Why We Aren't in a Recession Yet

The graph above, via Krugman, shows the decline in residential housing investment (the blue line) being offset by an increase in the American export sector (red line), both expressed as percentages of GDP.

All the economists who had predicted a recession for this year (including me) could not have predicted the increase in exports which seems to have saved us (so far), because they could not have expected the value of the dollar to drop so heavily this year. Things don't look especially good for the short-term future, but if exports stay strong then any recession which does hit may be shorter and less painful than it otherwise would be.

This also shows us why a return to protectionism would be horrible: it would likely result in the institution of foreign tariffs against our products as retaliation. Since we may end up relying more on exports to sustain the overall economy until the housing market recovers (and employment gets better), this would be disastrous. It would also increase inflation worries, which could keep the Fed's policy tighter, making recovery take longer.