We are just two days into 2008, and the tendency is, as it always is this time of year, to look in the rearview.

So, how did the U.S. economy fare in 2007? Well, the dollar declined 10% in the last year. Today, the greenback extended that decline, falling further against the euro (EUR) and dropping near the lowest point in three weeks against the yen (JPY).

This dollar weakness has pushed the price of gold to almost $860 this morning.

Today’s stumble for the already flailing U.S. currency followed the Institute of Supply Management reporting that the U.S. factory sector contracted in December.

MarketWatch reports: “The ISM index fell to 47.7% from 50.8% in November. Economists expected the index to slide to 50.5%. Readings under 50% indicate more manufacturing firms were contracting than were growing in December. It was the lowest reading since April 2003 and the first sub-50 reading since January 2007.

“‘Today’s release is definitely unsettling,’ wrote Stephen Stanley, Chief Economist at RBS Greenwich Capital.

“‘The real question is whether today’s data point to a brief pause in activity or a more persistent trend. It is always tough to make that call when faced with one outlier downside reading. We are inclined to wait a month and see what the January figures look like before tossing the manufacturing sector onto the trash heap,’ he added.”

The ISM index is just the tip of the iceberg. 2007, as The New York Times puts it, was not for the faint of heart. The bursting housing bubble, mortgage debt rotting the banking system, soaring energy prices, and the list goes on.

Some of the main concerns for the health of the U.S. economy are the effects that are still being felt from the bursting housing bubble. The rate of foreclosures is unheard of – even before many mortgages have reset to higher rates.

This leads many to believe that homeowners are falling behind on mortgage payments because suddenly, inexplicably, their home is worth less that it was months earlier. How could this be?

Unfortunately, we haven’t hit the bottom of the housing market quite yet. Many expect housing prices to fall by 5 or 10 percent more in 2008.

Meanwhile, unsold homes continue to sit, vacant. “2.6 percent of the nation’s housing stock is unsold,” reports The NYT. “Even in the worst years of recessions in the early 1980s and 1990s, the share of vacant homes did not exceed 1.9 percent.

So, will the U.S. economy shake this news off...like it did in 2007? That’s right, despite the volatility of the credit crunches, subprime bust, CDOs, SIVs and more billion-dollar writedowns than you can shake a stick at, 2007 will go down in the books as a “positive” year for the markets, Addison and Ian at The 5 Min. Forecast tell us.

“Benchmarks fell on Monday, the year’s last day of trading, by about 0.7%. Nevertheless, the Dow finished the year up 6.4%, the S&P 500 ended up 3.5%, and the NASDAQ reigned supreme once again, up 9.8%.

“But, the real growth in 2007 came from abroad. The FTSE All World equities index rose 10.3% last year,” they continue.

“No surprise, the Chinese market proved to be the cream of the crop... the Shanghai composite ended the year up 96%. Brazil and India took the silver and bronze, up 76% and 74% respectively, according to the FT.”

Only time will tell what 2008 will bring, but that won’t stop us from speculating.

“Either the negatives finally metastasize and drag the economy down, or a fresh source of growth emerges, helping to sustain consumer spending despite the ongoing worries about housing and tight credit,” says The New York Times.

“There are even odds of a recession,” said Mark Zandi, chief economist at Moody’s Economy.com. “It literally could go either way.”

Either way, stay tuned, dear reader. We have an interesting 12 months ahead.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.