Happy Holidays? Recession Worries Are On the Rise

The holiday season is here. A recession may not be far behind. And if you remain among the shrinking number of optimists, be warned that the next few weeks will probably decide if and when cheer gives way to doom and gloom.

“The risk of recession is very real here,” says Robert Brusca, chief economist at Fact and Opinion Economics, adding that the chances are “better than 50/50” and likely to happen around the "turn of the year.”

David J. Phillip / ASSOCIATED PRESS

As Wall Street and retailers track the latest holiday sales in microscopic detail, a parade of economic data due out in the next couple weeks will tell volumes about the economy and the Fed’s chances for achieving a soft landing.

Among the closely-watched indicators are consumer confidence (due out Tuesday),  revised thrird-quarter GDP (Thursday), personal income (Friday), the ISM index of manufacturing activity (Dec. 3),  factory orders (Dec. 5) and the mother of all economic indicators, nonfarm payrolls (Dec.7.)

Oh, and let’s not forget three reports on the dreary housing market (Tuesday, Wednesday and Thursday) and the Fed’s FOMC meeting (Dec. 11).

Reality Check for Markets

“If the entire holiday season is as weak as I expect it to be, I think there will be a reality check in the stock market,” says Nouriel Roubini, professor at NYU’s  Stern School of Business and chairman of Roubini Global Economics.

Roubini, who is calling for a recession of greater length and severity than those of 2001 and 1991, says there’s been a suckers rally in stocks because investors believe the ”Fed is going to be able to to rescue the economy.”

Roubini cites a litany of negatives, including a housing recession, contracting personal income, a weakening job market, high oil prices and, of course, a credit crunch that is "getting much worse."

Along those lines, Brusca says all the talk about the resiliency of the US economy and consumer is “getting old,” adding that “there are just too many things’ to withstand.

Many economists have cited rising incomes and a stable job market are bright spots in a darkening environment, but recent declines in the mood of the consumer are brining that into doubt.

Concern About Jobs

“With weakness like this in consumer confidence you have to have some concern about what's going on in the job market,” says Brusca, who predicts that the weekly jobless claims, which have started to trend higher, will assume “a bigger role.”

Brusca will be watching that economic series closley as well as the November nonfarm payrolls report. Brusca says anything around an increase of 100,000 – what he calls “kind of break even” – should allay most concerns about the job market.

Not for Roubini, who expects job creation to be well below 100,.000.

“The job market is much weaker than the headline numbers suggest,” he says.

When it comes to the economy these days,  even the most optimistic don’t sound too positive. Take Jim Awad, vice chairman of WP Stewart Asset Management, for example.

“We will flirt with recession based on continuing problems in the financial sector,” he says. “In many sectors it will feel like a recession, but it won't be a recession.”

Awad is among the consensus in expecting growth of 1.0 percent to 1.5 percent in the fourth quarter, but says the “big important, glaring risk” is more writedowns.

He doesn’t expect the forthcoming economic data to “change the mosaic,” adding that investors have a “predisposition to look at things through rose-colored glasses” at this time of year.

Trade Is Saving Grace

The saving grace will be trade because of strong exports generated by the weak dollar, so Awad suggests investors look at multi-national, growth companies that are capitalizing on that.

Few share the belief that the export sector alone can keep the economy out of recession, offsetting a weakening consumer sector and the already battered housing and real estate industries.

Sam Stovall, chief investment strategist at Standard & Poor’s, points out that every recession since 1960 has been marked by a year-over-year decline in housing.  “There's an awful lot of uncertainty about the consumer, ” says Stovall.

Stovall, whose firm sees a 40-percent chance for a recession, playfully ads that he sees a “Charmin” economy, meaning “softness ahead but no recessionary squeeze.”

Stovall expects more volatility than is usual and says the key for the markets is the S&P 500 holding its October low.

“Volatility is probably one of the only certainties out there,” he says.

© 2009 CNBC.com