The main news coming out of the weekend was the proposed budget by the Obama administration.

The 2011 budget deficit would be a record $1.645 trillion (thanks to the tax compromise passed late last year) though the administration laid out cuts of $1.1 trillion from the deficit over the next 10 years.

From Bloomberg: Obama's $3.7 Trillion Budget Sets Fight in Congress

President Barack Obama will send Congress a $3.7 trillion budget that would reduce deficits by $1.1 trillion over a decade, setting up a battle with Republicans who have already deemed the plan insufficient to reduce federal debt.

The deficit for the current fiscal year is forecast to hit a record $1.6 trillion - 10.9 percent of gross domestic product - up from $1.4 trillion the administration estimated previously, according to documents released this morning by the administration. It would fall to $1.1 trillion in fiscal 2012, the fourth consecutive year of deficits exceeding $1 trillion. By 2015 it would decline to $607 billion, or 3.2 percent of GDP.

While that may focus investors attention to the US' worrying fiscal picture, the markets will also be busy with data on retail sales, consumer and producer inflation, manufacturing, jobs, and housing.

We should come away from this week with a better picture the US economy.

Is consumer spending sustaining? Did manufacturing improve in February? Did core inflation rise - putting more pressure on the Fed? And did jobless claims stay near the 400K level? We'll have answers to these questions by the end of the week.

Tuesday

Retail sales are expected to climb 0.5% in January, around the pace we saw in December. Excluding autos, sales are expected to be slightly higher at 0.6%.

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US retail sales have picked up dramatically in the last 4 months of 2010 and has fueled a consensus that the US economy's recovery is being put on more sustained footing. US GDP grew at a 3.2% annualized rate in the 4th quarter thanks to a 4.4% increase in personal consumption. We've seen a leveling off from the very strong pace set in September-November, but if we hit expectations its still a good sign for the US consumer.

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On Tuesday, we also get data on the manufacturing sector with a leading index - the NY Fed Empire State Manufacturing PMI. It's expected to rose to 14.7 for February, from 11.9 in January. That would show a pick in activity, keeping the manufacturing sector at the forefront of the recovery - next to consumer spending.

The Philly Fed Manufacturing Index, which comes out on Thursday, is expected to keep its strong pace by posting a 20.8 reading for February following a 19.3 level in January.

Stronger manufacturing will bolster the case that the US economic recovery is sustainable, though it has not necessarily translated into the strong job gains necessary to meaningfully bring down the unemployment rate.

Wednesday

On Wednesday we get our main measure of manufacturing output as the US posts its Industrial Production data for January. Expectations are for a 0.5% increase following December's 0.8% rise. That's a slower pace of growth, but still a moderate gain.

We also get a look at producer price inflation. PPI is expected to past a strong monthly increase of 0.8% for January, which follows a 1.1% climb in February. The annual pace is forecast to ease to 3.5% from 4.0%. Higher producer prices - mainly as a result of higher energy costs - can mean higher consumer prices to follow. CPI data comes out on Thursday.

Wednesday also brings data on housing starts and building permits. We know that the housing market is still facing tough headwinds. Housing starts are expected to rise to an annual pace of 540K for January (from 529K) while building permits will fall to an annual pace of 565K from 627K according to forecasts. If the data is weaker than expected it could mean that the construction sector will continue to feel the pain of the Great Recession as new home starts languish.

On the monetary policy side, we get Meeting Minutes from our last FOMC meeting. The statement showed that FOMC members were in unison in their voice that monetary policy and the recovery, so far, have not met the goals they set out of a better employment picture and normal inflation.

Thursday

On Thursday we get more data on the inflation subject. The consumer price index is expected to rise 0.4% in January, following a 0.5% increase in December. The core rate is expected to edge up 0.2% following a 0.1% increase. If these figures come in stronger than expected it will start to put more pressure on the FOMC.

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Looking at the annual rate of CPI, we see that the core CPI has been trending downward, falling to as low as 0.8%. Expectations are for an increase to 0.9%. The headline annual CPI is expected to climb to 1.6% from 1.5%.

Also on Thursday we get our weekly jobless claims data. Expectations are for an increase in claims to 401K from our 2-and-a-half year low of 383K.

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