendi Chief Financial Officer Philippe Capron said at a Morgan Stanley (NYSE: MS) conference in Barcelona.

Vivendi is seen as the last obstacle for GE to strike a deal with Comcast, and Vivendi is asking GE for a higher price for its stake and certain deal protections, two people familiar with the matter told The Wall Street Journal.

Competition Likely to Change Comcast's Business Model

More than 54% of Comcast's top line comes from its TV customers, who are fleeing.

Rate increases have helped offset 10 consecutive quarters of net subscriber losses, but Comcast can only raise rates so many times before it alienates its customer base.

When the market decides it can no longer bear Comcast's rate increases, the company will likely turn to advertising revenue, which currently represents just 3.6% of sales. A deal with NBC Universal brings to the table more ad revenue from its 11 networks -including Bravo, USA Network and MSNBC – aligning the Comcast-NBC with media giants like Viacom Inc. (NYSE: VIA) and The Walt Disney Corp. (NYSE: DIS).

There are also Comcast's interactive, targeted ads a la Google Inc. (Nasdaq: GOOG), which generated just $15 million in sales in the third quarter. So far, these ads reach only a few subscribers in isolated areas across the country.

"But the big number," Chief Operating Officer Stephen Burke said of interactive ads earlier this month, "will be generated when the industry gets together and allows a national advertiser the ability to advertise across the country."

Cable operators like Comcast once had entire regions to themselves. But in the mid-1990s companies like The DirecTV Group (Nasdaq: DTV) and Dish Network Corp (Nasdaq: DISH) – with much-smaller dishes to mount than what was previously available – made it easy for consumers to switch to satellite TV.

From 2007 to 2008, DirecTV grew its subscriber base 4.6% while Comcast's shrank 0.8%. DirecTV now has 18 million TV subscribers to Comcast's 23.7 million.

Comcast and its satellite rivals saw new challengers with fiber-optic TV and Internet service, particularly Verizon Communications Inc.'s (NYSE: VZ) FiOS. Similar to the dawn of cable, Verizon's biggest challenge is burying the cables in neighborhoods (cable companies use copper-based coaxial cables versus FiOS' fiber-optic cables, so they can't share wires). As it installs more fiber in neighborhoods, Verizon is becoming more of a threat to Comcast.

Both providers use their market penetration – or how many customers they have out of the total amount of wired homes – as a key measurement for growth. Comcast was wired in 51 million U.S. homes at the end of the third quarter and saw its video penetration fall by two percentage points to 46.5%, compared to 48.5% in the same period a year ago.

Verizon FiOS TV, while available in far fewer homes – 10.9 million – is penetrating the number of wired homes fast, with a 24.7% penetration in the third quarter compared to 19.7% in the same quarter last year.

Because the number of wired homes grew by almost 2% in the past year, Comcast's market penetration on the surface looks flat. But that's not the case.

Comcast actually lost TV customers, going from 24.4 million subscribers in third-quarter 2008 to 23.7 million in this year's comparable quarter – a loss of roughly 700,000. Verizon's FiOS TV, which started in Texas in 2005, now has 2.7 million subscribers.

Comcast's penetration of homes that can receive its Internet service is growing, but at a slower rate than Verizon's. Of the 50.8 million homes wired for Comcast Internet, penetration was 30.9% in the third quarter versus 29.5% a year ago. Verizon's FiOS equivalent jumped to a penetration of 28.5% of the 11.5 million wired homes in the third quarter, compared to 24.2% in the same period last year.

Why Rent When You Can Buy?

Carrying cable channels like MTV, Comedy Central and the Disney Channel doesn't come cheap, and it's getting more expensive for Comcast as content providers try to make up for ad dollars lost to the recession.

Broadcast networks such as Fox and CBS intend to charge for their over-the-air channels that they once transmitted for free, putting pressure on cable companies' bottom line.

"Comcast's fear is that it will become more difficult to pass those price hikes on to viewers because of the increased competition," Jason Bazinet, a media analyst with Citigroup Global (NYSE: C) told the LA Times.

"If you are [Comcast Chief Executive Officer] Brian Roberts, buying a content company is a hedge against these rising programming costs," he said.

This would enable Comcast to help set the prices itself.

"For Comcast," Bazinet noted, "you would be collecting as many checks as you are cutting them."

Buying NBC would also make Comcast a bigger player in the sports arena; it already owns nine regional networks as well as the cable channel Versus. NBC brings to the table the NFL, NCAA football, the PGA and the Olympics. The deal would put Comcast in the same space as Disney's ESPN, according to Bazinet.

News and Related Story Links:

• Los Angeles Times:
  Comcast Aspires to Be A Major Global Communications Player
  
• The New York Times:
  Comcast Said to Be Close to Gaining NBC Universal
• Bloomberg News:
  Comcast, GE Said to Agree to Value NBC at $30 Billion
• The Wall Street Journal:
  Vivendi, GE Iron Out Terms for NBC Universal Stake

Jacobs, a 21-year company veteran, was most recently CEO of Lazard North America and has a history of leading M&A advisory teams.

“Jacobs is clearly qualified for the position because he has run the North American operations of the company,” Dick Bove, vice president and equity research analyst at Rochdale Securities LLC told Bloomberg Television. “It should be positive for Lazard.”

The worst financial crisis since the 1930s has resulted in a dramatic slowdown for the M&A market in 2009, taking huge chunks of revenue from the income statements of companies that depend on deals.

For Lazard, the downturn was evident: Third quarter revenue at its M&A and strategic advisory business – once its No. 1 source of sales – fell to $124.6 million from $230.8 million in the same period last year, a drop of 46%. That drop was easily offset by growth in its restructuring business, where revenue rose to $119.1 million from $23.9 million a year ago, a gain of 397%.

When the Lazard's board set out to find a replacement for Wasserstein, it could have appointed a new chief executive to take the company in a different direction – such as shifting more resources to its asset management business.

Instead, the company chose Jacobs, who has led Lazard teams on a number of high-profile deals. Most recently, he advised GlaxoSmithKline PLC (NYSE ADR: GSK) on its purchase of Stiefel Laboratories  Inc. and the Rohm Family Trusts, which played a part in the sale of Rohm and Haas to The Dow Chemical Co. (NYSE: DOW).

Lazard, which got 62% of its third-quarter revenue from its financial advisory business, is optimistic on the long-term future of M&A.

“The economy is beginning to stabilize and CEO confidence is returning,” then-interim CEO Steven J. Golub said last month. “We are still planning for a gradual increase in traditional M&A activity, reaching the prior period highs in about four years.”

M&A activity so far this month has reached a total value of $236.1 billion, up 44% from $163.7 billion in all of October, Financial News Online reported, citing data from Dealogic. Still, the total of $2 trillion in M&A deals so far this year are far behind 2008's pace. (Deal values had reached $2 trillion in July of that year.)

Analysts at Deutsche Bank AG (NYSE: DB) said in October the market is ripe for a significant rebound in M&A over the next 12 months as newly capitalized companies look for acquisitions to spur growth in difficult markets. A prime example of this was when Hewlett-Packard (NYSE: HPQ) last week said it would acquire 3Com Corp. (Nasdaq: COMS), giving H-P a shot in the arm in the networking business as well as a presence in China.

Jacobs has seen his share of turbulent times at the company, including 2005 when Wasserstein took the company public against the wishes of Michel David-Weill, a descendant of the firm's founders.

“Jacobs has always been there for Lazard through all the upheavals the firm has had during the last ten years," William Cohan, author of Lazard history “The Last Tycoons” told Reuters. “He has always been the guy behind the scenes holding the firm together.”

News and Related Story Links:

• Wikipedia:
  Bruce Wasserstein 
• Bloomberg News:
  Lazard Names Jacobs to Replace Wasserstein as CEO
• Financial News Online:
  News Analysis: The Return Of Bumper M&A
• Money Morning:
  Hewlett Packard-3Com Deal Shows Urgency for Growth in Competitive Tech Sector

Gross domestic product (GDP) in Japan grew at 4.8% annual rate in the third quarter, surpassing all the forecasts of 20 economists polled by Bloomberg News. That follows a revised gain of 2.7% in the three months ended June 30, according to Japan's Cabinet Office. Japan's economy grew 1.2% on a quarterly basis.

"The turnaround in public investment has definitely contributed to the rebound in GDP, so if they do start to cut it'll weigh on growth,” Hiromichi Shirakawa, chief Japan economist at Credit Suisse Group AG (NYSE ADR: CS), told Bloomberg.

Stimulus measures around the world helped Japan's exports grow 6.4%, but as global economies withdraw stimulus measures, growth in Japan is expected to slow. Programs like the United States' “Cash for Clunkers” ended in August and China's cut on sales taxes for small cars is scheduled to stop after 2009 ends.

Without these props in place, auto sales could fall 10%, taking 0.16% off economic growth, The Wall Street Journal reported, citing estimates from the Japan Research Institute.

In a troubling sign for unemployment and its overall economy, Japan's inventories are on the rise again, accounting for 0.4% of third-quarter growth. Should overseas demand falter, Japan – which already has one-third of its factories idle – this newfound economic growth could slow.

Japan's unemployment rate is currently at a near-record 5.3%.

“Manufacturers are saddled with massive overcapacity so you can't expect a strong recovery for quite some time. That's a given,” Hiroshi Shiraishi, an economist at BNP Paribas SA in Tokyo told Bloomberg. “That means this initial bounce-back in the economy won't really accelerate.”

Despite an expected slowdown in growth, most economists say overseas demand will prevent a double-dip recession in Japan, Reuters reported.

The Shift in Stimulus

Newly elected Japanese Prime Minister Yukio Hatoyama'sDemocratic Party of Japan (DPJ) blocked the outgoing Liberal Democratic Party's (LDP) additional $32.4 billion (2.9 trillion yen) in stimulus, and may hold the funds until next year amid declining tax revenue.

Unlike the LDP, which spent stimulus largely on infrastructure, Prime Minister Hatoyama and his fellow DPJ policymakers plan to use the money for social welfare spending, such as subsidized child care and lower tuition fees at schools.

While the stimulus measures are expected to help domestic demand, Japan will still be faced with reducing its record deficit, which accounts for 170% of its $5 trillion GDP. Estimates say the figure will balloon to between 200% and 250% sometime next year.

“The problem is that you can't expand fiscal spending forever because we've got this fiscal deficit to worry about,” Credit Suisse's Shirakawa told Bloomberg. “They're concerned about the economy on the one hand, on the other they're concerned about the deficit.”

To combat declining tax revenue and its rising deficit, Japan could issue at least $550 billion (50 trillion yen) in bonds, Finance Minister Hirohisa Fujii suggested.

“There's no mistaking the budget deficit stems from the past year's global recession. Now is the time to be bold and issue more deficit bonds,” Fujii told reporters at the National Press Club last month. "Those who may call this pork-barrel spending — that's a total lie.”

Ten-year yields fell to their the lowest level in almost four weeks as shares on the Japan's Topix slipped on concern companies will sell more equities to raise funds.

“The GDP report paints a positive picture of the Japanese economy, but the shape of the economy going forward is still unclear,” Makoto Yamashita, chief Japan interest-rate strategist at Deutsche Securities Inc. in Tokyo told Bloomberg. "We'll see some rapid adjustments in the bond market today following last week's gains.”

News and Related Story Links:

• Bloomberg News:
  Japan GDP Accelerates, Easing Risk of Renewed Slump
• The Wall Street Journal:
  Double Dip for Japan?
• Reuters:
  Japan Extra Stimulus Likely, GDP Fails to Convince
• Wikipedia:
  Yukio Hatoyama
• Wikipedia:
  Democratic Party of Japan
• Wikipedia:
  Liberal Democratic Party (Japan)
• The New York Times:
  Rising Debt a Threat to Japanese Economy
• Bloomberg News:
  Japan Bonds Rise a 5th Day as Stock Losses Outweigh GDP Growth

H-P will pay $2.7 billion in cash for 3Com, which is second to Cisco Systems Inc. (Nasdaq: CSCO) in business networking. Cisco and H-P have steadily been encroaching on each other’s businesses: Earlier this year, Cisco started making servers while H-P last year began to renew investment in its ProCurve networking business.

Deals like the one between H-P and 3Com are “part of a broader theme where there’s a lot of talk of convergence in the data center,” said Jayson Noland, an analyst at Robert W. Baird & Co. Inc. “Cisco and H-P are going to compete more and more.”

PC market leaders like H-P and Dell Inc. (Nasdaq: DELL) diversified away from their core business of desktop and laptop computers as the recession clamped down on consumer spending. Instead, they chose to focus more on enterprise servers, software and services.

Dell acquired Perot Systems Corp. (NYSE: PER) in a bid to capture more of the lucrative services sector and to take share away from H-P, which last year paid $13.9 billion for Electronic Data Systems LLC (EDS). Services now make up almost 31% of H-P’s sales, compared to Dell’s pre-Perot 10%.

“This was a move designed to try and catch up with its competitors,” Kaufman Brothers LP analyst Shaw Wu told Bloomberg News. “[Dell was] behind in services and being vertically integrated. That’s the model that worked – providing the hardware, software and services.”

In the case of the H-P’s acquisition of 3Com, the convergence lies in data centers, huge warehouses filled with servers that operate everything from Web sites to corporate networks. The data center market is fast becoming flooded with dollars, and by the time this year has ended, businesses will have spent $100 billion on data center software and hardware, market research firm Interactive Data Corp. (NYSE: IDC) forecasts.

The drive by tech companies to make their companies more businesses-friendly could spur more mergers and acquisitions (M&A).

A Competitive Advantage Through Consolidation

There’s plenty of growth to be had for even the largest tech companies, and it’s not just in enterprise. Online advertising giant Google Inc. (Nasdaq: GOOG), bought mobile application advertiser AdMob Inc. for $750 million just days after a Money Morning analysis on Google’s push to monetize the budding smartphone market. 

“AdMob is clearly the best of its ilk for applications monetization,” Google Chairman and Chief Executive Officer Eric Schmidt told Bloomberg in an interview last week. “We think that’s as strategic as search monetization, which, of course, we’re very good at.”

Many popular mobile apps are free, particularly news and social media apps, which makes them a prime space for ads.

“The free apps have to be paid for somehow, and the model we’ve become very comfortable with is using advertising,” Carl Howe, an analyst with Yankee Group Research Inc. told Bloomberg. “I think it could be, actually, a big business.”

Even though Google would likely be successful by bringing its AdSense program to mobile phones, it chose to buy the established AdMob, which was founded in 2006. AdMob specializes in image-based mobile display ads within apps, giving Google – which only had text-based ads being shown in apps – a head start on competitors like Yahoo Inc. (Nasdaq: YHOO) and Microsoft Corp. (Nasdaq: MSFT).

Microsoft has a clear opportunity for in-app advertising. Its counter to Apple’s App Store and Google’s Android Market, Windows Marketplace for Mobile, just launched last month.

Like it did with traditional Web search, the Redmond, Wash. software giant once again finds itself looking up at Google. That’s not to say it isn’t trying: Earlier this year it formed a partnership with Quattro Wireless.

In this fast-paced game of staking a market share claim, Quattro could find itself the target of an acquisition by either Microsoft or Yahoo.

Google’s buy of AdMob “is a catalyst event, so [it will] likely will make other players take a look at what they need to do to take advantage of the growth in consumer, advertiser and publisher interest in mobile to impact their own growth,” Quattro said.

Quattro has seen its ad impressions go from 150 million a year ago to 5.5 billion per month this year, Bob Davis, of Quattro investor Highland Capital Partners LLC told Fortune magazine.

Then there’s smartphones themselves, which are steadily growing into handheld computers.

Microsoft and Google already make operating systems for handsets, while Dell will debut its first smartphone in China later this month. And of course, there’s Apple Inc.’s (Nasdaq: AAPL) iPhone rounding out the list of computer-related companies with its hands in mobile. H-P, the world’s largest PC maker, clearly has an opportunity with smartphones: It has one currently on the market and another due for release later this month.

With a war chest of more than $13 billion, H-P could go shopping for a faster start in an already crowded race. One company that would stand out is H-P’s old PDA nemesis, Palm Inc. (Nasdaq: PALM).

Palm’s flagship Pre smartphone has sold just 205,000 units since its summer launch, compared to 146,000 iPhones sold on its first day on the market in 2007, according to Ars Technica. With a market cap of about $1.6 billion, Palm is affordable for H-P and would benefit from H-P’s vast resources. H-P would get an established name and well-reviewed mobile operating system in Palm’s WebOS.

Whether these scenarios play out or not, the one certainty is recent pickup in the tech industry’s consolidation won’t be ending anytime soon.

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Speaking to the press at the Singapore Foreign Correspondents Association, Zoellick said policymakers must be vigilant in preventing asset bubbles and that the private sector is needed to stoke demand.

"And so when that stimulus money has run its course, then the question will be, will the private sector rebuild demand?" he said.

Part of the problem going forward for East Asian economies is policymakers typically follow the U.S. Federal Reserve. However, nations choosing to do this may face challenges because the recovery won’t be symmetrical.

"I think one of the questions here will be the timing of how they manage the interest rates and the risk that they could get some inflation and even asset bubbles which obviously, if they become a serious issue, could undermine confidence going forward," he said.

Asian economies are already self-sustaining, argues Money Morning Contributing Editor Martin Hutchinson, a leading expert on international financial markets. But the problems could be ahead for nations such as the United States and United Kingdom.

"At some point they will have to remove stimulus, as the rising commodity prices will feed through to inflation," said Hutchinson, who sees the current surge in commodities and stock equities as a bubble that has profit opportunities for investors.

World policymakers should keep existing stimulus packages in place, but hold off on implementing new ones, Zoellick says.

Once those packages are removed, it’s up to consumers to pick up the slack – a scenario that the Zoellick fears won’t happen quickly enough in the United States, which is expected to ease its current monetary policy by the middle of next year.

"If you've got large scale unemployment, if you've got consumers rebuilding savings and deleveraging, I don't think the consumer is going to play that role," Zoellick said. "What's the other source of demand?"

Unemployment, which economists expect to remain elevated in 2010, could have an adverse affect on banks already inundated with toxic assets, as more consumers default on their loans.

"You're going to have problems with delinquencies of credit card loans, consumer loans, people won't be able to pay their mortgages," said Zoellick. "Some banks are going to continue to be troubled by bad loans."

Indeed, even with numerous government programs in place to help consumers keep their homes in the United States, and the nation could be at the dawn of a second wave of foreclosures.

"Foreclosures should remain really high as long as unemployment is rising, and that is through next spring," economist Mark Zandi of Moody’s Economy.com told USA Today. "They should be very high into spring."

Zandi’s forecast is optimistic compared to one by Rick Sharga, senior vice president for marketing at research firm RealtyTrac Inc.

"We’d hoped this year would be the peak as far as foreclosures, but we’ve since concluded it will not be," said Sharga. "We should see a peak in foreclosures at the end of 2010."

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• China's currency, the yuan, which Beijing keeps undervalued to boost exports.
• The large trade imbalance between China and the United States.
• And a pending free trade agreement (FTA) with South Korea.

Analysts believe President Obama will push to ratify a free trade deal with South Korea that was signed in 2007 but has failed to pass legislatures in both countries. Many also hope he will pursue other agreements like it.

"We are standing on the sidelines while Asian nations clinch new trade deals," said Thomas Donohue, president and chief executive officer at the U.S. Chamber of Commerce. "We'll pay the price if this continues. It's time to see action from Washington."

There are 168 free trade agreements currently in place in Asia, up from just 22 in 1980, according to the U.S. Trade Representative. Eighteen more have been completed but not yet implemented and 70 more are being negotiated. However, the United States has only two FTAs with Asia-Pacific countries: Singapore and Australia.

Former President George W. Bush pledged U.S. participation in the Trans-Pacific Strategic Economic Partnership Agreement, also known as "P4," which includes Singapore, Chile, New Zealand and Brunei. In addition to its FTA with Singapore, the United States has an agreement with Chile, but would need deals with New Zealand and Brunei to become a full member of the pact.

So far, the White House has stalled on P4 negotiations as it reviews the U.S. trade agenda. U.S. Trade Representative Ron Kirk said the talks are "the most practical way to be engaged" with the region, but declined to say when or even if the United States would resume negotiations over the agreement.

When President Obama stops in Singapore this weekend, he will participate in the Annual Economic Cooperation summit, where he'll be pressed on the United States' trade stance. He'll then face questions next week in Seoul over ratification of a 2007 FTA with South Korea.

Trade Representative Kirk said last week the Obama administration would not send the deal to Congress for a vote until Seoul allows more U.S. exports, including automobiles.

"Our market is open to Korean autos," Kirk said in a speech to the U.S.-Korea Business Council. "All we are asking for is for our own auto companies to be able to compete on a level playing field in the Korean market."

Ratification of the South Korea FTA would eliminate an 8% duty on U.S. auto imports. South Korea President Lee Myung-Bak said in June that he was committed to the deal, but declined to set a timeframe.

Trade Imbalance, Yuan Highlight Full Agenda for Obama in China

The most closely watched part of President Obama's visit will be next week when he visits Shanghai and Beijing.

Speaking to Reuters, the president said he would raise with Chinese leaders the sensitive issue of the yuan, which hasn't appreciated since July 2008 and is considered to be a large factor contributing to the U.S. trade deficit with China, which stood at $20.2 billion as of October.

"As we emerge from an emergency situation, a crisis situation, I believe China will be increasingly interested in finding a model that is sustainable over the long term," President Obama said. "They have a huge amount of U.S. dollars that they are holding, so our success is important to them."

Still, the president warned if currency and yuan issues don't get resolved, he thinks "both economically and politically it would put enormous strains on the relationship."

It's unlikely that China's will reverse its stance on the yuan, as exports are still suffering, having fallen 15.2% in September.

Beijing will hold its official line on the nation's exchange-rate policy, Qin Gang, spokesman for China's Ministry of Foreign Affairs told Dow Jones Newswire. The government will continue to reform its exchange-rate regime by raising rate flexibility while still keeping the yuan rate basically static.

Qin also reiterated the Red Dragon's concerns about the United States, calling on the American government to maintain the medium- and long-term sustainability of its fiscal policy.

"This will be conducive to the stability of the U.S. dollar exchange rate and it will be conducive to China and the whole world," Qin said.

Governments in trade surplus countries – such as China – must act to cut the disparity between saving and investment so they can raise demand in their own economies, U.S. Federal Reserve Chairman Ben Bernanke said last month at a conference of the Federal Reserve Bank of San Francisco.

"Admittedly, just as increasing private saving in the United States is challenging, promoting consumption in a high-saving country is not unnecessarily straightforward," Bernanke said, suggesting that governments remove its citizens' motive for saving by making pension systems stronger and increasing spending on health care and education.

President Obama will also attempt to cool tensions over the trade spat that has escalated between the two countries in the last few months.

In September President Obama imposed a 35% tariff – on top of the existing 4% duty – on Chinese tires coming into the United States. That order came mainly at the behest of the United Steelworkers union, which says 5,000 union jobs have been lost since 2004 because low-cost Chinese tires are flooding the market. From 2004 to 2008, the number of tire imports from China has tripled.

That was followed in October by a U.S. investigation into seamless steel pipe imports from China. The government agency will make a decision on preliminary anti-dumping duties in December and could impose new duties of almost 100% on imports of steel pipes from China as soon as February.

China responded with an "anti-dumping" probe into U.S. auto parts and chicken meat imports. Beijing is also investigating Detroit's "Big Three" automakers to determine whether or not they are receiving U.S. government subsidies, or selling their products in China below market costs.

The United States isn't seeking to engage in trade protectionism, U.S. State Department official Robert Hormats told Chinese university students yesterday (Tuesday), but acknowledged the trade tensions between the world's No. 1 and No. 3 economies.

"Support for international trade in the United States is much less today than it was several years ago," Hormats said, adding that especially with rising unemployment "there is skepticism about trade, and I have to say that to you candidly."

Hormats stressed the United States would rather settle the dispute as opposed to taking them to the World Trade Organization (WTO).

"I know the tire case caused a great deal of tension in China," Hormats said. "But I want to assure you that the U.S. is not a protectionist country."

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