SYNOPSIS: A look at the gifts that Recession-Claus brought us for Christmas -- and it's not very promising

Merry Christmas? No no no.

Retailers found lumps of coal in their stockings this Christmas; the holiday shopping season was disappointing. So where's the economy heading?

Put it this way: It's getting harder to tell a tale with a happy ending.

Here's the story so far: In 2000 the bubble finally burst. As investors and businesses rediscovered the law of gravity, business investment plunged, and the economy slumped. Then the situation stabilized, more or less. Repeated interest rate cuts encouraged families to buy new houses and refinance their mortgages, putting cash in their pockets; yes, the tax cut also made a marginal contribution. Strong housing demand and consumer spending partly offset the lack of business investment. And so the economy began growing again.

But it has been a jobless, joyless recovery. Payrolls have continued to shrink. The number of people who have been unemployed for more than six months — an indicator of families facing severe distress — has risen 55 percent over the past year. And thanks to inaction by Congress and the administration, 800,000 of those long-term unemployed will lose their benefits tomorrow.

Falling stocks have also taken their toll; many older workers whose 401(k)'s have imploded can no longer afford retirement. Even as overall employment has fallen, the number of working Americans over 55 has increased 8 percent.

This dreary picture will change — but in which direction? Will it brighten, as businesses finally start spending? Or will it darken even further as worried, heavily indebted consumers pull back?

Most business commentators have been cheerily predicting a recovery in business investment, week after week, for the past year — brushing aside businessmen who say that they have no plans to invest anytime soon. But it keeps not happening.

On the other hand, a small minority of pessimists — sometimes including me, depending on what I had for breakfast — have been insistently predicting a collapse in consumer spending, which also hasn't happened.

Which will it be? Let me throw some disheartening ingredients into the mix.

First, the Fed has almost run out of room to cut interest rates. It has other tools at its disposal — but it will be reluctant to try exotic, untested policies unless the economy is clearly facing deflation. So don't expect Uncle Alan to bail us out anytime soon.

Then there are the dogs of war. Oil futures are already above $32 per barrel. Donald Rumsfeld assures us that we can fight two wars at once, but nobody seems to have thought about the state of oil markets if there is simultaneous turmoil in the Persian Gulf and Venezuela. Also, gold prices have been soaring; this doesn't affect the real economy, but it's an indicator of nervousness.

What about help from Washington? I'll talk about the administration's "stimulus" plans in another column, but one thing that's clear is that the apparent centerpiece — lower taxes on dividends — has nothing to do with stimulus. The administration clearly still believes that problems aren't challenges to be met, they're opportunities to push a pre-existing agenda.

Finally, there's the desperate plight of the states. New estimates by the Center on Budget and Policy Priorities show that state governments are facing their worst fiscal crisis since the 1930's. Since Washington shows no interest in helping, states will be forced into desperate expedients. Taxes, mainly taxes that fall most heavily on the poor and the middle class, will go up. Spending on education and, especially, health care will be slashed, with the heaviest toll falling on struggling low-wage workers and their children. (Leave no child behind!)

Aside from the resulting suffering, the efforts of states to balance their budgets will be a significant drag on the economy, probably several times larger than the boost from the administration's so-called stimulus program.

Are there any possible sources of good news?

Yes, a few. A walkover victory in Iraq could lead to sharply lower oil prices. Technology marches on, so businesses could finally decide that it's time to replace aging equipment, even though they still have plenty of spare capacity. Inventories are low; someday businesses will restock, and in so doing give the economy a boost.

Are you enthused? I'm not. I hope I'm wrong, but this doesn't look like a happy new year.

Originally published in The New York Times, 12.27.02