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Two UA economists made the unhappy announcement local business leaders have been fearing Friday: We're probably already in a recession.

Marshall Vest, director of the Eller College of Management's Economic and Business Research Center, told an audience of about 750 the housing slump is driving the economic downturn.

Problems in the credit markets and high oil prices are also contributing factors, he said during an annual economic forecast held by University of Arizona researchers.

"It's unlikely that any one shock could bring the economy down," Vest said during the forecast, which was held at The Westin La Paloma Resort & Spa. But the combination of those factors is "really a serious test of the economy's resilience."

Vest expects the recession to last through 2008 and the economy not to reach full steam again until 2010, he said. He urged business leaders to keep a sharp eye on their budgets in the coming year.

The good news: He and fellow UA economist Gerald Swanson predicted the recession will likely be mild compared with past recessions.

"I'm an optimist," Vest said.

Swanson also was hopeful for a quick end to the recession but said in the interim it will be rough.

"After my talk, there will be an open bar," he quipped during a speech peppered with jokes to lighten the mood. "If anyone slits their wrists, there will be doctors on hand."

Arizona is among five states in the nation either in recession or on the verge of it, Vest said. The others are Michigan, California, Florida and Nevada, he said. For most, the primary cause was likely a boom and bust in the housing market with heavy speculation and prolific use of risky mortgages, he said.

"Things got a little crazy here during the housing bubble," Vest said in a press conference before the event. "It was a lot of fun while it lasted. Now we're suffering from a hangover."

A recession is a prolonged decline in overall economic activity, characterized by economists as two consecutive quarters of negative growth in gross domestic product.

Generally, recessions cannot be charted until after they happen because it takes time to collect data, Vest said. But indicators in the housing market and job statistics are pointing in that direction, he said.

Building-permit activity has dropped by 56 percent statewide from a peak about two years ago, he said. Industries related to housing growth, including construction and mortgage businesses, have suffered job losses in recent months.

The state's job growth rate of about 2 percent has fallen from a high of about 6 percent during the boom and is still falling, Vest said. He expects job growth to virtually halt next year. Unemployment, meanwhile, will continue to rise, he said.

Tucson could weather the slowdown somewhat better than elsewhere in the state, particularly Phoenix, because the housing boom wasn't as pronounced here, he said.

Still, the inventory of unsold homes is high, he said.

With more than 9,000 homes on the market, Tucson has about 12 months worth of inventory compared with about 10 months nationwide. Phoenix has about 15 months worth of inventory. In normal markets, there is about four to five months worth of inventory, Vest said.

The glut of homes on the market has led to a slowdown in construction and related employment, which has reverberated throughout the economy, Vest said.

Adding to the mix are problems with foreclosures and the tightening of the credit market, Swanson said. Consumer confidence is flagging, and rising interest rates on credit cards for some borrowers are not helping, he said.

Some forecast attendees said they were not surprised by the pronouncement of a recession for Arizona.

"I think it was very consistent with what everyone was expecting," said Lucinda Smedley, a consultant to developers and home builders. "I think everyone is anticipating that next year will be slow."

Long Realty Chairman Stephen Quinlan said he expects home prices will head downward next year and the number of real estate agents in Tucson will probably go down.

But he added that pent-up demand from prospective buyers who currently are having trouble selling homes or waiting for prices to drop might help the market turn around.

"Once the market shifts, it's going to go fast," he said.