Are We Headed for Recession?

Watching the stock market these days can give you whiplash.

Every day seems to bring more jitters on Wall Street. Stocks plunge 360 points in hours, another financial powerhouse tells investors that it is going to take bigger losses than expected, CEOs lose their jobs and more Americans can't keep up with their mortgages.

To top all of that off, oil keeps hitting record highs, the dollar is plunging and retailers are moving sales earlier in the year, hoping to jump-start the holiday spending season.

So is our economy in shambles?

Federal Reserve Chairman Ben S. Bernanke came to Capitol Hill this morning to try to answer that question.

His message: The overall economy has performed well since March but will slow in the coming months because of rising energy costs and weakness in the housing, financial and credit markets. Bernanke said that he expects the housing market to hit bottom in the coming months, with the economy starting its recovery in the spring.

Bernanke said the Federal Reserve sees growth "as remaining sluggish during the first part of next year, then strengthening as the effects of tighter credit and the housing correction began to wane."

Bernanke went as far as to say that today's problems will ultimately help the economy.

"The recent developments may well lead to a healthier financial system in the medium to long term," Bernanke told the Joint Economic Committee. "Increased investor scrutiny of structured credit products is likely to lead ultimately to greater transparency in these products and to better differentiation among assets of varying quality."

Sen. Charles Schumer, D-N.Y., chairman of the Joint Economic Committee, asked the question on many minds: "Is a recession out of the question?"

Bernanke wouldn't make a prediction, saying "economists are extremely bad at calculating turning points." But he said that by the spring he expects that the "housing market begins to find a bottom."

As the housing market stops its fall, Bernanke said, the other, growing parts of our economy would lift the overall economy in the long-term.

The Fed chairman did not give any indication that the central bank had plans at this point to further cut interest rates. That news drove the market down by midday.

The Energy Crunch

This week has seen oil climb to a new intraday high of $98.10 a barrel, with many analysts saying that $100 a barrel -- a once unimaginable thought -- is on the horizon. It's no longer a question of if it will hit $100, but when.

Oil has been driven up in recent days by fears of political instability in the Middle East, a pipeline bombing the other day in Yemen, a storm shutting down North Sea oil platforms, production issues in Mexico and a fire at a Texas refinery. None of these factors alone drive up the price of oil, but they make traders jittery about the availability of next month's crude.

Further compounding this is the falling value of the dollar. Oil is traded in dollars, and when the dollar falls, oil generally rises.

This has ramifications for all segments of the economy.

Most Americans are already seeing the impact through higher gas prices. In past years, gas prices have declined coming off the peak summer driving season.

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