The Lowdown on That Big, Bad Slowdown

That's right. Recession.

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For-sale signs in St. Louis. As the inventory of unsold homes mounts, prices are dropping nearly everywhere.

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Call it the "Worth-Less Blues." Your house is worth less, your dollar's worth less, your retirement stash is worth less—and if hound dogs and ill-tempered women depreciate, America might have a recession-era ballad on its hands in 2008.

That's right. Recession. Looming fears that the economy will finally succumb to the brutal downturn in housing now appear worryingly real. Economists spent last week slashing their predictions for U.S. growth as surprise summer strength appears to have been sapped by tight credit and nervous consumers. "Best case is we will avoid a recession, but it's going to be very close," says economist Nariman Behravesh of Global Insight.

As it is, frightened banks are choking off lending at a quickening pace—a move that often precedes a recession. And, of course, the housing sector is already mired in a deep downturn, with trouble there sure to spread well into 2008 as an 11-month supply of unsold existing homes just sits on the market losing value. Mix in high gas prices and a manic stock market, and it's little wonder that consumer confidence has hit its lowest point since just after Hurricane Katrina.

Still, this sad song may contain a bit of melodrama. Unemployment is widely expected to rise but remains relatively low. Consumption has slowed but not stopped. Indeed, Federal Reserve Chairman Ben Bernanke said he expects incomes to continue to grow while also hinting at more rate cuts. That would be welcome news for homeowners, as would a possible move by the lending industry to delay the coming wave of resets on adjustable-rate subprime mortgages.

And although the White House just slashed its growth forecast, it still predicts a "solid" expansion in the coming election year.

Such sentiment is welcome, but it's not likely to strike a pleasant-enough note to keep folks—from Wall Street all the way to your street—from humming a worried tune.

TAGS:
recession
economy
  • Kirk Shinkle

    Kirk Shinkle is a senior editor for U.S. News Money and manages the Best Funds portal. Follow him on Twitter @KirkS or email him at kshinkle@usnews.com.