Levy Institute Strategic Analyses have always stressed the relevance of the linkages between conditions in financial markets and the real economy. In our last Strategic Analysis, we reported a simulation showing a high probability for a recession and an increase in unemployment in 2008, conditional on the assumption that turmoil in financial markets would slow the pace of household borrowing to more moderate levels. We projected that there would be serious consequences for aggregate demand, output, and employment. At the time of that analysis, in November 2007, most commentators still focused on financial markets, doubting that the financial upheaval that began last summer would have effects on the real economy. Subsequently, the assumed drop in household borrowing that underlay our conditional projection was borne out in actual data, and a U.S. recession is now thought by almost everyone to be a serious possibility.