Policy actions, such as the setting up of a Resolution Trust Corporation, should in time stabilize the banking crisis. However, the knock-on effect from the financial turmoil is yet to be fully felt on the economy.
Leading economic indicators seem to be suggesting as much: in the U.S. for example, the recent decline in the Conference Boards Index of Leading Economic Indicators is comparable to the decline recorded in the second quarter of 2001, when the U.S. economy was in recession. While the 2001 recession was mild, inflation concerns this time around have delayed the Federal Reserves easing of monetary policy.
As the U.S. economy slides further into what should be a deeper recession, stock markets could remain weak. But the economic slowdown will tame inflation and allow the Federal Reserve to cut interest rates to provide the extra stimulus to get the economy and stock market back on an upswing, perhaps more noticeably by the middle of 2009.