Make money in 2008: The outlook

The economy, housing, employment and the markets: What will matter most to your money next year?

By Walter Updegrave, Money Magazine senior editor

(NEW YORK) Money Magazine -- Given the pervasive gloom in the face of the housing slump and sudden sharp drops in stock prices earlier this year, you might have figured it was just a matter of time before the economy would collapse faster than the Colorado Rockies in the World Series. In fact, a survey last summer found that two-thirds of Americans believed the economy either was already in a recession or would be in the next year.

The litany of depressing news has only seemed to get worse since then: surging oil prices, mortgage defaults, investment banks writing off subprime loans, the dollar skidding to new lows - pass the Prozac.

Well, we've got two words for you: Cheer up. If you delve behind the headlines, you'll find that despite all of these challenges, the economy has actually held up pretty well this year. And key indicators suggest that next year should be even better (okay, maybe not a lot better).

What specifically lies ahead for the stock market, housing, jobs and the rest of your finances? Here's a closer look at the big stories that are likely to have the greatest impact on how you manage your money next year.

The economy: slow growth but no recession

Hard to believe but true: Recession is not around the corner. The consensus of the 52 economists polled each month by Blue Chip Economic Indicators is that the economy will kick off 2008 with annualized growth at the sluggish pace of 2 percent or so in the first quarter. Then it will gradually pick up steam and close out the year chugging along at just under 3 percent (see the chart at right), roughly in line with the U.S. economy's long-term annual growth rate.

True, next year's 2.4 percent annual pace is a far cry from the get-out-the-party-hats growth the country enjoyed in the late '90s. But that's not necessarily a bad thing. Slow to moderate growth should help keep inflation and interest rates under control - economists expect consumer prices to rise less than 2.5 percent next year and interest rates to stay within a quarter- to a half-point of current levels.

That kind of scenario should allow stock prices to keep moving up (albeit not straight up). And, perhaps most important, it should keep a real economic downturn at bay.

That's not to say that there won't be challenges. The biggest problem area by far is the slumping housing market, where the number of homes for sale keeps rising, prices keep falling and foreclosures, defaults and related woes represent a real drag on economic growth.

Already-anemic new-job creation will also continue to slow next year, so you'll have a tougher time landing a new position or getting a raise. Then too, the U.S. dollar, which sank to an all-time low of $1.45 against the euro in October, isn't expected to make a comeback anytime soon.

Housing woes can't derail economy

The one bright side: The sliding buck has made U.S. goods cheaper abroad, which in turn has boosted exports - and that increase in trade has been instrumental in keeping the country out of recession.

It's always possible that some unforeseen wild card could turn the consensus slow-to-moderate growth picture into a full-fledged downturn. One potential trouble spot is the U.S. credit system, which remains fragile because of all those mortgage defaults, particularly among subprime loans.

If we were to see a major blowup - say, several financial institutions simultaneously taking large and unexpected losses in subprime or other risky debt - already-anxious lenders could drastically cut back on new loans. That could prompt both consumers and corporations to dramatically lower their spending, which could be the catalyst that sends the economy spiraling downward.

"Credit is mother's milk for an economy," says Mark Zandi, chief economist at Moody's Economy.com. "And if credit's not there, the economy would quickly falter."

And since 2008 is a presidential election year, there's always the possibility that politics could upset the works. One area that concerns economists is an incipient trend toward protectionism, driven in part by tainted exports from China (pet food, toothpaste, lead-paint toys) as well as a sense that Americans may not be benefiting from globalization.

Recent polls suggest that many voters believe free trade has been bad for the U.S. and that they'd agree with a candidate who favored tougher regulations to limit foreign imports. The worry is that presidential candidates might cater to this sentiment with talk of import quotas or currency restrictions that could lead to retaliation from U.S. trade partners. This could undermine the export growth that's now a key driver of the U.S. economy.

"If we were to see a pullback in globalization, that could pull the U.S. economy and the financial markets down," says Dennis Jacobe, chief economist at the Gallup Organization.

Barring such an economic or political surprise, however, the big story for 2008 should be moderate growth, not recession. And that in turn should enable you to keep your own money growing too.