Recession fears stoke political debate

That report follows more bad news from the housing market — which continues to collapse after a prolonged boom that came to an abrupt close last year after years of easy-money lending left lenders coping with big losses and millions of borrowers facing foreclosure.

New home sales in November — the latest data available — sank to their lowest level in more than 12 years. After months of declining sales and rising inventories of unsold homes, the drop was worse than most analysts had expected.

“At the moment housing activity is just plunging, and it is a huge drag every quarter on growth,” said Gault.

Forecasters who see the glass half full are hoping that the sharp drop in new home starts is actually a good sign because it reduces the inventory of unsold homes. Eliminating that backlog is a key ingredient to any recovery in the housing market. And the sooner that recovery comes, the sooner the overall economy can regain strength.

A pickup in exports by U.S. companies – due in large part to the weakness in the dollar - has also provided an important buffer to the economic damage done by the turmoil in the housing and lending markets. A weaker dollar makes U.S. goods more competitive when sold in overseas markets: it’s the equivalent of putting all U.S. goods on sale for foreigners.

“While there is plenty to be negative about with respect to housing, credit and the consumer, at the same time we believe we are in the early stages of a manufacturing renaissance,” Merrill Lynch economist David Rosenberg wrote in a note to clients Wednesday.

But, as Wednesday's ISM data indicated, it’s not clear that that surge in exports will continue. A lot depends on how well the economies of major U.S. trading partners hold up this year. If growth abroad remains strong, continued demand for Made in America products could offset the meltdown of the housing market and help the U.S. economy get through the current weakness without heading into reverse. If the housing market remains weak, consumers tighten their belts and the export sector falters, there would be little left to head off recession.

The question of whether the economy dodges a recession won’t be answered until several trends become clearer — starting with signs of life in the housing market. Another key ingredient is the impact of recent moves by the Federal Reserve to lower interest rates as it tries to clear the sand out of the gears of the global credit markets. After all but shutting down in August, the debt markets perked up in the fall — only to slow again in December. Multi-billion-dollar losses posted by major banks and investment houses have spooked lenders and investors and tightened credit — even as the Fed is trying ease.

The Fed’s latest rate-cutting moves — and its promise to pump billions of dollars into the global credit markets — are designed to ease those lending fears and get the financial markets back on an even keel. But in minutes of the Fed's Dec. 11 meeting released Wednesday, policy makers acknowledged the trouble it faces in setting the right course.

“Although members agreed that the stance of policy should be eased, they also recognized that the situation was quite fluid and the economic outlook unusually uncertain,” the minutes said.

Higher oil prices could also limit the Fed’s rate-cutting options if higher energy prices begin to work their way into the cost of other goods and services and stoke inflation above current levels. The antidote for an outbreak of inflation is usually to raise — not lower — rates.

That could force the Fed to choose between raising rates to contain inflation and lowering them to promoting growth — a choice made more difficult by the political pressures of the presidential campaign season.

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