Let me give it to you straight: The economy is slipping into a recession. The credit crisis has gone from bad to disastrous and is now impacting business and consumer spending.

For the first time in four years, the private sector isn't creating new jobs. Consumer spending is also showing signs of strain as American Express (AXP) reported slower spending and higher delinquencies. Big-ticket items have fallen for three of the last four months.

Now before you sell everything, let me tell you what I see unfolding. Now that big states like California, Florida and Michigan are already in a recession, both political parties are taking about stimulus programs. However, by the time any stimulus legislation arrives, it will probably be too little, too late.

The Wall Street Journal recently had an excellent article that implied that the prices in many major housing markets wouldn't bottom out until the second or third quarter of 2009. And housing problems go hand-in-hand with other problems: For instance, the bigger a state's housing problem, the more likely it is to have budget problems. Layoffs from local governments could also subtract from GDP growth. In December, the unemployment jumped from 4.7% to 5%. Since 1949, anytime the unemployment rate jumped 0.3% in a month, a recession has ensued.

So the course of the economy falls into the lap of the Federal Reserve. The good news is that Ben Bernanke has finally acknowledged the crisis. The bad news is that the Fed didn't do anything about it except to continue with its special auctions that have helped to lower the LIBOR rate a bit.

An artificially high LIBOR rate has been hindering business spending and the resets of many adjustable-rate mortgages. Until recently, the LIBOR rate refused to budge even though the Fed had already cut rates a full 1%. The higher LIBOR rate implies that banks simply don't trust each other.

So what can the Fed do now?

Well, if I were on the Fed, I would have already cut rates at an emergency meeting in January. But since the Fed has decided to wait until their meeting on January 29 and 30, they now must cut rates 0.5% at their meeting and promise more cuts in the future. The reason why the Fed can't cut by more than 0.5% is that if the Fed panics, then the whole world will panic. The dollar is very soft as it is. If the Fed is more aggressive than Wall Street anticipates, the dollar could go into a tailspin, which would result in severe inflation on imported items.

If the Fed only cuts by 0.25%, then Wall Street will likely sell off. That will signal that the Fed is still well behind market rates and any recession will could deep and long. Traditionally, the Fed has kept the pump primed heading into an election, so I hope that history will repeat itself in 2008.

The good news for us is that earnings season has arrived. The market is very focused right now on stocks with superior earnings growth like the stocks I recommend in Blue Chip Growth and Emerging Growth. Typically, the vast majority of my favorite stocks handily beat Wall Street's earnings estimates, and often gap higher as traders rush to buy more shares.