The current economic climate is scary and uncertain, but some aspects, like inflation and credit, are not as damaging as the typical consumer might believe, as long as America takes the proper corrective steps, said an industry expert.

“These are scary times and if you have a nervous disposition it’s very easy to work yourself up into a very gloomy lather,” said Martin Barnes, managing editor of “The Bank Credit Analyst,” speaking at the spring conference of the Trust Company of Illinois at the Danada House in Wheaton.

“But not all of the news is bad. There are some things that should make you feel a bit more reassured.”

Barnes pointed out that three C’s that sum up the way people are feeling: confused, concerned and cautious.

“Let me reassure you, you are not alone,” he said. “You are far from alone.”

Neither the U.S. economy nor the global economy will not shut down if American consumers stop their rampant spending habits for a period, said Barnes.

“The world is a better place to withstand the U.S. consumer lying down for a rest today than it was a few years ago,” he said. “You don’t need to shop so aggressively. The world won’t fall apart.”

Barnes pointed out that the corporate sector is in very good shape. In addition, market valuations are steady, stocks are up and more liquidity is being pumped into the system.

“The confidence is there and the money is there,” he said.

The catalyst for the current climate was the housing bust which, when broken down, was the result of unwise spending.

“There was an enormous misallocation of resources in America in regard to home ownership,” Barnes said. “When money goes into building a factory, it’s basically in investment in America’s future. But instead of putting our money into factories, we’re investing in some mansion somewhere. We went from putting our capital spending into factories to putting it into housing.”

The question on everyone’s mind now is when it will end. Barnes says that will be in the second half of this year. Construction activity will bottom out by the end of 2008 which should stabilize the market.

“Prices are another story,” said Barnes. “Prices were so high, that even when construction stops falling, (prices) will be falling for years.”

This prediction is based on the outcomes of the two housing busts of the early 1980s and 1990s.

“The same thing happened then. Prices went up a lot, construction collapsed and bottomed, yet prices kept falling for years,” Barnes said. “Activity will stabilize this year but pricing won’t for two or three more years.”

One positive aspect is that falling housing prices will not cause families and businesses to go under. Losing one’s job is a whole different story.

“The story of the consumer isn’t really about housing, it’s almost always about jobs and wages,” said Barnes. “That story is not great but it’s not terrible either.”

Companies, both large and small, are not creating a lot of new jobs. But at the same time, the nation is not experiencing mass layoffs that are typical of a recession, Barnes said.

“Employment growth is slowing but it’s not as bad as you might have expected,” he said.

Even though exports are up because of the weak dollar, the American economy must entrench itself and wait out the current slowdown, according to Barnes. And while the current recession may not be a particularly bad one, its recovery time may be longer than usual.

“This time, it’s really hard to see where the impetus for your more traditional, V-shaped recovery,” he said. “So I see it as a sluggish, slow recovery, which has some silver linings.”

One of those silver linings is that interest rates most likely will not go up throughout the duration of the recovery, allowing Americans to stay afloat in murky waters.

A worrisome topic that seems to be on the tip of everyone’s tongue is inflation, which, to most consumers, seems to be higher than the 4 percent the government says it is. Barnes separates inflation data into two categories: things that you buy all the time and things that you don’t buy very often.

“High frequency spending items have an inflation level of 7 percent, way above the 4 percent of overall inflation,” said Barnes. “So you’re not crazy in thinking that inflation is higher.”

On the flipside, the inflation rate for things that Americans don’t buy very often is actually in the negative, thus balancing out the inflation level.

“If there was any real concern that inflation was going to go up a lot and stay up, we’d expect it to show up in the bond market,” Barnes said. “They are pretty stable at the moment. I take some comfort in that.”

The credit crunch, on the other hand, is a whole different animal. Barnes believes that frivolous spending was the cause of the credit crisis.

“If you make money cheap enough, stupid people will do stupid things with it,” he said.

The result has been an enormous buildup of debt.

“Running up debt forces us to try and run it down and clean our balance sheets. What people call de-leveraging” said Barnes. “So that’s what we are facing. We’re going into a de-leveraging cycle, where credit will not be so easily available and the consumer is going to be under pressure to spend wise and save more.