Speaker Pelosi,

First, I wanted to offer my congratulations regarding the recent election.  You were one of the architects of our victory, for which I and the American country as a whole are extremely grateful.

However, you will assume power at a very difficult economic time.  Below are the problems you face.  None offer easy answers.  In fact, solving these problems will cause a fair amount of pain and difficulty, which may harm our majority's future electoral prospects.

A Slowing Economy

To top off the problems of a fiscal situation in tatters and an international trade deficit, the US economy is clearly slowing possibly moving into a recession.

Overall GDP growth is clearly decelerating:

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 1.6 percent in the third quarter of 2006, according to advance estimates released by the Bureau of Economic Analysis.  In the second quarter, real GDP increased 2.6 percent.

GDP growth has decreased from over 5% in the first quarter to 2.6% in the third to 1.6% in the third.  While there is great debate within the economic community regarding what will happen in the coming quarters, consider the following.

Merrill Lynch and the Federal Reserve are both saying the possibility of a recession are increasing:

The U.S. economy is ``on a knife's edge,'' and growth may slump to less than a 2 percent pace next year unless the Federal Reserve cuts interest rates, according to Merrill Lynch & Co. economists.

``Our recession-risk indicator is now at 51 percent odds for an actual economic downturn in the coming year,'' writes David A. Rosenberg, chief North American economist at Merrill Lynch in New York, in a note today. The last time the indicator registered that high was in the recession year 2001. product growth, adjusted for inflation, compared with Rosenberg's forecast of 2 percent growth in 2007 (the blue line). The 10-year trend in real GDP growth is shown in green.

The odds of a recession in the United States in the next year are now greater than 50-50, according to a simplified version of a model developed by an economist at the Federal Reserve.

The model, which relates the shape of the yield curve to the Fed's interest rate target, has been extremely accurate at predicting recessions in the past. But economists who study the business cycle say the model may be delivering a misleading message today.

Fed economist Jonathan Wright developed the model in a paper published earlier this year, based on research by, among others, new Fed Gov. Frederic Mishkin and New York Fed economist Arturo Estrella. Read his paper.

If bond yields stay at current levels for the next three months, Wright's model would predict a recession. Current yields have been in a recession-zone for only a day so far.

In Wright's model, a steep, sustained inversion of the yield curve, combined with a relatively high federal funds rate, would point to a recession.

In addition, we have the following problems:

The housing market - which subtracted a full percentage point from 3rd quarter growth - is still falling.  Housing starts have dropped 25% from their high in 2005, new home prices year over year changes are currently negative, existing home prices year over year changes are falling fast, inventory levels are shy high and undercounted, residential construction has fallen five months straight, and the US consumer is already in debt up to his eyeballs -- household debt over 90% of GDP and over 120% of disposable income.

Consumer credit is contracting, which may not bode well for the holiday shopping season.

U.S. consumer credit outstanding fell by the biggest amount since April 1992 in September as households took out fewer loans for items like automobiles and boats, the Federal Reserve said Tuesday.

Total consumer credit fell by $1.20 billion in September, or by a seasonally adjusted annual rate of 0.61%, to $2.366 trillion, the Fed

said.

Considering the sheer magnitude of the increase in consumer credit during this expansion, this development is not surprising:

And total household debt payments are taking a record amount of household income:

Job growth is the worst of the last 40 years:

And the recent employment reports indicate we are adding lowering-quality jobs to the economy:

But the larger point of all these numerical details -- and we apologize if you're feeling a trifle numbed by numbers -- is that the bulk of jobs being added are not big payers, and the bulk of the jobs being lost are."

Productivity increases - which have buoyed this expansion - are slowing:

Productivity increased 0.1 percent in the business sector, as both output and hours grew 1.4 percent (seasonally adjusted annual rates).  Nonfarm business productivity remained unchanged as output and hours both increased 1.6 percent (table A).

Finally, a select few are actually benefiting from the recent expansion.  First, note how corporations are taking a record share of national income.

And finally, the rich are getting richer:

In conclusion Ms. Speaker, you have your work cut out for you.  The Republicans have left a federal budget in tatters, an international trade deficit of record proportions that threatens the dollar and finally an economy built on debt and disproportionate distribution of the benefits that is near a recession.  I wish I had better news for you.