(FORTUNE Magazine) – It's the question that's been giving everyone a queasy feeling since Oct. 27, the day the market took ill and lost $650 billion in value. We know that one reason the U.S. economy has done so well for the past seven years is that the stock market has boomed (and vice versa, of course). But considering that the market today has fallen back to its June level, it's time to ask: What would happen to the U.S. economy if the market keeps going down?

Unfortunately, the answer is: nothing good. The real economy is far more vulnerable to the stock market today than ever before. Oh sure, the economy could shrug off a comparatively small correction, perhaps even something on the order of last month's 554-point drop. But most people wrongly shrugged off Gray Monday by recalling the conventional wisdom about the crash of 1987: that Wall Street's troubles didn't have much effect on the economy, and that the Fed quickly slashed interest rates and equity prices rebounded. The truth is that a sustained bear market could take the current economic expansion down with it.

Consider the real lessons from 1987: The region with the most investors and securities jobs--the Northeast--suffered widespread layoffs (New York City lost 20% of its securities jobs over three years), a real estate crash, and a severe economic slowdown. "It was terrible," recalls Steven James, a Manhattan manager for real estate broker Douglas Elliman. "People lost their jobs; they were forced to sell. And within weeks, everything snowballed."

At the very least, then, a true bear market could set off a regional recession. Midwesterners shouldn't feel too smug, however, because today every single region of the U.S. is more reliant on the stock market than the Northeast was in 1987. The share of American households with stock holdings has doubled, to 40%. Their average holding not only is about six times higher than the 1987 average, but is at least twice the value of the average Northeastern household's portfolio in 1987. In addition, for the first time, a significant percentage of workers are counting on stock as a part of their paychecks. And the securities industry has provided a disproportionate number of the jobs created since 1987: all 100,000 of the net new jobs created in the securities industry since 1987 have been generated outside New York City, where securities employment is still 12,000 jobs below its 1987 peak.

Thus, a bear market this time around would likely have far more serious economic repercussions, says Mark Zandi, chief economist for Regional Financial Associates. Besides a direct impact on profits and employment in the securities industry, a down market would make it more expensive for all kinds of businesses to raise the funds they need to invest and expand. Worst of all, it would curtail consumer spending, which alone accounts for two-thirds of all economic activity. Because investors change their purchasing habits according to their stock wealth, the bull market has added anywhere from $40 billion to $80 billion of consumer spending so far this year. Evaporation of the equivalent amount of wealth would reduce consumer spending by at least that much.

Then there's the psychological effect. Investors, Zandi says, are skeptical (either neurotically or correctly, depending on our view). Mistrusting gains, they spend only about 4 cents for every dollar rise in their portfolios, he estimates. In a crash, Zandi figures that the real and psychological wealth effects would be nearly twice as powerful--consumer spending might drop 7 cents for every $1 decline in stock values.

That may be optimistic. Kurt Karl, chief economist of WEFA, a Pennsylvania-based economic consulting firm, recently published a model showing that a sustained 25% correction--which would only return the S&P 500 to the level at which it started the year--would nevertheless reduce consumer confidence by about 15%. At those levels, consumer spending would drop a whopping 15 cents for every $1 decline, depressing GDP by more than $20 billion within six months.

Karl says there's a 15% likelihood of a crash-induced recession, though he thinks the Fed will come to investors' rescue as it did in 1987. But that might be overly optimistic too: Greenspan has been hinting he might not protect investors next time. He might even shrug off a crash of twice last month's severity--after all, the Dow was below 6500 when Greenspan gave his "irrational exuberance" speech.

It might not even take a bona fide bear market to slow the economy--volatility alone could be enough. Looking at data from the 1929 and 1987 crashes, Christina D. Romer, an economic historian at the University of California at Berkeley, has found that market bounces can cause consumers to cut back on large purchases. "Big movements make people nervous. Volatility matters more than level," she says. And while the stock market this year is about 80% more volatile than the average, Romer says that it is nowhere near as volatile as in the two crash years. Thus, she doesn't expect a major consumer pullback.

But consumer confidence has been dropping lately, and forecasters are scaling back expectations. Romer's research indicates that if all other things are held constant, the current level of stock volatility could reduce the output of durable goods by 5%. If she's right, even without a whiff of a crash, today's bumpy stock market could contribute to an economic slowdown.

--Kim Clark