Risks of a recession rising

There are those "R" words again.

The pain from higher borrowing costs may be spreading as consumers and businesses follow investors in shying away from risk, increasing the odds of a recession.

"While there is no basis for predicting a recession right now, the risks have surely gone up," says former Treasury Secretary Lawrence Summers, now a professor at Harvard University in Cambridge, Mass. "The combination of softness in the housing sector, contractions in credit, increased uncertainty and volatility, and losses in wealth make the chances significantly greater now."

Economists at JPMorgan Chase & Co., Lehman Brothers Holdings Inc. and Merrill Lynch & Co. are among those lowering economic forecasts as the rising cost of credit prolongs the worst housing recession in 16 years. Now, two areas of the economy that have held up well so far, jobs and consumer spending, no longer appear immune to the fallout.

Already, the financial turmoil has put a dent in consumer and business confidence, according to surveys taken in August. Wal-Mart Stores Inc., the world's largest retailer, lowered its earnings forecast for this year. Financial-services companies including Atlanta-based SunTrust Banks Inc. announced plans to eliminate thousands of jobs.

Though reports show a strong start to this year's third quarter, economists will be watching this week for U.S. auto sales and August employment to see whether spending and the job market might follow housing into a slump.

"We're taking the pulse of the economy a little more frequently," says Jonathan Basile, an economist at Credit Suisse Holdings in New York. "If the spillover from the credit crunch gets into autos, it would be the second major sector to fall and would solidify a lot of the fear in the markets."

Federal Reserve Chairman Ben S. Bernanke is under pressure to cut interest rates this month after the central bank said Aug. 17 that "downside risks to growth have increased appreciably." Futures trading shows investors are betting the Fed will cut its benchmark rate at least a quarter percentage point, to 5 percent, at its Sept. 18 policy meeting.

The Fed "continues to monitor the situation and will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets," Bernanke said at the Kansas City Fed's annual symposium in Jackson Hole, Wyo., on Aug. 31.