We are most likely in a very mild recession right now. Unemployment spiked in December, and consumer confidence has fallen to 88.6, which is well below the long-term average of 98.6. The Fed now knows that it should have dropped rates further last year. We’ll see just how far the Fed moves at its next meeting on Jan. 30.

Our grading system of the economy and the housing market is a “bell curve” model, with statistics at an all-time high receiving an “A,” statistics near the long-term average receiving a “C,” and the worst times ever receiving an “F.” In this grading system, it is OK to be a “C” student.

Here is our current report card:

Economic Growth: C

The U.S. economy continues to grow an average pace. GDP growth, which was a higher-than-expected 4.9 percent annual growth rate in the third quarter, is likely to slow considerably in the fourth quarter, according to current forecasts.

The year-over year change in payroll job growth fell below 1 percent for the first time since March 2004, and unemployment rose to 5 percent, which is its highest in two years.

While personal-income growth stayed relatively flat following marginal declines in October, retail sales activity improved in November as the holiday season swung into full gear. Core CPI — a key inflationary gauge — increased in November to 2.3 percent, and the inflation-adjusted federal deficit slipped further into the negative.

Leading Indicators: D+

The majority of the leading economic indicators contributed negatively to the leading index in November — evidence of the widening effect of the housing slump and high oil prices — performing below their overall historical average. The leading economic index in November decreased significantly for the second consecutive month and has been down in four of the last six months.

Among the indicators succumbing to the housing slowdown is the Purchasing Managers Index — a key measure of U.S. manufacturing — which contracted sharply in December to the lowest reading since April 2003, suggesting sustained weakness in manufacturing in the future and increased likelihood of recession. The early warning signal for manufacturing prompted investors to take fewer risks and caused a decline in the stock market. All four of the major stock indices we track lost ground in December, though home builder stocks increased for the month.

Mortgage Rates: B

Fixed rates fell while adjustable rates increased, resulting in a narrowing of the spread. The 30-year fixed mortgage rate ended the month of November at 6.17 percent, while the one-year adjustable rate stood at 5.53 percent. The Federal Reserve benchmark interest-rate cut in December to 4.25 percent is believed to be followed by a further cut in January.

As reported by the Mortgage Bankers Association, the percentage of mortgage loan applications with an adjustable interest rate fell to 10.4 percent in December, which brings this figure to a six-year low.

The ABX 06-2 BBB- series, which measures the performance of subprime loans issued in the first half of 2006, improved slightly toward year-end, but fell 80 percent for the year.

Consumer Behavior: C

Consumer confidence made only a small improvement in December, and nearly all other indicators declined. Consumer confidence rose slightly to 88.6 last month, below its long-term average of 98.6. Consumer sentiment and consumer comfort are performing well below their respective historical averages. Equity per owned household is declining as home prices are falling, but still remains quite high in comparison to history.

Existing-Home Market: D

Though there were some small positive signs in the existing-home market in November, the sector continues to perform poorly. Annualized home sales in November increased slightly to 5 million transactions, and the median price rose slightly for the month, according to the National Association of Realtors. However, these two figures are down 20 percent and 4 percent, respectively, in the last year.

The level of existing-home inventory fell slightly to 10.3 months of supply, but has remained near this level for the last three months. Pending home sales, which are a leading indicator of existing sales, fell 2.6 percent for November, which is further than expected following an increase in the previous month.

New-Home Market: D-

The new-home market remains weak, with no improvement in the record-low builder confidence, as measured by the NAHB’s current Housing Market Index value of 19. New-home sales dropped to their lowest annual volume since April 1995, with just 647,000 transactions in the last year. The level of unsold new-home supply jumped to 9.3 months as a result, with 3.6 months of completed new homes alone.

The median new-home price increased slightly for November, but is down 0.4 percent year-over-year.

Housing Supply: D-

Housing supply continues to decline. The 1.152 million total permits issued in the last year represent a 25 percent decline over the last 12 months. Single-family permits alone have declined 34 percent in that time to their lowest volume since June 1991. Starts declined sequentially to 1.19 million in the last 12 months, while completions increased to 1.34 million. Both starts and completions remain down over the last year, -24 percent and -29 percent, respectively.

John Burns is the founder of Real Estate Consulting in Irvine, Calif., which monitors changes in real estate market conditions and provides consulting services, including strategic planning, market research and financial analysis. He can be reached at jbrec@realestateconsulting.com.

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