Joshua Zumbrun, Forbes Published: Friday, December 05, 2008

(Reuters/Brian SnyderIn early December 2008, the Conference Board's closely watched consumer confidence index surprised most economists by jumping up to 44.9 from its all-time low of 38.8 in October.)

Dwelling too much on the doldrums violates the holiday spirit. Yes, the economy is in bad shape, very likely entering or already in a painful recession. But it's not all bad. No, really.

At the pump, oil price deflation is also known as cheaper gas. For those who have been priced out of the housing market for a decade, the imploding market offers hope they'll someday be able to buy.

"You have to ask the question: How long will this total lack of confidence last?" says Joel Naroff, the chief economist for TD Bank. "Can consumers remain irrationally despondent for an extended period of time?"

Mr. Naroff, picked in October by Bloomberg News as the year's top economic forecaster, has been looking at consumer confidence since it started to slip in the summer, and he thinks it's too pessimistic and will snap back. It's the same intuition that had Mr. Naroff worried about how badly misaligned the housing markets were when he called the downturn before many others.

History suggests Americans just don't stay depressed for long, he says. Even with economists talking of unemployment rising to 8% or 9% from the current level of 6.5%, most people and businesses will muddle through. "You go out eight months from now. You're in May, June, July. People discover they still have their jobs. Businesses have realized that while conditions aren't great, they're not going to fold," says Mr. Naroff, "They ask, 'Why am I behaving as if everything is going to collapse tomorrow?' And they come to the conclusion it's not, and that's when they start spending."

Note that Mr. Naroff talked to Forbes.com before his intuition proved correct. On Tuesday, the Conference Board's closely watched consumer confidence index surprised most economists by jumping up to 44.9 from its all-time low of 38.8 in October.

The economy's not out of the woods yet, by any stretch. Lynn Franco, director of the Conference Board's Consumer Research Center says, "Consumers remain extremely pessimistic, and the possibility that economic growth will improve in the first half of 2009 remains highly unlikely."

But there are other reasons to believe all is not lost. The National Association of Realtors is optimistic that many prudent buyers are waiting out a bad housing market. But the buyers are there. The NAR has been overly optimistic before, but home sales are so low that if those buyers did come back en masse, they could buy up the stock of excess housing faster than many anticipate.

Falling home prices are sapping home owners of the wealth effect they once felt they had in their homes. But they're also bringing prices back into alignment with people's wages.

Take the city of Phoenix. According to the Case-Shiller Home Price Index released on Tuesday, it's the city where home prices are falling fastest. The 2006 median income is around US$47,000. The National Association of Realtors said that in the third quarter, the median home in the region sold for US$185,000. In 2006, that median price was US$270,000. Assume that family is still earning US$47,000 today, the median house now costs four times their income from two years ago (when it cost nearly six times as much). Before long, it gets awfully tempting to stop renting.

In September, Phoenix saw its unemployment rise to 5.4% from 3.3% a year ago. That number will continue to rise. But most people will stay in their jobs; in the spring, some of them will start buying homes. By the summer, if the financial crisis has quieted down, will there be any reason not to start buying furniture? By next Christmas, will there be any reason not to bring back the ribbons, tags, packages, boxes and bags? Mr. Naroff's optimistic.

"If you don't get into a deep recession where coming out of it almost seems impossible, you get into a more normal, maybe extended cycle on households. Get cautious, get worried, get depressed and then," he says with a pause, "they live through it."