A year ago, corporate chiefs in Georgia and elsewhere could look back on almost six years of steady economic growth and a nearly 5-year-long bull market on Wall Street. Little did they know this would end in the second half of 2007.

Now, as mid-2008 approaches, the 15th annual Georgia 100 Best of Business report goes to press amidst a troubled economy and a nervous stock market, shaken by a punctured housing bubble and a virtual credit freeze resulting from the meltdown in the subprime mortgage market.

Executives of Georgia-based public corporations, like their peers elsewhere, are confronted by the most serious business threat since 2001 — the return of the dreaded R-word.

To be sure, the Federal Reserve's rapid and extraordinary response to the crisis in financial markets appears to have averted a worst-case scenario. But concerns remain that the first economic boom of the new millennium, and the first bull market in stocks, have indeed ended, perhaps for years.

On Main Street, the economy has moved to the top of most people's worry list in a presidential election year, ahead of the war in Iraq, health care and illegal immigrants. With oil prices at record highs and food costs rising, consumers are deeply concerned about the safety of their jobs.

Prolonged slow growth ahead?

In this atmosphere, some economists warn of a grave threat. But others take heart at recent data suggesting the economy may have muddled through the worst part of the crisis, only to head into a prolonged period of slow growth — 1 percent to 1.5 percent instead of the 3 percent historic trend line.

"The question right now is which of the three types of economic recoveries we will have," said Phil Larkins, senior portfolio manager for Northern Trust in Atlanta. "The 'V-shaped' recovery comes with strong growth, which is not probable. With the 'U-shaped' recovery, there is discernible but not rapid growth, not as rapid as with V. And the 'L-shaped' recovery is where you limp along for an extended period. It looks like we will limp along."

A big problem is that the housing crisis has not ended and may not bottom out for another year, suggesting a lengthy period of bad news about home prices, foreclosures and mortgages.

Atlanta financial adviser Dorsey Farr said the housing industry is experiencing "a necessary decline — the product of years of overinvestment in residential real estate and excessive growth in house prices — and consumers are caught between high debt burdens and insufficient savings."

"The negative wealth effect resulting from the decline in house prices will lead to some belt-tightening by U.S. households, which could send the aggregate economy into recession," added Farr, a principal in French Wolf Farr.

Many Georgia corporations probably thought a recession was already under way as 2007 ended. Almost any company related to residential real estate took a hit.

Shares of Beazer Homes USA, an Atlanta-based builder of midlevel and move-up dwellings in the South and Midwest, plummeted 82 percent in 2007 as investors responded to slower home sales and falling prices.

BlueLinx Holdings, which distributes plywood and other construction materials, experienced a 62 percent drop in share price.

Investors in Georgia's financial sector were hit just as hard as profits fell and losses mounted. Shares of the state's largest banks, SunTrust Banks and Synovus Financial, fell 26 percent and 22 percent, respectively. Returns for Georgia's many local and community banks were even worse.

Among last year's winners were companies situated in expanding markets. A farm boom, for example, helped Duluth-based farm equipment maker AGCO post a 120 percent rise in share price. Technology also produced some winners, as did industries that tend to be immune to recessions, such as health care and insurance.

Trouble on the bottom line

As a group, this year's Georgia 100 companies showed the evidence of an increasingly troubled economy last year:

• While 84 percent of the companies recorded revenue gains, just under half — 47 percent — reported year-over-year decreases in fiscal 2007 net income.

• The downturn in the stock market was especially damaging. Only 44 percent of the companies posted positive total returns in calendar 2007.

• So far in 2008, the stock market has recovered but has also been highly volatile, and the shares of many Georgia-based companies have been in the red much of the time.

The first hint that something was wrong in financial markets occurred just over a year ago, at two hedge funds operated by Bear Stearns, the investment bank that eventually paid $3.2 billion to settle an issue involving subprime, or high-risk, mortgages.

Then a $900 million hedge fund based in London failed, followed by German and Swiss bank disclosures of large write-offs. It was soon clear that the subprime problem was bigger than originally thought, as the crisis spread to other financial sectors.

Banks, especially, appeared to be in trouble and clamped down on credit after taking large losses on their subprime mortgage investments.

Bonds based on subprime mortgages rapidly lost value, and banks holding those bonds lost billions of dollars. In acts of self-defense, the banks put the brakes on credit, which had a negative impact on the broader economy.

The Federal Reserve responded to the growing crisis in stages. On Sept. 18, the Fed rushed to lower its federal funds, or short-term, interest rate by an uncommonly big half-point, followed by a quarter-point cut in October.

But large third-quarter losses by the likes of Citigroup and Merrill Lynch made it clear by the end of 2007 that the world's financial and investment markets had a collective case of jitters.

On balance, however, Wall Street has defied the doomsayers with healthy rallies. Despite a weak fourth quarter, momentum from earlier in the year enabled the market to end 2007 on the upside.

The Dow Jones industrial average, which closed 2007 with a gain of 6.4 percent, has risen in 2008; the broader Standard & Poor's 500-stock index, up just 3.5 percent in 2007, has risen this year as well.

The tech sector turned in the best performance in 2007, reflected in the 9.8 percent advance in the tech-weighted Nasdaq composite index — which is up in 2008.

It was the stocks of smaller companies that were hit hardest in 2007. The Russell 2000 index of small stocks declined 2.7 percent, another barometer of investor worry.

According to analysts, the stock market's surprisingly strong showing is a response to the decisive, if controversial, moves by the Fed and the Treasury to bolster the U.S. financial markets — moves described as among the most important since the Great Depression.

Emergency measures included the Fed's rescue of the Bear Stearns investment bank and the spread of Fed assistance to the investment banking market for the first time. Analysts have also been encouraged by some recent statistics suggesting that the credit markets may be loosening.

"Two months ago, investors were frozen in the headlights and not doing anything but buying Treasury bills," Larkins noted. "Now the yields have gone up, which means they are more positive."

According to Larkins, the liquidity problem has become "less restrictive" and the Fed's actions in defense of the markets "have encouraged investors to become a little more proactive in taking more risks."

As Georgia State University economist Rajeev Dhawan sees it, much depends on "the mind-set," or perception, of the lenders — and "the ball is in the lenders' court."

"This expectation is the key to the whole credit problem," said Dhawan. "At present, lenders are more worried about potential future losses, not just what they have written off. Consequently, they will be super-cautious in their new lending decisions affecting growth prospects longer than expected."

Nevertheless, Dhawan remains cautiously optimistic that the nation will begin to see some light at the end of the tunnel by mid-2009.

"Bad debt will get written down and work its way through the balance sheet of the system, and Fed rate cuts will help in this process by providing liquidity to undertake the write-downs," he said. "Now, the only solution is time."

Meanwhile, economists have tried to make sense of the year-old financial crisis, which has kept market watchers in a state of anxiety.

"We will look back on this as the most challenging period since the Great Depression," said Jeremy Payne, senior vice president at Capital IQ, a Standard & Poor's company. "There was a massive credit expansion in this country that was run up since 1982. We had the most impressive bull market in financial securities the world has seen. We are at the end of that bull market."

In a recent speech, Fed Chairman Ben Bernanke described the financial crisis as the outcome of an otherwise sound financial system gone awry.

He said the use of securities designed to spread risks and enhance market activity proved not to be immune to mismanagement.

"First, at the point of [mortgage loan] origination, underwriting standards became increasingly compromised in recent years," said Bernanke, citing especially subprime mortgages.

He said the revenue earned by institutions making subprime loans was "often tied to loan volume rather than to the quality of the underlying credits." At the same time, the subprime mortgage problem was disguised for a time by rising home values that enabled borrowers to refinance their loans.

"Because subprime loans were frequently securitized and incorporated into complex structured products, the resulting losses spread throughout the financial system," Bernanke said.

Charles R. Morris, a lawyer, former banker and author, estimates that by the time all the losses are tallied from mortgages and corporate loans and credit cards, the damage will reach $1 trillion. That's also the title of his new book, "The Trillion Dollar Meltdown."

"Very big, very complex, very opaque [financial] structures built on extremely rickety foundations are a recipe for collapse," Morris writes.

Economists who believe U.S. economic fundamentals are still strong are basically optimistic, but they recognize that troubles still lie ahead.

For one thing, the housing slump is not over, forecasters say. Housing starts are expected to dip below 1 million dwellings in 2008, before gradually recovering to 1.2 million by 2010.

And clearly, consumer spending and sentiment will be major factors going forward, especially with gasoline selling well above $100 per barrel and nearly $4 per gallon at the gas pump.

Investors, meanwhile, are concerned that cutbacks in consumer spending will ultimately hurt corporate profit growth, which had been on a record-setting trend through most of 2007.

Experts will continue to struggle for solutions.

The economy is beginning to be the central focus of the presidential campaign and will likely become more so.

And while it's not likely that any of the presidential candidates will resurrect President Bill Clinton's famous campaign slogan in 1992, talk show hosts, the media and Internet bloggers almost certainly will remind voters that "It's the economy, stupid!"