Fears that the United States is "one shock away" from another recession and that major banks are headed for deep troubles are rocking global markets again.
After a respite of a few days, stocks plunged Thursday as economic readings from the United States added to concerns that European leaders and banks won't be able to fend off a continent-wide crisis. Some commodities and currencies also sank, while the heightened dread sent gold prices to a fresh record and fuelled a rally in U.S. Treasuries, pushing yields to record lows.
While not all of the most recent economic indicators have been weak, the jumpiness of investors highlights just how much they doubt the ability of politicians and central banks to keep the global recovery on track. It isn't yet clear whether those fears are well founded or could themselves trigger a second slump.
Thursday's market swoon sent the Dow Jones industrial average down almost 420 points, or 3.7 per cent, while the S&P 500 shed 4.5 per cent and Toronto's S&P/TSX composite 3.1 per cent.
"There are some conflicting signs, but the risk that we're in recession is much higher than we'd like," said Jay Feldman, director of economics at Credit Suisse in New York, referring to the slowing U.S. economy. "We're close to it, we're maybe one shock away."
There have been worse days for markets since Washington's cherished triple-A credit rating was downgraded by Standard & Poor's on Aug. 5, sparking a bout of turmoil. And much of Thursday's panic-like selling followed a report from the Federal Reserve Bank of Philadelphia that showed manufacturing in the mid-Atlantic region contracted last month by the most in two years, an omen only if it points to a national trend.
But the response to a second-tier, regional indicator shows investors are on high alert for the slightest hint of a double-dip.
Other U.S. reports Thursday weren't much worse than expected. Sales of existing homes fell 3.5 per cent in July from the previous month, according to the National Association of Realtors. And first-time claims for jobless benefits rose by 9,000 last week, pushing them back above 400,000, though the four-week moving average fell for the seventh consecutive time.
Other readings promise more volatility. Next Tuesday, markets will get the latest data on sales of new homes in the U.S., which are still pressured by a glut of excess houses on the market.
"We are still working through the distressed properties, short sells, foreclosures, that sort of thing," said Angie Trigueiro, real estate broker for a small brokerage Titan Real Estate in Bakersfield, Calif. "We still have another couple of years to work through."
Next Friday, the U.S. government will publish another estimate of economic growth figures for a second quarter that by just about any measure was miserable.
The gloom is extending to vehicle sales, one of the bright spots in the recovery and a bellwether for U.S. industry, as well as for Canadian manufacturers. Consulting firm J.D. Power and Associates cut its forecast for U.S. auto sales to 12.6 million vehicles this year from a previous forecast of 12.9 million, and sliced its 2012 outlook to 14.1 million from 14.7 million.
"While it is not time to hit the panic button, it is clear that ascending from the recession is proving to be just as bumpy as the decline into it," said John Humphrey, the firm's senior vice-president of automotive operations.
One influential member of Federal Reserve chairman Ben Bernanke's policy-setting team – vice-chairman William Dudley – attempted to calm markets, telling an audience in Newark, N.J., that policy makers expect the U.S. recovery to stay afloat on the strength of "significantly firmer" second-half growth. The chances of another recession are "quite low," Mr. Dudley said, according to an account by Bloomberg News.
And not all investors are racing for the exits.
David Baskin, president of Baskin Financial Services Inc., a boutique investment counsel in Toronto, said anyone following the U.S. rebound should not be surprised that a number of "structural" impediments are preventing robust economic growth.
For instance, he noted that the overhang of foreclosed homes is only now starting to shrink. In addition, he said, companies have little incentive to add workers because consumer demand is flat and low borrowing costs make it easier to invest in new capital instead, especially when many of the millions who are unemployed don't have the right skills for the few jobs on offer.
"Growth is going to be slow and hard to come by while you work through these structural issues," he said. "I'm not panicked. I'm kind of bemused by the level of panic."
Still, a crucial question in the coming weeks will be whether there are enough investors like Mr. Baskin to keep a climate of fear from becoming a self-fulfilling prophecy.
Mr. Feldman and other economists are quick to point out that if another recession were to happen, it is unlikely to be as severe as the one that has been so difficult to leave behind. Indeed, part of the reason the U.S. jobs market has barely started to recover is that companies are hoarding cash, giving them a buffer should things go south.
With files from reporters Greg Keenan and May Jeong in Toronto