When Bill Clinton first ran for president in 1992, the economy was struggling to emerge from a jobless recovery, following a recession a year earlier. When George W. Bush was elected president eight years later, the economy was on the verge of another recession, this one brought on by the collapsing dot-com bubble. Do new presidents and nagging recessions go hand-in-hand? The current crop of White House contenders may find out in 2008, thanks to the slumping U.S. housing market, and the economic outlook for whoever wins the presidency is less than rosy.

Few things weaken an economy like a punctured asset bubble, and the United States is enduring its second one this decade. The value of property owned by households soared by nearly $10 trillion from 2000 to 2005, setting the stage for a fall. And fall it has. Home prices, measured nationally, have not declined for a full year since the Great Depression — but prices will indeed fall this year.

Housing is only the half of it. The presidential contenders are campaigning against the backdrop of a nasty credit crunch. As housing-related securities — based on defaulted mortgage loans — have slinked their way through the financial system, the contagion has spread. Banks are increasingly reluctant to lend, companies are paying more to borrow, and consumers are worried that jobs are becoming harder to find.

A Recession in 2008?

Will all of this push the U.S. economy into recession in 2008? Probably not, but it will be a close call. The Economist Intelligence Unit expects the economy to grow by not much more than 1 percent next year. That compares with average annual growth of 3.3 percent for the past 50 years. Interest rate cuts by the Federal Reserve should provide investors and borrowers with just enough lubrication to keep the economy from seizing up.

The fate of the U.S. economy rests, inevitably, on the shoulders of the ever-resilient U.S. consumer. Personal spending has not fallen in even a single quarter since 1991. Even during the dot-com bubble, when $8 trillion of stock market value disappeared in a flash, spending by consumers continued to grow. But they will be tested in 2008.

For most Americans, much of their wealth is tied up in their homes — and in many parts of the country, houses are a depreciating asset. True, home prices are not falling much nationally — by only around 3 percent to 4 percent year over year in the second half of 2007. But conditions will get worse before they get better. The number of unsold houses on the market is at a record high, which all but guarantees further price declines. New home construction is down almost 50 percent from its peak in January 2006. Builders are having trouble unloading homes, and they are laying off construction workers.

Other workers aren’t doing much better. In the year to May, the economy produced around 160,000 jobs a month, a healthy showing, and in line with long-term trends. In the past five months, the total has slipped to 90,000 a month. It will go lower as the primary election season gets under way early next year.

Jobs and the Next Administration

How much will all of this matter to the next president? A great deal. U.S. recessions, when they happen, are shorter and milder than they used to be. But the recovery from recessions has been longer and slower than in the past. The new president could be dealing with the aftereffects of an economic slowdown well into 2010, especially on the employment front; job growth has been especially slow to revive after recessions. As Clinton neared his first presidential election in 1992, the recession had been over for more than a year, but the economic pain lingered. (Remember “It’s the economy, stupid!”?) The 2008 presidential contenders may find themselves promoting economic stimulus plans as Election Day approaches and as the housing slump drags on.

The weak employment market won’t be the only concern for the new administration. U.S. workers have been remarkably productive over the past decade, helping the U.S. economy to grow at a solid pace. But there are signs the productivity miracle is fading, and if that happens, the economy will grow more slowly. Indeed, the EIU believes the country’s long-term growth rate has slipped below 3 percent a year and will only average around 2.7 percent to 2.8 percent during 2009-2012.

There are plenty of other risks for the new administration. Oil prices topped $90 a barrel in October, and while they may come down in 2008, they will remain high by historical standards for the foreseeable future. That could create inflationary pressures. On the positive side, the recent high prices will spur more production. But there is little sign that oil demand from emerging markets will ease; even if China’s economy starts to slow, as it inevitably must, India appears to be in a new growth phase. If the Middle East remains volatile, and it certainly will, the risk of a political shock that sends oil prices through the stratosphere is very real. Oil at $100 a barrel — perhaps well over $100 a barrel — probably is in the cards, and government plans to boost production of alternative fuels won’t help any time soon.

Trade Will Remain an Issue

Another number, with a lot more zeros, also awaits a new administration. The trade deficit will fall in 2008 as the weaker dollar makes U.S. exports more competitive and a slowing domestic economy curbs imports. But the deficit will begin rising again in 2009 as the economy recovers. Before the new administration’s term ends in 2012, a $900 billion annual deficit is possible, and if the economy surges and imports soar, a $1 trillion shortfall is not out of the question.

China will continue to account for the biggest part of the gap, and as the Middle Kingdom becomes an ever larger and more powerful economy, the backlash in the United States will grow. Punitive China trade bills will increase in number and severity, especially if the U.S. economy remains weak. The new administration will struggle to contain Congress and to persuade China to let its currency move in line with market forces.

Another deficit, for the government’s annual budget, also will become a greater concern. Despite a string of tax cuts and plenty of spending during the Bush years, the budget deficit has been contained, at less than 2 percent of the overall economy. (It surpassed 5 percent of gross domestic product during the middle years of the Reagan administration.) If Democrats are in control of the White House and Congress, as seems likely, spending almost certainly will rise, and the deficit could move higher, especially if health care costs continue to climb.

The biggest risk for the new administration — though perhaps the hardest to judge — is the prospect of another asset bubble forming. For all of its impressive work controlling inflation, the Federal Reserve has had a disturbing tendency to bail out investors and borrowers when times get tough. Alan Greenspan, the former chairman of the Fed, was quick to cut interest rates when financial markets complained, and Ben Bernanke, Greenspan’s successor, also has been generous with rate cuts during the current credit crunch. Though lower rates boost the economy, they can shield reckless investors from the consequences of bad decisions. The result is more risk-taking and more financial excess.

Will the next administration face another bubble in the stock or real estate markets? Don’t rule it out.

Leo Abruzzese is the Economist Intelligence Unit’s editorial director for North America.