(FORTUNE Magazine) – Is America headed for a recession? It better not be, because for the rest of the world, the resilient growth here and in Europe is just about all that's been keeping things from going from bad to much, much worse. The soothing party line from Wall Street's gurus, of course, has been that "supertanker America," as Goldman Sachs strategist Abby Joseph Cohen famously put it last year, will have no trouble navigating difficult global seas. The Asian depression, the Russian collapse, and the stock market's recent slide have simply taken some steam out of an economy that was in danger of overheating.

If the stock market carnage at home and economic pain abroad don't get any worse, the optimists will turn out to be right. But when Fed Chairman Alan Greenspan says that "it is just not credible that the U.S. can remain an oasis of prosperity," somehow their argument is no longer as reassuring as it used to be. If there's one truth to be gleaned from the rolling global financial crisis that began last summer, it's that however bad the situation in the world's emerging markets already looks, it can get worse. China and Latin America could finally get sucked into financial chaos; Western Europe's economies could falter under the pressure of emerging markets' panic; the Dow could drop another 1,000 points or so. If that happens, the U.S. economy may no longer be able to shrug off the world's troubles. "You can spin a story very easily for a recession, probably starting at the end of 1999," says Kurt Karl, chief economist of the forecasting firm WEFA.

Up until now America has been a bastion of economic strength in a world desperately in need of it. The current U.S. economic expansion is already the third-longest ever, and in December it should move up to No. 2 on the list. Unemployment is the lowest it has been since 1970. Consumers are spending up a storm, business investment is strong, and government finances are in their best shape in decades.

Since nobody ever really knows what the economy's going to do next, there's a lot to be said for just assuming that it's going to keep doing what it's been doing for the past 90 months--that is, growing. That's likely to be the call the Federal Reserve makes Sept. 29, when its Federal Open Market Committee meets to decide what to do about the short-term interest rates it controls. Most Fed watchers expect that it will simply do what it has done since March 1997--leave rates alone.

But there's been a fundamental change since midsummer. Back then the biggest risk to the economy was that low unemployment and high consumer demand would bring on inflation. The minutes of its early July meeting indicate that the Fed was seriously thinking about a rate increase to cool the economy. That's why financial markets used to react negatively to "good" economic data like low unemployment or high demand--they were afraid the Fed would have to crack down.

No more: Now the what-ifs bandied about by economic forecasters all show growth fizzling, not getting too strong. The economists at WEFA, for instance, have dropped their 1999 GDP forecast from 2.6% to as little as 2%. They have also constructed an alternate scenario for a 1999 recession, which they figure has a 35% chance of occurring. Standard & Poor's DRI, which is predicting 1.5% GDP growth in 1999, has a similar recession scenario.

The pessimistic scenario goes something like this: A continued slide in stock prices could dampen the "wealth effect" from stock market gains that has fueled the economy in recent years. Standard & Poor's DRI chief economist David Wyss figures the $2 trillion in stock market capitalization lost between July 17 and the end of August should translate into a $50 billion cutback in consumer spending, which would reduce GDP by about half a percent. Further market drops would cut GDP more, of course. Meanwhile, weak demand from abroad is already reducing exports--which dropped 8% in the second quarter. Exports make up only 13% of U.S. GDP, but they've been a big factor in economic growth in the 1990s. Reduced exports and weaknesses in multinationals' foreign operations also could cut into profits, and lowered profit expectations would lead corporate America to cut back on capital spending, another driver of GDP growth in recent years. Dimming prospects would also lead companies to lay off workers, further decreasing consumer spending. And weak corporate profits could bring further declines in stock prices, which...well, we've already shown what that can do to consumer spending.

Put it all together, and you could get a downward spiral into a recession. So far only a few elements of this scenario are in place--the stock market has dropped, exports are down, and corporate profits are slumping, but many other economic indicators, such as employment and manufacturers' orders, are still strong. Wyss says that what would tip the balance is more bad news from abroad--a currency devaluation in China is his chief fear.

A recession isn't the end of the world--the U.S. economy has survived 21 of them this century. But a U.S. recession coming when much of the world is mired in an outright economic depression could be messier and more prolonged than usual. Without strong demand from American consumers, Japan and other Asian countries would be even worse off. True, Western Europe, the world's other bastion of economic strength, is less susceptible to a "wealth effect" downturn than the U.S.--Germans, for example, have only 8% of their financial assets in the stock market, compared with Americans' 39%. But Western Europe is a lot closer to Russia and its imploding economy. "Russia and Eastern Europe were a rapidly expanding part of our trade," says Deutsche Bank chief economist Norbert Walter, who is cutting his 1999 GDP growth forecast for Germany from 3% to 2%.

What is perhaps most unsettling about the current recession threat is that it's so different from anything today's economic policymakers--and investors--have ever dealt with. Virtually every recession since World War II has begun like this: The U.S. economy overheats, prices begin to rise, and the Federal Reserve cracks down with an interest-rate hike. That's why economic forecasters keep a close eye on wage pressures and commodity prices, why bond traders sell at the slightest hint of inflation, and why the Fed is so obsessed with keeping the good times from getting out of hand.

Now the biggest danger is in the opposite direction--in the sort of deflationary economic spiral that devastated the U.S. in the 1930s and that won't let go of Japan in the 1990s. Unlike Japan, the U.S. has a functioning banking system, and unlike their early-1930s predecessors at the Fed, Alan Greenspan and his colleagues are ready and willing to fight market panics and deflation by throwing money at them. But they're not miracle workers. "We put far too much faith in the Fed's ability to cause problems or solve them," says monetary economist Charles Plosser, dean of the University of Rochester's Simon School of Business. "There's only a limited extent to which they can do anything about real problems, real crises."

Another concern: Policymakers may not have any time to react. A Fed interest-rate cut usually takes a year or two to work through the system. Today, economies and markets seem to be melting down practically overnight. After Thailand devalued its currency last summer, Asian stock market after stock market collapsed, bringing local economies down with them. In a matter of months, 60% of the stock market wealth in the region was wiped out. Morgan Stanley's Latin America stock index has halved in the past ten months. In August, Russia had at least a semblance of a market economy; now it has none.

Of course, markets have a remarkable way of resolving seemingly intractable economic problems. But the assumption that markets will be allowed to work their magic (with maybe a little Keynesian help here and there) is another underpinning of current economic thought that may not hold up to new realities.

For years it looked as though the world was inexorably moving toward free markets and the free flow of capital. Not anymore. In Russia the government has defaulted on its debts, and for the moment the Communist Party is calling a lot of the shots again. Malaysia, which a few years ago was the epicenter of the emerging-market investment boom, has imposed strict controls on capital flows. This drastic step was actually recommended as a temporary, limited tool by economist Paul Krugman in the pages of FORTUNE ("Saving Asia: It's Time to Get Radical," Sept. 7, 1998), but Malaysian Prime Minister Mahathir Mohamad clearly sees it as something more permanent--a rejection of the market forces that have pummeled his country. "The free-market system has failed and failed disastrously," says Mahathir. At about the same time, the supposedly laissez-faire leadership of Hong Kong spent billions buying shares to prevent further stock market declines. It's conceivable that other frustrated political leaders in Asia and elsewhere will follow these examples. Even the U.S. Congress--the same folks who in 1930 gave us the Smoot-Hawley Tariff Act--could turn against free trade if the economic situation worsens significantly here.

In sum, it's a different world out there. It's possible, even probable, that the remarkably resilient and flexible U.S. economy will survive and thrive in this new environment. But as the economic problems facing the world increasingly become political ones, it may take more than eager consumers and confident investors to fix them. Until a year ago, it seemed a good thing that the world had weak, embattled leaders who basically kept their noses out of economic affairs. Now, however, strong leadership may be what's called for. And it's mighty hard to imagine Bill Clinton, Keizo Obuchi, Helmut Kohl, Boris Yeltsin, or Jiang Zemin rising to the occasion. Hedge your bets.

WITH REPORTING BY Janet Guyon (London) and Jeremy Kahn