While pundits have recently downplayed the odds of another recession, the economy still looks vulnerable, judging by recent data and past history.

Merrill Lynch's David Rosenberg, a typically bearish economist, said this week that the chances of a double-dip recession have been "reduced significantly," due to diminished geopolitical worries, lower oil prices and tighter credit spreads. But the latest data seem to suggest that the economy is still on a knife's edge.

With consumer spending accounting for two-thirds of economic growth in this country, jobs are key. And yet the labor market is continuing to struggle, with the unemployment rate rising to an eight-year high of 6% in April.

Perhaps more significantly, the economy lost 525,000 jobs over the last three months. Since World War II, there has been only one time that the economy lost jobs for three straight months without being in a recession, and that occurred during a steel industry strike in 1952, according to Bloomberg.

Recent manufacturing data, meanwhile, also seemed to have dashed hopes for a powerful recovery once the war had ended. In fact, the Institute for Supply Management number fell to 45.4, its lowest reading since October 2001. Whenever the ISM has dropped below 45 in the past, it has typically signaled an economic contraction.

Over the last month, 68% of economic news releases have been worse than expected, and revisions of prior data have generally been down, according to Merrill Lynch.

In many ways, the current environment is similar to that of May 2001, when the economy was receding.

Back then, economists also were beginning to dismiss the idea of a recession because the yield curve had started to steepen and GDP growth had just come in at 2% for the first quarter. That would ultimately be revised down to negative 0.6%. An initial reading on growth for the first quarter of 2003 came in at 1.6%. Also back then, the Nasdaq had surged 30% from its lows, whereas today, the Nasdaq is up 32% from its worst point.

Of course, there are significant differences between the economy in spring 2001 and the economy today. At that time, interest rates were higher, as were stock prices, and U.S. companies had just put in their worst quarterly earnings performance since 1991. In contrast, corporate profits are growing today, even though the war with Iraq has seemingly dampened economic activity.

Still, Drew Matus, financial market economist at Lehman Brothers, said that in some ways, things might actually be worse today than they were during the last recession, because the consumer is now worn out after spending cash gained through home refinancing. Business confidence is also lower than it was a couple of years ago after so many corporate scandals, he said.

Although few pundits believe the economy is headed for the same kind of weakness that endured in 2001 -- with three quarters of negative growth, the economy does appear to be much more sluggish than the recent run-up in the stock market would suggest.

Aside from a weak consumer, a big decline in the dollar also could weigh on economic activity going forward. Although a falling dollar is beneficial to corporate earnings, it can discourage foreigners from investing in U.S. assets because a decline in the value of the dollar reduces the value of stocks and bonds to overseas investors. Economists worry about this because the U.S. is heavily reliant on foreign investors to finance the growing current account deficit.

In recent weeks, stock investors have largely ignored trends in the economy, focusing instead on some better-than-expected first-quarter earnings. It's worth noting, however, that estimates for the rest of the year have been coming down, and because stock prices have jumped so much, valuations are higher now than they were a month ago.

The market is now trading at almost 17 times 2003 operating earnings, as measured by Thomson First Call; that's up from 16 just four weeks ago. Based on more conservative GAAP numbers, some analysts note that valuations are historically very high.

The stock market is also at risk for other reasons. For example, sentiment has proven to be overly optimistic recently. According to Chartcraft.com's Investors Intelligence survey, bullish sentiment rose to 48.3% from 42.7% the prior week while bearish sentiment fell to 29.2% from 34.8%. And over the past month, the CBOE volatility index, a measure of fear in the marketplace, has fallen almost 20%, suggesting a high level of complacency.

Seasonal factors also could weigh on stocks going forward. Since 1950, equity returns have been positive from October through April in 40 years, with only 13 years of negative stock returns. But for the May-to-September period, only 33 years have been positive while 20 have been negative. More recently, the May-to-September period has produced negative returns for five consecutive years, according to Richard Nash, chief market strategist at Victory Capital Management.

Bulls also must contend with new accounting scandals a la Healthsouth ( HLSH.PK) and, some might say, Tyco ( TYC). Meanwhile, continued risk aversion from individual investors and still questionable corporate balance sheets also suggest that a new bull market isn't yet upon us.

Victory Capital's Nash believes much of the upside for the markets has probably been seen, at least for now, but he is hopeful that the economy will turn around later this year, noting that tax cuts, inventory accumulation, an accommodative Federal Reserve and improved corporate cash flow should all help out.

Salomon Smith Barney economist Steven Weiting also points out that stronger periods of economic growth often have begun during times of high unemployment as companies cut costs and produce "more with less." Indeed, sustained productivity gains have offset declines in payroll declines in five of the last six months, helping to keep the economy afloat. He also believes "natural forces of income and output growth should gain traction" as the year progresses.