Housing, poses enormous risk to the U.S. economy through its impact on financial markets, financial institution solvency and consumer confidence and spending. Key will be what happens to housing prices and the extent to which falling prices affect expected losses on mortgages and other linked financial instruments and the extent to which declining wealth affects consumer spending. Prospects are decidedly negative on all fronts as housing price declines continue unabated.

The linkages between housing wealth, price changes and consumer spending are imprecise and have been hotly debated. As the evidence comes in the debate is being resolved. Unfortunately, it appears increasingly that the resolution is in the direction of those who believe that housing had a substantial impact in stimulating consumer spending during the bubble phase and will have a commensurate negative impact now that the bubble is unwinding.

The revised estimate of Q3 GDP growth was -0.5%. This figure will be revised once more. The final number will be reported in the coming week and is expected to be revised down to between -0.6% and -0.9%.

Real consumer spending declined at an annual rate of 3.7% in the third quarter(likely to be revised down to -4.0%), the first negative quarter since 1991 and the worst negative quarter since the second quarter of 1980. Unfortunately, based on the severe decline of 4.7% in nominal retail sales from September through November, consumer spending is likely to fall further in the fourth quarter, which would make the current recession comparable in ugliness to the 1973-75 recession.

Table 1 shows the range of opinion that prevailed at the beginning of 2008 and the year-to-date results. Actual results through the October-November timeframe reflect a severe and troublesome deterioration in the performance of the U.S. and global economies coincident with the violent upheaval that swept over global financial markets beginning in mid-September. Indeed, virtually all optimism has evaporated and fears of the potential consequences of the rapidly escalating global recession abound.

The pessimistic view presented in Table 1 at the beginning of 2008 was actually not the worst view at the beginning of the year but one that reflected a mild recession scenario.