A Look at U.S. Economic Data Scaring Investors

The Institute for Supply Management announced Wednesday that its service-sector index fell to 52.7% in July, down from 53.3% in June, and well below expectations the index would rise to 53.5% last month. While any reading over 50% signals that the sector is still expanding rather than contracting, the index has declined significantly since a 59.7% peak in February.

The ISM’s new orders index fell 1.9% to 51.7% in July, and the backlog of orders index fell 4.5% to 44.0%. While industry growth continues, it has slowed drastically, and the U.S. service sector accounts for three-fourths of all economic activity, and employs four out of every five U.S. workers.

The news comes in a data-rich week that had consumer spending down in June, global manufacturing slowing to a crawl in July, and unemployment levels unchanged as last month U.S. employers planned to eliminate over 60,000 jobs, a 59% year-over-year increase and an increase of 60% over June.

Former Treasury Secretary Lawrence Summers says there is a one-in-three chance that the U.S. will experience another recession. Italy’s and Spain’s sovereign debt problems are only adding to the peril, signaling that the next recession could be as widespread as the last, or even more severe, as many countries face defaulting on their obligations. Even China’s once-burgeoning economy has begun to slow, and Japan has been in its own recession since the March earthquake significantly damaged infrastructure and decreasing production for some of Japan’s largest manufacturers, including Toyota (NYSE:TM) and Honda (NYSE:HMC).

The S&P 500 (NYSE:SPY) index fell 2.5% on Tuesday, completely erasing 2011 gains. The Dow Jones Industrial (NYSE:DIA) index, while still up 1.38% in 2011, is down nearly 1,070 points off its high for the year, and has plummeted roughly 980 points since July 21. The Nasdaq Composite (NASDAQ:QQQ) remains only 0.6% above where it started the year.

Markets have been taking a beating this week, with all the major indices falling off more than 2% yesterday as investors blinded by the looming debt ceiling finally opened their eyes to the realities of the faltering U.S. economy. Asian shares followed suit, falling over 2% on Wednesday. Safe-haven investments like gold and the Swiss franc have been pushed to record highs in terms of U.S. dollars. Italian and Spanish bond yields have also risen to 14-year highs.

JPMorgan (NYSE:JPM) cut its 2012 economic growth forecast for the U.S. to 1%. Goldman Sachs (NYSE:GS) has analyzed unemployment figures dating back to 1948, finding that there is a 76% chance that the U.S. economy is either already in a recession or will be within the next six months, especially if the unemployment rate continues to rise. And Washington’s recent deal to cut spending means they have little power to buoy the flailing economy, putting pressure on the Federal Reserve to find a way of stimulating the growth, likely through a third round of quantitative easing.