Wall Street: Cutting Through the Confusion

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Silvia says it will be easier than that, particularly if you watch manufacturing indexes and especially weekly jobless claims figures, which often spike quickly when a recession starts. For whatever reason, businesses start to unload workers, which causes Americans to cut back on their spending. By contrast, consumer spending may be a lagging indicator.

The Credit Crunch

One of the big dangers out there is the stress on the financial system from turmoil in the debt markets. Banks and other financial institutions have cut back lending, running away from riskier debt. The fear is that an unwillingness to lend money, both to companies and households, will choke off economic growth. That's why many are watching closely the London interbank offered rate, or LIBOR, a key benchmark indicating what banks are charging each other for loans, and other measures of the credit markets' appetite for risk.

The Federal Reserve, European Central Bank, and Bank of England have pumped hundreds of billions of dollars into the financial system in an effort to loosen up liquidity. On Dec. 18, LIBOR rates fell significantly. Jukes says central bankers "seem rather determined," and will likely get their way. But, says Bill Larkin of Cabot Money Management, the very fact that central bankers are so involved "tells you the scale of the problem."

Housing

There's a long list of problems for housing, the U.S. economy's weakest sector: overbuilding and speculation in the past few years; rising foreclosures, often on subprime mortgages; a new inability for subprime and other risky borrowers to get new mortgages. There's too much supply and not enough demand, and problems are widely expected to continue into 2008. The big question: How bad will it get? And how will that affect the rest of the economy?

Falling house prices are "the No. 1 danger" to the economy, Slok says.

On the plus side, however, the state of home prices is "at the center of the Fed radar screen." Along with the Federal Reserve, Congress and the Bush Administration also seem to be taking housing problems seriously. However, some doubt they'll agree on a workable plan to help subprime borrowers, particularly in an election year. Larkin believes more innovative and creative approaches to the problem are needed.

According to the futures market, investors are now expecting home prices to fall about 7% next year. Some are predicting drops in the double digits.

Many economists expect the economy to slow down in late 2007 and early 2008 but then rebound after Fed interest rate cuts take effect in the middle of the year. A deep drop in home prices could derail that.

Though the economic outlook is cloudy right now, things may clear up in a quarter or two. That's when it will be more apparent just how much damage the credit and housing crises have caused the economy. How long the healing process will take is another story.

Steverman is a reporter for BusinessWeek's Investing channel.