For months, economists have debated whether the United States is headed toward a recession. Today, there is no doubt. President George W. Bush can tout his $150 billion economic stimulus package, and the Federal Reserve can continue to cut short-term interest rates in an effort to goose consumer spending. But those moves are unlikely to stop the economy's slide. The severe liquidity and credit crunch from the subprime mortgage bust is now spreading to broader credit markets, $100 barrels of oil are squeezing consumers, and unemployment continues to climb. And with the housing market melting down, empty-pocketed Americans can no longer use their homes as ATMs to fund their shopping sprees. It's time to face the truth -- the U.S. economy is no longer merely battling a touch of the flu; it's now in the early stages of a painful and persistent bout of pneumonia.

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Meanwhile, other countries are watching anxiously, hoping they don't get sick, too. In recent years, the global economy has been unbalanced, with Americans spending more than they earn and the country running massive external deficits. When the subprime mortgage crisis first hit headlines last year, observers hoped that the rest of the world had enough growth momentum and domestic demand to gird itself from the U.S. slowdown. But making up for slowing U.S. demand will be difficult, if not impossible. American consumers spend about $9 trillion a year. Compare that to Chinese consumers, who spend roughly $1 trillion a year, or Indian consumers, who spend only about $600 billion. Even in wealthy European and Japanese households, low income growth and insecurities about the global economy have caused consumers to save rather than spend. Meanwhile, countries such as China rely on exports to sustain their high economic growth. So there’s little reason to believe that global buyers will pick up the slack of today’s faltering American consumer, whose spending has already begun to drop.

Because the United States is such a huge part of the global economy -- it accounts for about 25 percent of the world's GDP, and an even larger percentage of international financial transactions -- there's real reason to worry that an American financial virus could mark the beginning of a global economic contagion. It may not devolve into a worldwide recession, but at the very least, other nations should expect sharp economic downturns, too. Here's how it will happen:

TRADE WILL DROP: The most obvious way that a U.S. recession could spill over elsewhere in the world is through trade. If output and demand in the United States fall -- something that by definition would happen in a recession -- the resulting decline in private consumption, capital spending by companies, and production would lead to a drop in imports of consumer goods, capital goods, commodities, and other raw materials from abroad. U.S. imports are other countries' exports, as well as an important part of their overall demand. So such a scenario would spell a drop in their economic growth rates, too. Several significant economies -- including Canada, China, Japan, Mexico, South Korea, and much of Southeast Asia -- are heavily dependent on exports to the United States. China, in particular, is at risk because so much of its double-digit annual growth has relied on the uptick of exports to the United States. Americans are the world’s biggest consumers, and China is one of the world's largest exporters. But with Americans reluctant to buy, where would Chinese goods go?

China is also a good example of how indirect trade links would suffer in an American recession. It once was the case that Asian manufacturing hubs such as South Korea and Taiwan produced finished goods, like consumer electronics, that were exported directly to American retailers. But with the rise of Chinese competitiveness in manufacturing, the pattern of trade in Asia has changed: Asian countries increasingly produce components, such as computer chips, for export to China. China then takes these component parts and assembles them into finished goods -- say, a personal computer -- and exports them to American consumers. Therefore, if U.S. imports fall, then Chinese exports to the United States would fall. If Chinese exports fall, then Chinese demand for component parts from the rest of Asia would fall, spreading the economic headache further.

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