May 9 (Bloomberg) -- Josef Ackermann, chief executive officer of Deutsche Bank AG, summed up the debate over the global economy at a meeting I recently attended: It's either the beginning of the end or the end of the beginning.

In taking stock of the economic slowdown, most economists have their eyes on the U.S. residential housing market. Many of those expecting further declines are focused on rising foreclosures and falling home prices, which according to the S&P/Case-Shiller Composite-20 City Home Price Index are down 12.7 percent from a year earlier.

With a 10-month supply of existing homes and an 11-month supply of new homes on the market, the housing bears see little stabilization in sight. Those predicting a rebound this year point to the plunge in housing starts to 947,000 as of March, down from a peak of 2.29 million in January 2006. Amid this decline, they see inventories being whittled down enough to suggest that we may have a rise in new building by year-end.

A piece of the puzzle that must be calculated into any determination of the depth of our economic doldrums is the condition of commercial real estate -- the shopping malls, hotels, and office buildings that tend to go along with real- estate expansions.

Until recently, commercial real estate was a bright spot in the economy, serving as a buffer against the declining housing market. While residential investment plummeted 28.9 percent from the start of 2006 through the end of 2007, investment in nonresidential structures grew 24.9 percent over this period.

Offsetting Housing

At the same time that residential investment subtracted almost a full percentage point of gross domestic product growth in 2007, investment in nonresidential structures was adding 0.4 percentage point back. And while the delinquencies on residential mortgages have been on the rise since the first quarter of 2006, delinquencies on commercial mortgage bonds reached a record low of just 0.27 percent this January, according to Fitch Ratings.

Whether we are at the end of the beginning or at the beginning of the end may rest partly on whether commercial real estate can avoid a big slump. While the direst predictions of New York University economist Nouriel Roubini have not yet come to pass, there are reasons for concern.

First, commercial real estate tends to lag behind housing trends. The residents of new developments need stores to shop in and offices to work in, so commercial projects are planned after a town starts booming and are completed in the following quarters. So when times are good for housing, commercial property makes the real-estate investment news even better.

In Reverse

Unfortunately, the reverse also seems to work. With 312,000 private-sector jobs lost in the last four months, foreclosure rates more than double what they were a year before, and the homeowner vacancy rate at a record high, it's easy to see why commercial construction projects are losing their appeal.

Second, there are lots of reasons to suspect that commercial real estate was subject to some of the loose lending practices that afflicted the residential market. The Office of the Comptroller of the Currency's Survey of Credit Underwriting Practices found that whereas in 2003 just 2 percent of banks were easing their underwriting standards on commercial construction loans, by 2006 almost a third of them were relaxing.

Fitch Ratings offers evidence of such eased standards, reporting that the share of securitized commercial loans that were fully amortizing -- or structured to be paid off in full by the end of the loan period -- fell from more than 92 percent at the start of 2002 to just 13 percent by mid-2007.

Tightening Up

Now we see from the two latest Federal Reserve Senior Loan Officer Surveys that this trend is being reversed: Almost 80 percent of domestic banks are tightening their lending standards for commercial real-estate loans.

If this is deja vu then we may face double-bubble trouble for real estate and the economy.

There already are signs that the commercial real-estate market may have begun to turn south. The GDP numbers for the first quarter of 2008 show that after growing 12.4 percent in the last three months of 2007, investment in nonresidential structures declined 6.2 percent and subtracted almost a quarter percentage point from growth.

While it is true that the day after these GDP numbers came out, new spending figures on nonresidential construction suggested its drag on growth in the first quarter may have been overstated, this is hardly a sign that we are out of the woods.

Because much of the current construction received the green light several quarters ago when the economy looked healthier, the worst might still be to come.

``It is quite possible that the tighter credit conditions and economic slowdown has barely started to filter through,'' Merrill Lynch & Co. economists Sheryl King and David A. Rosenberg recently wrote. ``We have little doubt, though, that it will. In spades.''

If that is the case, the middle of the middle may be the best we can hope for.

(Gene Sperling, formerly President Bill Clinton's top economic adviser, is a Bloomberg News columnist. He is a senior fellow at the Center for American Progress and is advising Hillary Clinton in her bid for the 2008 presidential nomination. The opinions expressed are his own.)

To contact the writer of this column: Gene Sperling in Washington at gsperling@cfr.org

Last Updated: May 9, 2008 00:05 EDT