There were moments in January when stock prices soared to 52-week highs. But toward the end of the month, they pulled back again. They ended January down slightly from their 2009 year-end levels. The number one question concerns whether or not the recovery is self-sustaining yet.

A catalogue of uncertainties

At times of uncertainty, investment confidence takes a beating. That appears to be what has happened to stock market prices most recently. Among the leading uncertainties with respect to the overall U.S. economy is housing starts. After improving a little in the middle of last year, they started falling again. This was over concern about unoccupied homes clogging up the marketplace due to foreclosures on prime mortgages. High unemployment has greatly expanded the number of people in distress over how to meet their monthly bills. The fallout from debt defaults in the commercial mortgage sector is also still uncertain, but expected to be severe.

On the surface of it, the gross domestic product figure that was released on the last day of January was a cause for considerable optimism. It showed 2009’s fourth quarter output increasing 5.7% on an annualized basis versus the third quarter. Part of the reason was a significant slowdown in inventory cutbacks. This alone can contribute to GDP growth in the short run. However, there needs to be an increase in consumer demand and a consequent rebuilding of stock longer term for the inventory cycle to be effective on a more consistent basis.

Exports sales were another major cause of fourth quarter growth. This was helped along by the weaker U.S. dollar and an increase in demand from other nations that are moving along their recovery paths. China is the leader in world economic growth. So much so, in fact, that the Chinese government has launched a program to rein in expansion. Boom times in China threaten asset price bubbles, too-rapid price inflation, and other problems that coincide with overheating.

Washington’s budgetary deficit enormous and growing

At the start of February, another uncertainty has been introduced into the mix. Washington’s 2010-2011 budget is projected to yield a $1.6-trillion deficit. That will be on top of the $1.4-trillion deficit for the 2009-2010 fiscal year. U.S. federal budgets run from Oct. 1 to Sept. 39. The back-to-back deficits are hugely stimulatory. They will also require inordinate amounts of capital financing. The immediate reaction in world currency markets was more weakness in the U.S. dollar. At the same time, commodity prices edged upwards in a normal inverse reaction. The latest U.S. inflation figure was +2.7% year over year. Forget what central bankers are saying. There are reasons to be worried that inflation may escape its chains.