If Las Vegas is taking bets on the chances the U.S. will succumb to another recession, its likely new data released on Thursday would tilt the odds more in favor of the double-dip camp.

Its clear Wall Street is shifting its own bets further away from the continued sluggish growth scenario: the Dow Jones Industrial Average plummeted roughly 500 points in afternoon trading. 

While fear of a double-dip recession has likely never been higher during the rocky recovery, economists still largely believe the U.S. will continue to see anemic growth but stave off two consecutive quarters of contraction.

Thats not to say the chances of another recession havent increased. They have risen dramatically given scary stock market plunges, Europes worsening debt mess and Washingtons political failures. Now economists are very concerned the gloomy mood around the world caused will ultimately become a self-fulfilling prophesy.

Even if conditions themselves arent that horrible, if sentiment gets bad enough, they could turn mediocre economic fundamentals into negative ones, said Josh Feinman, global chief economist at DB Advisors, Deutsche Banks institutional asset management arm.

First Hint of Contraction?

The latest economic scare arrived at 10 a.m. ET on Thursday care of the Philly Fed, which said its business conditions index plummeted to an alarming -30.7 level in August. That marks the lowest level since March 2009, a dramatic decline from Julys 3.2 reading and was not even remotely close to the 3.7 print economists had forecasted.

The Philly Fed was just a brutal number. This could be the first indicator we have that the economy is moving into negative growth territory, Bob Auwaerter, who manages $600 billion in money market and bond assets at Vanguard, told FOX Business.

There were no bright spots in this scary report, which measures factory activity in the mid-Atlantic region. New orders slumped to -26.8 from 0.1 in July and, most concerning, six-month business conditions hit 1.4, down from 23.7 and the weakest level since November 2008.

According to Barclays economic analyst Peter Newland, a Philly Fed reading below -20 is rare outside of recessions. In a note, Newland said, Without a strong rebound in the coming months, this will be taken as a very worrying development for policymakers.

Other data also released Thursday showed inflation ticked higher and existing home sales declined 3.5% in July to the lowest level of the year, underscoring the depressed state of the critical housing market.

Even before those figures were released, economists at Goldman Sachs downgraded their U.S. economic forecast and Morgan Stanley warned the U.S. and Europe are dangerously close to recession. 

Not Falling Off a Cliff

Despite the gloom and doom picture painted by the Philly Fed report, economists point to hard data released about the third quarter that paint a less pessimistic scenario.

For example, retail sales jumped 0.5% to $390.4 billion in July, the best performance since March. Excluding auto and gasoline, sales rose to a better-than-expected 0.3%.  The government also said industrial production climbed 0.9% in July, outperforming forecasts for a rise of 0.5%.

Likewise, initial jobless claims dipped below the 400,000 level last week for the first time since April. Of course, that proved to be short-lived as they jumped to 408,000 this week, but the four-week moving average still slipped to mid-April territory.

Looking at fundamentals, you have reason to believe this economy is not in free fall. It does not feel like October 2008. said Adolfo Laurenti, senior economist at Mesirow Financial. I think economic conditions may not be as bad as the perception at this moment in time.

Its important to remember that a double-dip recession is not the so-called baseline scenario by most economists -- yet.

For example, 39 economists surveyed by USA Today from August 3 to August 11 put the chances of a second recession at 30%. While thats twice as high as three months ago, it is still considered unlikely.

Similarly, three economists polled by FOX Business in the wake of Thursdays ugly data believe the odds of a double dip are between one in four and one in three.

It has gone up dramatically, but were still not expecting a double-dip at this point, said Gus Faucher, director of macroeconomics at Moodys Analytics, which sees a 33% chance, up from just 15% a few months ago. I think weve got an economy that is expanding and creating jobs. I think we will see an acceleration of growth in 2012.

Feinman predicts a 25% to 33% chance of a double-dip, a level that he says is uncomfortably high and well above his single-digit forecast from early this year.

Self-Fulfilling Prophecy?

Of course, few people believe the U.S. will grow at anything close to the rate a large economy should after a deep downturn. Goldman expects gross domestic product growth of just 2% through the first quarter of 2012 -- a tepid expansion that will actually increase the unemployment rate.

The problem is that the U.S. economy is growing so slowly -- GDP rose just 0.4% in the first quarter and 1.3% in the second -- that it could be shoved into reverse by a shock to the system or extremely negative sentiment.

Already, U.S. consumer sentiment plummeted in August to the lowest level since 1980 and stock markets have been struck by enormous turbulence unseen since the 2008 crisis. Cash is fleeing risky assets for the relative safety of bonds -- the yield on the 10-year Treasury bill briefly tumbled below 2% for the first time ever on Thursday.

When you have an economy that doesnt have a lot of momentum, it doesnt take a whole lot of retrenchment to tip you over, said Feinman.

Faucher believes some of the recent negative indicators may reflect an overreaction to events of the last few weeks. He points to the paralyzing debate over raising the U.S. debt ceiling, the downgrade of the U.S. credit rating by Standard & Poors and scary drops on the Dow.

Overreaction or not, the bearish feelings could still be enough to cause a contraction if consumers sharply cut back on spending and employers begin slashing payrolls and scrapping expansion.

Both optimistic and bearish camps are worried about how painful a double-dip recession would be because the U.S. has not fully recovered from the last downturn and help from the Federal Reserve and Congress does not seem to be on the way.

We reduced our portfolio risk two weeks ago in anticipation of a downturn, said Jack Ablin, chief investment officer at Chicago-based Harris Bank. Our concern is that without central government support, this could be a little harsher than previous downturns.

Feinman echoed that sentiment, saying, It would be just horrible. Its one thing to enter a recession when the unemployment rate is just 4% or 5%. Its a whole other thing when the unemployment rate is at 9%.

Home prices have already plummeted back to 2002 levels and many Americans have yet to recover from the drubbing their 401(k)s took during the financial crisis.

For many people, this would be a double-whammy without ever offering a respite in between, said Laurenti.

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