The national economy is in recession. Even the Bush administration acknowledges this fact. The severity of this downturn is the subject of much debate. Will this contraction be short and shallow, long and shallow, or as some have suggested long and deep. Regardless of which path the economy eventually takes, events in the Middle East will surely play a significant role in shaping domestic conditions. 

     In the short run the military buildup should have a positive effect on many businesses which supply the military and thus bolster the flagging economy. However, if the United States should become bogged down in a protracted war the financing of the war effort could present a problem. Will these expenditures require more debt financing or the raising of taxes, or will the allies pick up a significant share of the cost? How this question is answered will have a significant impact on our economy through various channels of influence such as interest rates, inflation rates, and employment and income levels. At this juncture no one knows what path the war will take, let alone the possible economic ramifications. Needless to say, the uncertainty of the situation is being played out on a daily basis in the world's financial markets which fluctuate wildly with each new bit of information whether good or bad. 

     This recession is unique in the sense that this is the first contraction since the 1930's that has been primarily centered in the country's financial services sector. Some analysts are concerned that the recession could be made worse by the problems facing ,this vitally important segment of the economy. Further, with corporate and personal debt at record high levels, the ability to service that debt comes into question especially if the downturn in economic activity is prolonged. This would only serve to compound the difficulties and make the contraction worse than it otherwise might have been. 

     Some good news in all of this is that with the growing slack in the economy interest rates should continue their downward drift. The fall in demand for goods and services should also help to put a lid on inflation. In other words, wage and price increases will become increasingly more difficult to pass on to consumers. This should allow the Federal Reserve System to be more flexible in its money and credit policies. Thus, the Federal Reserve will have a freer hand in attempting to mitigate the negative aspects of the recession. But once again, the wild card in all of this is the war in the Middle East and its influence on matters not just here in the United States, but in all countries of the world.