WITH ALL OF THE BAD economic news coming out these days, I wouldn't be surprised if many readers are wondering if I am not being overly optimistic in my reports on the U.S. economic outlook. So, to provide a balanced view of the turbulent economic scene, let me sketch the more widely believed worst-case scenario. Then, I can honestly say, "I report, you decide."

The economy is not merely slowing, it is heading towards recession. New home sales are 34 percent below year-earlier levels, as homes move from builder to buyer at the slowest pace in thirteen years. The market for existing homes is no better: sales are down 23 percent, and the inventory of unsold homes has resumed its rise after a brief fall. House prices are down about 10 percent, and are headed lower at an accelerating pace. Worse still, non-residential construction, until now holding its own, "is likely to decelerate sharply," says Fed chairman Ben Bernanke.

Nor is any relief in sight. "Downside risks to growth remain," warns Federal Reserve Board chairman Ben Bernanke, frustrated by the inability of the Fed to bring the housing market's decline to an end. The Fed has cut its short-term rate by 2.25 percentage points since September to 3 percent. But rates on the standard 30-year fixed rate mortgage are stuck at around 6.8 percent, almost exactly where they were at the height of the credit crunch last autumn. And any hope that the government would intervene directly was dashed when Treasury Secretary Hank Paulson announced that he sees no reason for "the American taxpayer to be stepping in with more taxpayer dollars," and congress refused to give bankruptcy judges power to re-set mortgage terms.

Given that houses are most Americans' largest asset, it is little wonder that consumer confidence is at its lowest level in five years, and that consumer spending, which held up in the first half of 2007, "appears to have slowed significantly," as Bernanke put it to the House Committee on Financial Services. That's not news to car companies, which are watching sales shrink to 10-year lows.

More important, falling house prices, rising mortgage (and credit card) defaults, and other negative developments in the credit markets are shriveling bank balance sheets, making it more difficult for them to lend to even credit-worthy customers. There is no question that such credit as is being made available to both consumers and businesses is offered on tougher terms--more collateral, higher interest rates, more proof of credit-worthiness. Tighter credit, especially when combined with plummeting consumer confidence, causes the blood to run cold in the nation's boardrooms. Projects are put on hold, investment spending declines and with it the new jobs needed to keep the unemployment rate down. Unemployment rises, consumer confidence and spending drop even more, foreclosures increase, credit tightens even more, and America settles into a long period of substandard growth, or actual decline.

Meanwhile, the number of people waiting for the next shoe to drop in credit markets is rising. When Credit Suisse can go from an "all's well" to discovery of a $2.85 billion loss in a few days, investors can be forgiven for wondering what's out there. There's an old saying that you can't make chicken salad out of chicken droppings, and investors have discovered that applies to the complicated debt packages that were supposed to elevate the quality of dicey loans by bundling them with other dicey loans. You can't make a triple-A credit instrument out of lots of loans that are unlikely to be repaid.