First the bad news: The consensus among economists is that we are in a recession. Now the good: We're likely seeing the worst of it now, and growth may return in the second half of 2009.

Heading into a new year, many Americans may be concerned about the potential for prolonged economic pain and are hoping for a return to prosperity and better fortune. Additionally, the incoming administration will bring a new set of economic and tax policies that are likely to affect the finances of most Americans in some way.

What's Going On

Recessions are difficult to detect until several months after they begin. However, a range of current economic indicators is pointing toward a recession. Chief among them is the 0.5 percent contraction in gross domestic product (GDP) in the third quarter of 2008. (2) Economists expect a deeper decline in the fourth quarter. GDP represents the value of all goods and services produced in the United States and is widely regarded as the best way to get a snapshot of recent economic activity. The simplest definition of a recession is two consecutive quarters of negative GDP growth.

The employment situation is also pointing toward a recession. The economy shed more than 1.2 million jobs in the first 10 months of 2008. The unemployment rate climbed to a 14-year high of 6.5 percent in October 2008. (3)

What's Ahead

In The Wall Street Journal Economic Forecasting Survey, which is based on the average responses of 54 economists, respondents expected GDP to shrink at a three percent annualized rate in the fourth quarter of 2008, followed by a shallower 1.5 percent decline in the first quarter of 2009. They called for GDP to grow at a slight 0.3 percent annual rate in the second quarter of 2009, marking the beginning of a slow recovery. (4) However, the WSJ economists also project that the unemployment rate will climb to 7.7 percent by the end of the 2009. (5)

In the Federal Reserve Bank of Philadelphia Survey of Professional Forecasters, 51 panelists predicted a 2.9 percent drop in GDP for the fourth quarter of 2008, then a further decline of 1.1 percent in the first quarter of 2009 before conditions improve. They predicted a year-over-year contraction of 0.2 percent for 2009 and foresaw a jobless rate of 7.7 percent by the end of 2009. (6)

Overall, economists supported government efforts to stimulate the economy. More than 80 percent of economists in The Wall Street Journal survey favored a stimulus package in January or earlier, and 34 percent said permanent tax cuts should be the top priority in any economic stimulus. Based on the average response, they indicated that the total size of the government's response this year and next should be more than $250 billion.

Presidential Policy Shift

During the campaign, the incoming administration proposed several immediate and long-term policy changes that could have a wide effect on the economy. If enacted, several of these proposals are almost certain to affect your situation.

Increasing the top marginal income tax rates: The new administration has proposed making permanent the 10 percent, 15 percent, 25 percent, and 28 percent marginal income tax rates and brackets, which were reduced to their current levels in 2003 and are slated to expire after 2010.

The top marginal rates, currently at 33 percent and 35 percent, would return to their pre-2001 rates of 36 percent and 39.6 percent for single filers earning more than $200,000 and couples earning more than $250,000. The personal exemption amount and itemized deduction phaseouts for these same taxpayers would also be rolled back to levels that were in place in the 1990s.

New taxes on capital gains and dividends: A new 20 percent tax rate on long-term capital gains would apply for individuals earning more than $200,000 and couples earning more than $250,000. A new 20 percenttop rate on dividends would apply to people making more than $250,000. Individuals earning less than these amounts would continue to pay taxes on dividends and long-term capital gains at the current rates.

A permanent estate tax: It's unclear whether the currently scheduled one-year repeal of the federal estate tax will be allowed to take place in 2010, but the new administration has proposed a permanent 45 percent tax rate on estates larger than $3.5 million ($7 million per couple).

Among other new proposals to deal with current economic conditions:

l Penalty-free hardship withdrawals in 2008 (retroactively) and 2009 from IRAs and 401(k) plans of 15 percent of the account balance up to a $10,000 limit. Ordinary income taxes will still be due on the amounts withdrawn, but the 10 percent penalty would be waived for withdrawals prior to age 59½.

l Temporarily allowing individuals older than age 70½ to delay required minimum distributions from tax-deferred retirement programs.

l A $3,000 refundable tax credit for businesses that hire additional full-time employees in 2009 and 2010.

1, 5, 7) The Wall Street Journal , November 13, 2008

2) Bureau of Economic Analysis, November 25, 2008

3) U.S. Bureau of Labor Statistics, November 7, 2008

4) The Wall Street Journal Economic Forecasting Survey, November 2008

6) Survey of Professional Forecasters, Federal Reserve Bank of Philadelphia, November 17, 2008

Consult your financial professional before making any investment decision. You cannot invest directly in an index. Past performance does not guarantee future results. This information was prepared by emerald publications. If you would like more information, please contact Frederick Hubler at 610-560-2003 or www.ccwmg.com. Frederick Hubler is a Registered Representative and is President of Creative Capital Wealth Management Group. If you need retirement income, you should call us! Securities and Advisory Services offered through Mutual Service Corporation. Mutual Service Corporation and LPL Financial are affiliated companies and are members of FINRA/SIPC. Creative Capital Wealth Management Group is not affiliated with Mutual Service Corporation or LPL Financial.