As if Friday's jobs report wasn't bad enough, there's another worry for the markets: With more than half stimulus money chewed up, how does the economy survive without the government holding its hand?
Some $398 billion of the total $780 billion in stimulus funds have been used up through tax breaks, public works projects and a varied menu of entitlement programs aimed at dragging the US out of recession and back into prosperity.
Oh, and the stock market has benefited too. All that spending has generated revenue that in turn sent investors back into the financial markets looking for bargains, the result being a historic 70 percent rally over the course of 14 free-spending months.
So is the economy ready to take off the life preserver and swim on its own?
At least in Washington, there is doubt.
The House recently passed a watered-down additional stimulus package of tax breaks and safety-net spending that imposes new taxes on fund managers and multinational corporations. The deficit-goosing $79 billion package angered some economists who think it's time for the government to back off.
"If we keep renewing stimulus that we've applied in the past, we'll not know whether the economy is able to stand on its own," says David Resler, chief economist at Nomura Securities International in New York. "The private sector part of the economy can support continued expansion. We need to be weaned from these programs lest we find ourselves in circumstances where we're perpetually dependent on them."
About 70 percent of the stimulus is likely to be gone by the end of 2010 and rest will fade away in the ensuing two years.
Few believe that will signal the imminent demise of the stock market. Yet analysts also say the recent market correction—and expected slow grind for the markets ahead—in part reflect pricing in the end of the government intervention and the advent of a stock market with the training wheels off.
"Equity markets are supposed to be forward-looking. Prices are supposed to reflect all the information we have on hand at the moment," says Paul Dales, senior US economist at Capital Economics in Toronto. "We all know that the fiscal stimulus is going to slow over the next 12 months. So hopefully some of that is priced in."
To be sure, the current Wall Street correction is likely about more than free money coming out of the market.
But without that government safety net, analysts say investors will need to see sure signs of strength before the market can regain sustainable momentum.
"The question becomes whether the economy is strong enough to maintain momentum in growth," says Quincy Krosby, market strategist at Prudential Financial. "If we can continue to create jobs, investors will be satisfied that the economy is ready to stand on its own. But without job growth most investors are still going to invest but I don't think you're going to see the market levitate the way it did from the March 9 (2009) lows."
Most investors are increasingly worried about the ballooning budget deficit, which the nonpartisan Congressional Budget Office expects to hit $1.3 trillion by year's end. The deficit was $160 billion in 2007, the year before the financial crisis erupted.
"As long as the economy is growing at a level in which we're gaining traction and we're adding some jobs, investors will applaud the stimulus coming out," Krosby says. "If we start pulling back in terms of GDP expectations and fear takes over the markets, investors will want to see some stimulus come back in one form or another."
But that pullback may happen independent of the stimulus, says Chip Hanlon, president of Delta Global Advisors in Huntington Beach, Calif.
Hanlon says the "baked-in tax increases" coming with the expiration of the tax cuts from former President George W. Bush and expenses associated with national health care will coincide with the end of stimulus to create economic troubles.
"It wasn't a technical correction, it was a reflection correction," he says of the market's May downturn. "People were having a moment of self-reflection, and Western markets looked around the world and didn't like what they saw."
Still, many market pros think there will be a safety net for the safety net—in other words, more stimulus should the withdrawal of the current stimulus provide excessive hardship.
"Government is still able to borrow at a very low rate. If push came to shove I suspect people in the administration and Congress would try to agree on another fiscal stimulus to replace some of the original stimulus that is fading," Dales says. "If it looks like it's disastrous, you can probably bet another stimulus is around the corner."