Can we dodge a recession? Many consumers feel poor

Business was already down at the Muddy Cup Coffee House this year. Now, Jim Svetz, owner of nine coffee shops in Upstate New York, fears things are only going to get worse.

Consumers "see the news, it's big news, it ends up being on the major news channels, and then everyone becomes worried, and it affects their spending," Svetz says. "It's very tough out here."

The U.S. economy has largely been resilient since the financial turmoil began more than a year ago, continuing to grow, albeit at a more subdued pace than in prior years. While some economists predicted the economy was headed for recession, others expected the USA would stay above water. But many economists think the latest chapter in the credit crunch saga, despite the government actions, will be too much for the economy to take, finally driving the USA into its first official downturn in seven years. Action by government in recent days may only soften the already heavy blow.

"The economy is set on a course for a deeper recession" after the last few weeks, says Allen Sinai, president of Decision Economics. He predicts the unemployment rate will climb to near 7.0% from 6.1% in August.

"We're in a danger period for the next six or eight months," until house prices are expected to bottom, Carnegie Mellon economics professor Marvin Goodfriend says.

Recession is no sure thing, though. The market turmoil has led to a few developments that could keep the economy growing. Petroleum prices have fallen sharply from their July peak amid expectations for decreased demand in a slowing economy. And mortgage rates have fallen, making it easier for creditworthy customers to refinance their mortgages and reduce their payments.

"There are a lot of offsetting things going on here," JPMorgan Chase senior economist James Glassman says, noting that for the past year consumers have kept spending despite the broader financial issues.

Before last week's market upheaval, the U.S. economy was already slowing substantially during the second half of the year as a drop in consumer spending and an easing in export growth provides less support. Housing continues to act as a drag. Employers are consistently shedding jobs.

The stock market has lost $3.5 trillion of its value since its most recent peak last October. And Americans have seen more than $1 trillion in real estate wealth disappear from the peak hit a year ago, according to Moody's Economy.com.

Now, the frenzy in financial markets has led to the bankruptcy filing of investment bank Lehman Bros., government takeovers of Fannie Mae, Freddie Mac and insurer AIG, and a $700 billion proposal to shift bad bank assets to government.

Those actions could take a toll on confidence as Americans are bombarded with headlines of an economy under duress, people worrying about their money and investors yanking cash out of what were previously considered safe investments. In addition, credit is expected to become even tighter, making it harder for companies and individuals to access the cash needed to make investments and everyday purchases.

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