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Double-dip recession: Could it be a 'sell-fulfilling' prophecy?

A nosedive in stock prices doesn't mean a double-dip recession is inevitable. But investor sell-off could hurt an already weak economy by dampening consumer and business spirits.

Passersby are reflected at an index board inside the Athens stock exchange, August 9. The global economy stumbled deeper into crisis as stock markets slumped further on Wednesday, with investors losing confidence that the United States and Europe can rein in their debt burdens quickly and avert a double-dip recession.

Yiorgos Karahalis / Reuters

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Financial markets took another rough ride Wednesday, amplifying concerns that the US economy could be embarking on a "double dip" back into recession.

Policy signals from the Federal Reserve had helped to ease investor fears a day earlier. But by late Wednesday, the Dow Jones Industrial Average was down over 350 points for the day, moving below the 11,000 level.

Although several factors have set investors on edge, the most basic is concern about whether the economy will grow or veer into another recession. The answer will have big implications for American jobs and incomes, as well as corporate share prices.

So is a double dip arriving?

It's very hard to tell, especially considering the tepid pace of recent economic growth. Forecasters have a far-from-perfect track record in seeing turning points, and distinguishing a temporary slowdown from a slide into recession.

What's clear, though, is that forecasters see a higher risk of recession than they did just a couple of months ago. Many say the risk is substantial – a 25 to 50 percent chance.

And if stock prices fall further, that itself could increase the likelihood of a double dip. Weak stock prices make it harder for companies to finance new ventures, and sagging account balances can dampen consumer confidence. In that sense, what might be called a "sell-fulfilling" prophecy is possible, in which investors, selling in fear of an economic slowdown, help make one happen.

Growth in gross domestic product has cooled markedly so far this year. America was posting GDP growth near a 4 percent annual rate at the start of 2010. That dwindled to barely 2 percent by year end, and just 0.4 percent and 1.3 percent in the first two quarters of 2011.

"Every time real GDP growth has decelerated to less than 2 percent on a year-to-year basis the economy has either already been in recession or fallen into one within a year," economist Mark Vitner of Wells Fargo wrote in a recent analysis, citing 11 instances since 1950. "The record is not very comforting."

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