Well, we may as well be up front about it - we are either in or about to enter an economic recession. My forecast calls for the next two quarters to post zero or negative GDP growth. (Remember: the "official" definition of a recession is two consecutive quarters of negative growth.) Housing will need to lead us out of this recession. On that front, there have been some positive developments. Both the housing stimulus package passed earlier this summer and the $700+ billion rescue package (or bailout, if you prefer) will, eventually, help turn housing around.

Of course, recession is hardly good news for the housing market because few jobs are created and many are lost. Indeed, so far this year the economy has shed 760,000 payroll jobs. Fewer jobs holders means lower housing demand. But if a recession is accompanied by rising housing affordability then home sales can trend higher. Indeed, we see that happening now. NAR's housing affordability index rose to 123.3 in August of 2008; compare that with the 106.6 level registered a year ago.

But a prolonged deep recession - certainly a possibility in light of the most severely tested financial market stress since the Great Depression - can dampen consumer confidence and put up barriers to homebuying. Fortunately, the economic downturn appears manageable. Let's see why by reviewing some of the key economic trends to watch.

Consumer Spending

Consumer spending accounts for nearly 70 percent of economic activity. A normal healthy consumer spending growth figure is about 3 percent (in real terms above the inflation rate). In the first half of this year consumer spending grew at only one percent -- and is expected to record a mild contraction in the upcoming quarters. Aggregate personal income is also likely to have fallen because of fewer jobs. In addition, there has been a sizable decline in net wealth from falling stock prices and falling home values. The combined income and wealth effects will be such that consumer spending, at best, will add nothing to economic growth in 2009. Another government stimulus plan may temporarily raise consumer spending but will do nothing for a long-term sustained rise unless the overall economy recovers and begins to add jobs.

Business Spending

Business spending for equipment turned negative in the recent quarter, not surprising given that corporate profits have fallen for four straight quarters and weak sentiment regarding consumer spending prospects. Construction activity for commercial real estate, which had been growing solidly, will be weakening in light of the credit crunch and rising vacancy rates. One positive picture is on the current lean business inventory conditions. Unlike many past economic downturns when companies had to hold back production because of bloated inventory, the very thin inventory conditions will permit companies to ramp up production at the first sign of economic recovery.

Government Spending

Government spending can create jobs. Upgrading and expanding nation's infrastructure, hiring more teachers, or building jets and tanks can stimulate the economy over the short-term. But spending without additional tax revenue over the long run can result in higher interest rates. For the short-term at least through 2009, government spending is expected to rise 1 to 2 percent.

Net Exports

Net exports have been steadily improving in the past year. The U.S. continues to import more items, but the exports have been booming over the past five years, growing at near double-digit pace. The export growth in the second quarter was very impressive, clocking in at a 12.3 percent growth rate. Why the surge? The weak U.S. dollar has made U.S. products more competitive. Interestingly, the dollar has actually strengthened of late since the start of the global financial crisis. While foreign countries may blame the U.S. for the subprime loans and the credit market turmoil, they (as well as we) turn to and trust the dollar in times of crisis. The strengthening in the U.S. dollar this time around is a positive development because there is about a two-year lag time in impacting international trade flows from changes in currency. So the net exports continue to be a positive factor for the economy going into 2009. Also, oil prices, which are denominated in dollars, fall when the dollar strengthens. Given that REALTORS® traditionally are heavy drivers, lower oil prices are welcome.

The Bottom Line

Put it all together and what do we have? A recovering economy will help consumer and business spending to turn the corner and the economy to move in a self-sustaining pace. But it requires a catalyst to get things started. The tumbling housing market and the subprime mortgage defaults have caused financial markets to freeze and have pushed the economy to fall into a recession. But the rising home sales of late and a sustained momentum will bring the economy back into the fold. Rising home sales will also thin out housing inventory and begin stabilizing home prices. The credit market will start to unfreeze once home prices have hit bottom. Simply put, the economy will not recover without a housing market recovery.

Fortunately, policymakers and both Presidential candidates clearly recognize the need to get the housing market moving. The two housing stimulus bills (homebuyer tax credit and higher loan limits), $700 billion Treasury plan and the Federal Reserve's actions are designed to assure steady mortgage flow and help revive the housing sector. To push the "revival" along, additional stimulus - such as removing the repayment feature of the homebuyer tax credit and raising the loan limit higher - would be welcome. As housing recovers, the economy will expand and create jobs. America and its exceptional ingenuity always find a way to move past crises and back to economic prosperity.