Back down into recession or finally up toward recovery, Moody's Analytics Chief Economist Mark Zandi says the inflection point for the economy will likely occur in the coming months and before the 2012 election. Zandi said Thursday there is a 40% chance the economy will slide back into recession within the next year. Real GDP during the first half of 2011 increased at nearly 1% annualized rate and job growth slowed from close to 200,000 new positions per month to barely positive at the end of the summer. "This is not sustainable. Unless spirits improve soon, businesses will ramp up layoffs, consumers will pull back and the economy will fall into another recession," Zandi said in a research note. In an interview with HousingWire Thursday, Zandi said the problems threatening the economy is a laundry list of outside and articifical forces created by the struggling economies in Europe and the "psychologically debilitating events in Washington," such as the recent debt crisis debacle and subsequent Standard & Poor's downgrade. But at its core is housing. Before a Senate subcommittee Wednesday, Zandi said the U.S. economy faces an overhang of 1.25 million vacant homes and roughly 3.5 million loans in the foreclosure process or more than 120-days delinquent. Signs of restarting foreclosures in the recent report from RealtyTrac was a good sign of progress, Zandi said. "Housing generally is a major source of growth early in recovery. Two years into a recovery housing should be a tailwind to growth and of course it's not. It's a drag. Housing is not adding to growth," Zandi said. "It's subtracting." Some monumental litigation sagas could be resolved in the coming months to help both the banks and the government-sponsored enterprises to address housing going forward. These include the servicing settlement between banks and the 50 state attorneys general and the mortgage securities lawsuits between, again, the banks and the Federal Housing Finance Agency. With the banks able to put their mortgage woes behind them, the economy might be able to move forward. "The inflection point will come sooner than later," Zandi said. "The AG, servicer has been slow and arduous, but I think it will be solved well before the next election, hopefully in the next few months. I'm hopeful the FHFA lawsuit will be resolved over the next few months. A few cases may be extended after the election and be ongoing for many, many years. But I'm hopeful that the fallout of the suit is well before then." The U.S. banking system as a whole is in reasonably good shape, he said. Many small banks will fail, and Bank of America (BAC) continues to shift businesses and executives around, but credit has been made available. Commercial and industrial loans are up as much as 6% from last year. Auto loans and small business loans are also on the rise. "I don’t think the banking system is a real problem with the economy. There is an issue of writing first mortgages but I don't think it's capital. I think it's more litigation risk and putback risk," Zandi said. Write to Jon Prior. Follow him on Twitter @JonAPrior.