U.S. Federal Reserve (FOMC) Minutes

"Home prices had declined more steeply than anticipated, and the weakening housing market, combined with a softening in labor markets, appeared to be weighing on consumer sentiment.

Businesses also were seen as becoming more pessimistic and cautious, despite a strong foreign demand for U.S. goods.

Strains in financial markets had increased, portending a possible further tightening in the availability of credit to households and businesses.

Against this backdrop, many participants thought some contraction in economic activity in the first half of 2008 now appeared likely.

The economy was expected to begin to recover in the second half of the year, supported by recent monetary policy easing and fiscal stimulus.

Accommodative monetary policy and a recovery in financial markets along with an abatement of the downdraft in housing activity were expected to help foster a further pickup in economic growth in 2009.

However, considerable uncertainty surrounded this forecast, and some participants expressed concern that falling house prices and stresses in financial markets could lead to a more severe and protracted downturn in activity than currently anticipated."

So all are betting for a better second half although as time and event unfold, this view is downgraded each time. That remind me, the 2001 period when each market participants preaching that next half would be better. Ultimately one got it right 2 years after...

So the risk is massive for a recession and for a bad one in the U.S. The next question is about contagion, how much will it impact the rest of the world and in particular Europe.

Here is what they have to say Europe in their minute :

"In the major advanced foreign economies, the rate of growth of real gross domestic product (GDP) generally declined in the fourth quarter. The source of the slowdown varied substantially across economies. In the euro area and in the United Kingdom, output was restrained by a softening in domestic demand."

That is true for Finland that has seen its GDP fall from 6.2% to 3.4%, almost halving it in a year. Although one has to recognize that this is still a very good one. Would that GDP continue to deteriorate or would it stabilize at around this level? it's all depending on the consumer...