"So much has happened since Mesirow Financial's Economics Group published its Mid-Year Economic Review on June 6, 2007 - credit market conditions tightened, more than 60 mortgage lenders went bankrupt, the European Central Bank and the Federal Reserve increased their repurchasing activities to buoy short-term borrowing in credit markets, fears of a recession intensified - all of which caused economists to revise their forecasts downward," says Diane Swonk, chief economist of Mesirow Financial.

"Historically, economists have overestimated the costs associated with financial crises and underestimated the subsequent rebound in growth. The stimulus created by a crisis-induced easing of monetary policy, in particular, is significant. Economic growth in both 1988 (the year after the stock market crash of 1987) and 1999 (the year after the Russian debt debacle and the failure of LTCM) exceeded 4%," notes Swonk.

In her September newsletter, Swonk examines the current financial crisis and provides her outlook for economic growth and monetary policy in 2007 and 2008, which includes:

- Consumer spending. Spending on housing-related items such as building materials, furniture, and appliances is expected to remain particularly weak. The only exception may be in parts of the Midwest, where heavy rains and flooding in August triggered a surge in spending on repairs.

- The upfront drop in housing construction is expected to be particularly large as some builders are forced to go belly up in the face of a tighter credit environment. This will not only add to already bloated inventories, but will also put further downward pressure on home prices.

- Business investment is expected to remain strong. Persistently strong growth abroad and pent-up demand are the primary reasons.

- Inventories continue to rebuild from exceedingly tight levels earlier in the year and will help provide a tail wind for manufacturing activity even if demand softens.

- Government spending is expected to remain somewhat subdued, as state and local governments grapple with the shortfall in revenues associated with the housing bust.

- The trade deficit is expected to improve, with growth in the U.S. slowing more rapidly than growth abroad.

- Inflation did not improve as much as initially expected in the second and third quarters, but is forecast to slow to a rate consistent with the Fed's "comfort zone" or 1% to 2% by year-end.

- Bernanke Fed. The August decline in employment fueled fears that the financial market crisis is undermining growth, which is upping the ante on the Fed to ease. The best bet is that the Fed lowers both the Fed funds rate and the discount rate at its meeting on September 18.

"There is little reason to believe that the current financial crisis will be any different from past ones; the economy is surprising us once again with its resilience. With that said, the Fed will also be forced to eventually take back anything it gives us in lower rates today," concluded Swonk.