The odds are that the U.S. will slip into a recession, but the depth of the economic downturn will hinge on where housing prices go and the level of mortgage defaults, said Martin Feldstein, a Harvard University professor and president of the National Bureau of Economic Research.
In an interview on CNBC, Feldstein said the chances of a recession have decreased in the past month, but "the odds are we will slide into a recession."
"In the last month, I would say (the case for a recession) has been decreasing, but if you compare where the economy was at the end of March...there's no question, the economy is down by just about every measure."
Although the economy grew slightly in the first quarter, according to the latest government data, some economists think the US is already in a recession.
Feldstein's comments gave weight to the view that while the US may be suffering a downturn, it may not be be as bad as many feared, partly because the Federal Reserve has cut rates so aggressively.
The National Bureau of Economic Research, which Feldstein heads, is considered the official arbiter of whether the economy is in a recession. Although a recession is generally defined as two consecutive quarters of negative economic growth, the bureau does not use the gross domestic product, or GDP, in determining a recession and usually makes the call after the recession is over.
Feldstein said it's still possible that the economy will flatten out in the next few quarters, but he remains worried that home prices will spiral downward, falling much more than the prices need to in order to correct the housing market. If this causes a big increase in the number of defaults, and ultimately in foreclosures, the economy could be pushed into "a significant recession."
"We saw house prices overshoot by 60 percent relative to costs of building, relative to rents," he said. "I worry about the possibility that they will keep falling, they will spiral downwards. In the same way that they went much too high, they could go much too low, and if that happens, then we're going to see individuals feeling a lot poorer, cutting back on their spending, defaulting on mortgages, and we're going to see the holders of those mortgages see their assets, their capital being cut, and therefore their ability to make loans being cut."
Feldstein also said it's too soon to know what impact the tax rebate checks will have on the economy.
In addition, he said, a potential suspension of federal gas taxes would only provide temporary relief to the consumer.
"The beneficiaries will, at least in part, be the people who are oil producers and not the American consumer," Feldstein said.
As for the Fed, Feldstein doesn't expect the Federal Reserve can do much more to help the current situation.
"They've used up half their balance sheet setting up credit lines to take on questionable credit from the banks and from the securities firms; they've brought interest rates down to a point where we have negative real Fed Funds rates; so I think policy now shifts to the Administration and the Congress, if we're going to put a floor under these house prices," he said.