There are many factors churning up market volatility and contributing to a frightening stock market sell-off, but chief among them is growing fear of a new recession.
With growth averaging less than 1 percent in the first half of the year, the U.S. economy is already perilously close to recession. But until the past few weeks, most economists had been forecasting a convincing pickup in the second half.
But a string of ominous economic data, showing that an already weak recovery in the U.S. may be stalling out, has led many economists to downgrade their forecasts. And now some are growing concerned that the financial market turmoil itself will further sap consumer and business confidence in a vicious cycle that will end in recession.
The growing concerns have destroyed trillions of dollars in investor wealth, taking the broad Standard & Poor's 500 down more than 16 percent in less than a month. The Dow Jones industrial average, which lost 4 percent this week, has moved more than 100 points in 10 of the past 14 sessions.
"The recent slowdown was initially blamed on the Japanese earthquake and higher oil prices," said Kevin Caron, a portfolio manager at Stifel Nicolaus."Now as we move into September, because of the disruptions we've seen in the financial markets in August, I wouldn't be surprised to see the data for September coming in weak as well."
Most economists still believe the U.S. will skirt another recession. That view is based at least in part on historic efforts by the Federal Reserve to pump money into the financial system and drive interest rates to the floor. The policy, which the Fed intends to continue for the next two years, is designed largely to offset losses to banks and households from the ruinous lending binge that brought down the housing market.
The strategy is working, New York Fed President William Dudley said Friday, who referred to a "slow convalescence" in household finances and banking system help. And a recent Fed survey confirmed that bankers are increasingly willing to lend.
But cheap, widely available credit hasn't yet produced the expected effect of boosting spending and growth.
"We have filled the gas tank; we've got lots of fuel in there," said Dallas Fed president Richard Fisher. "Someone needs to step on the pedal and engage the transmission mechanism."
Consumers and businesses are proving reluctant to do so. Last month's debt ceiling deadlock left a cloud of uncertainty and damaged confidence, especially after Standard & Poor's downgraded U.S. sovereign debt below AAA for the first time.
Over the past week, fresh reports have heightened worries that another recession may be looming. Even as mortgage rates have fallen to record lows, sales of existing homes continued to drop in July and sellers reported an uptick in contract cancellations.
Two separate regional reports showing a slowdown in manufacturing, threw cold water on hopes for one of the few sectors that has contributed to growth since the recession ended two years ago.
Big banks have responded by cutting their forecasts for growth for the second half of the year and 2012. Citigroup, JPMorgan Chase and Wells Fargo all published new, lower GDP estimates Friday. Citigroup cut 2012 growth forecast to 2.1 percent from 2.7 percent, while Wells Fargo sees growth next year of just 1.1 percent, down from a previous view of 1.9 percent.
JP Morgan Chase expects now sees GDP up just 1 percent in the fourth quarter, instead of the 2.5 percent previously forecast.
All those figures technically would avoid recession, although private-sector economists are typically highly reluctant to forecast so-called negative growth.
As growth forecasts are falling, so are hopes that the government can provide meaningful remedies with the traditional tools of fiscal and monetary policies.
President Obama has promised to unveil new proposals in early September to get the economy moving again. But the partisan gridlock in Washington will make substantial proposals all but impossible to enact before year-end, when Congress is set to vote on a deficit-cutting package worked out by a special committee of 12 legislators.
No matter what agreement is reached, consumer spending will likely take another hit early next year unless Congress extends a payroll tax cut and approves another extension of unemployment benefits. Goldman Sachs economists estimate the failure to continue those programs would cut 2012 GDP by roughly $270 billion - or about 1.7 percent. With projected growth at 1-2 percent, that in itself could be enough to tip the economy back into recession.
There also appears to be little more the Federal Reserve can do to spur growth. The central bank's recent pledge to keep short-term borrowing rates at near zero until at least mid-2013 may have made matters even worse, according to Fisher, who was among three Fed policymakers who voted against the move.
"Now you know that you can wait to borrow because the rates are going to be locked in and be locked in at very low levels for a two-year period," he said. "So one of my arguments was that this might well further retard recovery and commitment."
Going global?
This month also brought signs that the economic slowdown may be going global. European GDP barely budged in the latest quarter, as consumers there remained shaken by the continuing stalemate over debt problems and Greece, Spain and Italy.
This week, investors bailed out of European banks stocks as fears spread that some may not have enough capital to withstand losses from their government debt holdings. Those fears worsened after a meeting between French president Nicholas Sarkosy and German chancellor Angle Merkel failed to bring a hoped-for solution.
Their pledge — to work toward closer coordination of European government budgeting and borrowing — only highlighted worries that European regulators are ill-prepared to handle the failure of one or more banks.
"If there's a problem in the U.S. bank, within about a week, the (Federal Deposit Insurance Corp.) is on it, taking over the bank, taking care of everything, "said Sean Egan, president of the independent bond research firm, Egan-Jones Ratings. "You don't have to worry about it. In Europe you don't have that because of the political structure."
This month's stock market sell-off has inflicted trillions of dollars worth of losses on households, investors, pension funds, banks and other financial institutions. Those abrupt, wrenching losses add further strains to a global finance system still recovering from the Panic of 2008.
The latest panic has also left American businesses and households badly shaken. Many have been calling their brokers, and investment advisors like Carter Worth, at Oppenheimer Asset Management, with orders to "abandon ship."
"I said, 'What ship are you talking about? The ship is at the bottom of the sea here,'" he said. "This thing just collapsed. Usually you have time to get off the boat."