The way things unfold for the economy in 2010 has larger implications than normal, with the United States going into a mid-term election year that may turn on economic issues. Investors in particular are more curious than they otherwise would be, as it is not too often that we experience the kind of dramatic volatility we have seen in the preceding two-year period (2008 was one of the worst years in history for the stock market; 2009 was one of the best). The following five areas will be the most important to watch:

Jobs, jobs, jobs

No economic issue carries as much political impact as does unemployment. In December, the national unemployment rate hovered above 10 percent, with most experts admitting that millions of people who have "given up" on finding a job were being excluded from the data of the unemployed. In other words, it may get worse when it gets better, as even when jobs do seem to be returning, an awful lot of people who are sitting on the sidelines will re-surface in the numbers. The current administration made lofty promises about what its stimulus package would do in lowering the unemployment rate. Not only are economists watching, but voters are as well.

Inflation vs. deflation

The most significant arm-wrestling match in recent memory in the economic landscape is the conflict between the forces of inflation and the forces of deflation. One camp argues that the United States is headed down the path the Japanese took in the 1990s, wherein no actions will prove effective at "reflating" the economy, and the process of de-leveraging the balance sheets of American households (and American banks) will keep us with a deflationary environment for years to come. The other camp is sure that the recent increases in money supply and government spending are going to inflate the currency and devastate the purchasing power of the dollar. Monetary authorities claim that it will be neither-that they will turn the spigot off at just the right time, and we will come out of this with just enough fuel in the economy to get things going again, but not so much that a soda pop costs $15. Both sides are passionate in their arguments, and both sides often misunderstand and mischaracterize data. Inflation does not seem to be imminent in much of the data (i.e., long-term interest rates have stayed quite low), but other price signals indicate that it cannot stay away forever (i.e., the price of gold).

Government spending

It is not likely that we will see signs of fiscal discipline coming out of Washington in 2010. The final months of the Bush administration brought about the TARP legislation that committed $700 billion to re-capitalizing the nation's financial system (with General Motors and Chrysler somehow part of that). One month into the Obama administration the largest spending bill in U.S. history was passed. Cleverly titled a "stimulus" bill by the American media, this partisan legislation (not a single Republican in the House of Representatives voted for it) committed nearly $1 trillion of additional (borrowed) funds to the Treasury budget. The bill took Keynes' metaphor of "paying people to dig ditches, and then paying them to fill them up again" to a new level, as the bill allowed for a host of dubious government programs to be created for the purpose of "igniting" the economy. Since its passage, Obama and Democratic leaders in Congress have spent months fighting for expensive healthcare legislation. Citizens have to be wondering: What new spending commitments lie on the horizon, and does anyone have any plans for how to pay for these things?

The health of business (small and big)

Profits are the mother's milk of stock prices, and in a much more meaningful sense, they are the mother's milk of the entire economy. Companies with a profit motive are often capable of overcoming tremendous hurdles (burdensome regulation, onerous taxes, etc.) toward goal of growing their bottom line and increasing their market share. Some businesses are reporting the beginning of improvements in their operations, while others continue to languish. Mergers and acquisitions were at record levels near the end of 2009 (usually a sign of health in corporate America). The new year will answer the question as to whether 2009 was a pump fake in some sort of economic recovery, or whether we have actually bottomed, with profitable growth ahead.

What about consumers?

Many are adamant that the economy cannot be said to have fully improved until we see consumers really spending again. Others (like me), tend to feel that a renewed period of thrift and fiscal discipline is ultimately a good thing for the economy. If excessive debt and leverage is what caused the crisis of 2008, then it seems surreal to suggest that extended debt and leverage will be the cure. Consumers will spend for what they need and what they can afford, but to benchmark the economy by how little capacity consumers leave themselves on their credit cards seems like a recipe for disaster.

Many other factors will affect these considerations (such as interest rates, the housing market, monetary policy, and so forth), and many other factors will be affected by these considerations (like commodity prices and the bond market). But it's clear that the new year will be another wild ride in what may prove to be a watershed economic era.