Recession looms like a specter for 2008

Whether it happens or not, the "R word" today is one of the most analyzed economic prospects for the new year.

Former Federal Reserve Chairman Alan Greenspan said the risk of a recession is about 50 percent.

Treasury Secretary Henry Paulson and the current Fed chairman, Ben Bernanke, are guessing a recession is less than 50 percent likely.

A recent poll of economists by WSJ.com put the chances of a recession -- traditionally defined as two consecutive negative growth quarters -- at about 38 percent.

Among local economists who believe a recession is going to hit and hurt Chicago area consumers are Harris Trust and Savings Bank Chief Investment Officer Jack Ablin and The Northern Trust Co.'s head of research Paul Kasriel.

"If there is a recession, it will be the best-anticipated recession in decades," Ablin said.

The former head of DePaul University's business school, Michael Miller, said if a recession emerges, the Chicago area's reliance on manufacturing, the auto industry and housing could make the local economy particularly vulnerable.

"Because of our reliance on manufacturing and financial services, Chicago could be affected sooner than the rest of the country," Miller said.

Some parts of the economy are already suffering the affects of recession, including housing and manufacturing.

In the Federal Reserve's first quarterly economic outlook published last month, it predicted a slowing economy with rising unemployment and a moderating housing industry. And the Federal Reserve's report foresaw recession scenarios.

"The possibilities that markets could relapse or that current tighter credit conditions could exert unexpectedly large restraint on household and business spending were viewed as downside risks to economic activity," the Fed said in its forecast.

"Sailing in uncharted waters" is the headline of Mesirow Financial Chief Economist Diane Swonk's annual analysis of the economy.

"The best bet is that the expansion continues and a recession is averted," Swonk said.

A growing global economy, a thriving farm sector, low inflation and rising exports will all combine to keep the economy growing, she wrote.

One certainty will be the 2008 presidential election, in which the economy will be a hotly debated topic. The stock market could react adversely to statements of the candidates, according to Carl Tannenbaum, an economic consultant based in Downers Grove.

Should a recession be on its way, local companies will weather the downturn depending on each firm's current health, Miller said.

Schaumburg-based Motorola Inc. suffered double-digit stock losses this year and will be guided by incoming chief executive officer Gregory Brown. Motorola activist investor and billionaire Carl Icahn has called for the breakup of the company into smaller entities.

Sub-prime mortgages this year rocked HSBC, which has its North American headquarters in Prospect Heights. A wave of mortgage interest rate resets are expected to come due in 2008.

Sears Holdings Corp. will be struggling to improve same-store sales, something it didn't do in 2007. A recession could hurt consumer spending and profits at the Hoffman Estates-based retailer.

Chicago-based Tribune Co. will be under the new leadership of its new owner, real estate billionaire Sam Zell. He promised this month to be "an agent of change."

2008 will be Vernon Hills-based computer equipment firm CDW Corp.'s first year as a privately held firm, after being acquired by Madison Dearborn Partners for $7.3 billion.

At Oak Brook-based McDonald's Corp., 2008 might be branded the "Year of the Breakfast Wars." Its premium coffees already have won some taste tests against Starbucks. In the coming year it will begin rolling out lattes and iced coffees.

Deerfield-based Kraft Foods Inc. will be working to integrate its newest acquisition, France-based Groupe Dannone's biscuit unit. Its success at boosting macaroni and cheese sales in 2007 convinced it to try to boost innovations with other products, such as Oreo cookies, DiGiorno pizzas and Maxwell House coffee beans.

Northern Trust's Kasriel said the answer to the recession question won't be known until 2009, when the macroeconomic indicators will officially review U.S. economic output.

"The people suffering the affects of the recession will know it's a recession," Kasriel said. "It will feel like a recession, but we won't know, officially, that it's a recession until it's over."