It's time to push the panic button on the global economy

After a summer of mostly good news about the American economy, observers and financial markets are suddenly in a renewed state of panic this October. The fall started out looking nice with oil prices falling globally, which is normally a good sign for the typical American consumer and the broader American economy. But it's dangerous to try to draw conclusions from the movement of a single price. As the broader context has become clearer, the message sent by the price of oil's drop has started to look more and more alarming. Then this morning came some distressing new economic data from the Census department that sent bond yields plunging, a typical sign of recession fears.

Here's why people are suddenly worried about the health of the economy.

Stock prices are falling

(Google Finance)

One simple indicator is that after a long bull market run, the US stock market has collapsed and given back all its 2014 gains over the past few weeks. Stock prices are often over-emphasized in economics writing relative to their modest importance for the financial welfare of the typical American family. But when you're trying to understand commodity price movements, it's important to look at stock prices. If falling oil prices were primarily a sign that we're entering a new era of energy abundance, you would expect to see share prices rise. When shares and oil slump at the same time, it's an indicator that financial markets are expecting weaker demand.

Inflation expectations are tumbling

(Treasury Department)

This chart shows the difference in the interest rate on an inflation-protected 10-year Treasury bond and a 10-year Treasury bond that carries no inflation protection. It's a gauge, in other words, of the market price of inflation protection. That price has started falling sharply, an indication that investors have sharply revised downward the amount of inflation they are expecting.

Reduced inflation expectations are a natural consequence of falling commodity prices. But there's a twist. The old inflation expectations were not very high — there was no inflation problem. And here, again, the stock market experience is relevant. If investors thought inflation was likely to fall due to a massive new innovative boom you would expect them to bid the price of stocks up. Instead, stocks have been cratering — a sign that this decline in inflation expectations is probably in anticipation of a collapse in demand.

The global picture is a disaster

Angela Merkel with Vietnamese Prime Minister Nguyen Tan Dung (Sean Gallup/Getty)

On Tuesday, the Eurozone reported that industrial production in Europe had fallen 1.9 percent over the past year. Even the German economy is struggling, leading to fears that the Eurozone will fall into a third post-crisis recession. Since the Eurozone never addressed the underlying problems that led to its last crisis, a new European downturn could plunge the world into another round of big financial scares.

The difference is that this time around the Chinese economy is also slowing, as is Russia's, as is Brazil's. It's basically bad news everywhere.

US retail sales just fell

(Census Bureau)

In theory, the American economy could keep growing even while other countries lapse into the recession. The falling stock market could be a red herring — markets go up and markets go down, and our stock prices have been rising for a while. But people got really spooked when the Census Bureau reported Wednesday morning that retail sales in the United States fell in September.

One month's worth of bad data shouldn't necessarily cause a panic, but in light of all the other trends it's alarming. In particular, one would want to see that consumers who are spending less on gasoline and other energy products are pouring at least some of their savings into buying other stuff. Instead, the September report appears to show consumers pulling back across the board — even as demand from abroad is clearly falling apart. Just when it looked like hiring was poised to take off, demand for goods and services is slumping instead. A very troubling sign for an economy that, despite recent good news, is still on the weak side.

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