U.S. economic forecast for 2008: Bleak

The outlook is for a rocky time ahead for the US economy as it moves into 2008.

Many economists predict that America will move closest to a downturn since the current expansion began seven years ago. If the economy does contract, economic seers expect a shallow retrenchment, most likely in the first six months of the year. Most see only limited improvement in the latter half.

A lagging economy is likely to have wide ramifications. In the heat of a presidential election year, unemployment would start to rise, making the economy a major issue for the candidates. An anemic economy would also present a challenge to the Federal Reserve Board, which might opt to keep cutting interest rates. Soft economic numbers, moreover, could have a detrimental effect on corporate profits – depressing financial markets and lowering tax receipts, straining government budgets.

"There is not much margin for error. It would not take much to push us over the edge," says Dennis Hoffman, an economist at the W.P. Carey School of Business at Arizona State University (ASU) in Tempe. "It's hard to come up with boom-time scenarios."

Of course economists and Wall Street have been pessimistic – and wrong – before. This past year, for example, strong exports, thanks to the weak dollar, and an unexpected inventory buildup resulted in a surge of 4.9 percent growth in the third quarter, much higher than the forecasts.

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