Are we in a recession? That is still the common question but it is not really relevant. While growth remained positive in the first quarter, it sure feels like a recession. And most importantly, everyone seems to be acting as if there is one.

The economy is not a pretty sight. Let’s call it the revenge of the subprime lender. The irrationally exuberant mortgage companies put millions of families into homes they couldn’t afford and the economy is paying the price. Housing starts have collapsed, falling by nearly 65% from the peak. Rarely over the past fifty years have we seen construction levels this low. While activity may not decline much more, don’t expect home building to pick up any time soon. Home sales are off about 35% from their highs and the level of houses for sale is twice what it should be. As a consequence, nationally prices have dropped at the greatest rate since the depression and they are still falling.

The housing meltdown not only led to major declines in construction employment, but worse, it spread into the manufacturing sector. All those firms which supplied goods such as building materials, plumbing, electrical supplies and appliances suddenly found their demand cratering. Output and employment is now falling in the industrial heartland.

But we could have survived both the construction and manufacturing cutbacks if the financial sector hadn’t suffered a profit meltdown. When firms suffer large losses they become conservative and when banks lose money, they stop lending. The result has been a credit crunch that is limiting the ability of companies of all sizes to borrow money. And that means a broad based slowdown.

So, how do we get out of this mess? First, we may not have actually gone into a recession. First quarter growth was modestly positive and matched the weak 0.6% pace posted in the last quarter of 2007. The rebate checks are actually in the mail. Though most will be saved or used to pay down debt, some will be spent. The consumer, who is being pressured by rising energy and food costs, could continue to spend slowly.

In addition, the Federal Reserve finally has gotten it. Interest rates have been cut sharply. Critically, the Fed is now attacking the real problem, the credit crunch. Chairman Bernanke has been aggressive and imaginative in adding funds. We may not see any additional rate cuts past the recently reached 2% rate. But that is okay. The Fed is concentrating on making sure the financial system works more normally.

Looking ahead, growth may bounce around the rest of the year but there is a good chance that by year’s end, the economy will be coming back. And with the actions that have already been taken, the first half of 2009 seems to be setting up to be quite nice.