The stock market is starting to feed economic fear, not just reflect it.
Stocks have fallen four weeks in a row. Some on Wall Street worry that the resulting blow to confidence, not to mention 401(k) statements, has set off a spiral of fear that could push prices even lower, cause people and businesses to pull back and tip the economy into a new recession.
"I'm nervous that fear will lead companies to stop hiring and people to stop spending," says Jim Paulsen, chief investment strategist of Wells Capital Management.
A home sales report this past week showed that more sales than usual fell apart at the last minute, which suggests plunging stocks and dismal economic news gave buyers cold feet. At least 16 percent of deals were canceled ahead of closings last month, four times the rate in May.
Beth Ann Bovino, senior economist at Standard & Poor's, says another plunge in stocks could "push us closer to the brink."
The run of bad economic news started last month when the government said the economy grew much more weakly in the first half of this year than thought. Growth, at an annual rate of 0.8 percent, was the slowest since the Great Recession ended in June 2009.
Eeconomic weakness has made investors more likely to sell stocks at the first hint that things are getting worse. Last week, they got signs aplenty.
A regional survey by the Federal Reserve said manufacturing had slowed in the mid-Atlantic states by the most in more than two years. Existing home sales fell in July for the third time in four months. Another report showed that exports from Japan had slumped for the fifth straight month. Japan is still reeling from the effects of an earthquake and tsunami in March.
The housing market, which usually helps lead an economic recovery, keeps getting worse. The plunging stock market and scary economic news won't make it any better.
"What you're seeing with the economy, on the job front -- it's scaring a lot of people," says Brian Fine, a loan manager at Mortgage Master in Rockville, Md. He says the housing market will languish until buyers and sellers feel more secure about the economy.
The news from Europe got worse, too. Fear spread that European banks, already ailing because they hold bonds of countries that are struggling with debt, were having trouble getting short-term loans to pay for day-to-day activities.
For investors, the prospect of banks scrambling for cash dredged up bad memories of the global credit freeze that hit in the fall of 2008 -- and they sold stocks.
"A negative feedback loop appears to be in the making," two economists at Morgan Stanley wrote Thursday in a widely cited report that itself seemed to beget more fear and selling. It warned that the U.S. was "dangerously close" to recession.
Investors will be on edge this week as they scrutinize new data on the economy. On Tuesday, new home sales for July are released, followed on Thursday by a weekly report on how many people are joining the unemployment line. On Friday, the government will give its second estimate of how fast the economy grew from April through June.
The most anticipated event, though, is a speech the same day by Federal Reserve Chairman Ben Bernanke at a retreat in Jackson Hole, Wyo.
Investors hope Bernanke will announce, or at least preview, further steps to help the economy. But economists say it is unlikely Bernanke will unveil anything ambitious.