"There's a concern that we could fall into recession" because of weak home and auto sales, said Jim W. Paulsen, chief investment strategist at Wells Capital Management, a wholly owned subsidiary of Wells Fargo Bank.

But Paulsen, who made 2007 market and economic predictions during a Wells Capital luncheon this week at the Four Seasons, said the slumps have reached their worst.

And because contracting home and auto sales are only 9 percent of real gross domestic product - with housing making up 5 percent and autos 4 percent - the forecast isn't so bad.

The remaining 91 percent of the economy is still growing, Paulsen said.

"The rest of the economy is still in pretty good shape," he said.

But still, economists worry the slowdown in housing and autos could drag down that other 91 percent of the economy.

"The odds are, most of the damage is behind us," said Paulsen, adding that the housing and auto markets need not grow during 2007 to keep the economy humming, but only cease contracting.

Paulsen also pointed to the continued growth of the commercial real estate market during 2006 - despite a slowing on the residential side - as an indicator that there is no major housing market crisis to come.

Typically, a housing market collapse is due to rising interest rates, but rates are currently near 40-year lows.

"How can interest rates be oppressive for residential but not commercial?" Paulsen asked. "Housing has fallen under its own weight of great success.

"Demand hasn't changed; supply was merely too large."

Last year residential real estate was a $700 billion industry, and commercial real estate generated $650 billion.

This year the commercial real estate market has remained the same, and the residential market brought in $600 billion.

"In the past we've killed off both those markets at once," Paulsen said.

He said it would be a unique event in American economics if interest rates stayed low and the real estate market still collapsed.

Also, Paulsen said liquidity is rising faster than GDP growth, meaning companies are making more off workers than ever before and spending money, too.

And there's no need for concern due to falling bond yields, Paulsen said, which have gone up and down five times since the economic recovery in 2003.

The U.S. also saw 2.3 million new jobs created in 2006, and consumer spending was strong.

On a global scale, emerging economies are looking particularly robust, and Paulsen said they may be pulling the U.S. out of a slump rather than the other way around for the first time in history.

Emerging markets currently make up 51 percent of global GDP. By 2025 they will account for 66 percent of global GDP.

"The U.S. is losing its leadership position," Paulsen said, which makes people "feel bad."

But he said the growth of emerging economies is actually a good thing for America, which needs new middle classes to consume its goods.

"In a decade, we will have gone from where the U.S. was the only consumer market," to creating consumer markets all over the world in former developing nations, Paulsen said. "We're going to start getting this back. In the end we're going to be glad we ran 15 years of trade deficits."