With stock markets falling, the housing market in a tailspin and credit tightening, corporate America is bracing for the impact.

The economic contagion that started with a slump in U.S. home prices and spread throughout the financial sector as default rates on risky subprime mortgages rose has spooked investors the world over.

Top U.S. executives said they are preparing themselves for the possible spread of the effects of the slowing economy.

Department store chain J.C. Penney Co. regards pretty negative sentiment as a business reality for the near future, its chief executive said on Thursday.

There's going to be up and down cycles in the business, said Mike Ullman, CEO of the Plano, Texas-based chain. Our responsibility is to find a way to perform whatever the environment, despite a pretty negative sentiment in the market place, particularly about housing and energy.

Deere & Co. (DE.N: Quote, Profile, Research), which makes heavy equipment used in construction and agriculture, has already started to brace for slower demand, a top executive said on Wednesday, even as the company reported better-than-expected profit.

We have tried to be very responsive to the downturn by stepping on the brakes aggressively on our production, said Mike Mack, chief financial officer of Moline, Illinois-based Deere. Everybody is getting a chance to watch this volatility in this market and try to understand what the impact is going to be on housing starts.

A U.S. Commerce Department report on Thursday showed the number of new homes on which construction started in July was at its lowest level in 10 years.

CORRECTION THRESHOLD REACHED

The three major U.S. stock indexes -- the Dow Jones industrial average, the Standard & Poor's 500 index and the Nasdaq Composite Index -- fell as low as 10 percent below their mid-July record highs on Thursday, a threshold professional investors consider a market correction.

The market turmoil is not the only worrying factor for executives. The trade organization Manufacturers Alliance/MAPI on Thursday lowered its 2007 U.S. economic forecast. It now expects 1.9 percent gross domestic product growth this year, down from an inflation-adjusted 3.3 percent in 2006.

The housing downturn will likely be more severe, more widespread and last longer than most economists predicted, said Daniel Meckstroth, the group's chief economist. Problems in subprime lending are affecting prime loans and have set off a general re-pricing of risks in financial markets.

American Axle & Manufacturing Holdings Inc., a Detroit-based maker of car and truck parts, is keeping a close eye on the housing market -- a key indicator of demand for pickup trucks, for which it supplies components.

Any time there is an increase in volatility, and particularly if that volatility is pushing the stock values and bond values down, that is concerning, said Chief Financial Officer Michael Simonte. We have our liquidity set and we think we are in pretty good shape.

The credit tightening -- spurred by the subprime woes -- has pinched the financial and real estate sectors. But manufacturing and retail said they have not yet felt the pain in their financing costs.

Our costs of capital are really pretty fixed, said Penney's Ullman. I don't see how the volatility in the credit market right now is affecting how we finance the company.

Jason Maltby, president of Mindshare National Broadcast, a unit of advertising firm WPP Group Plc, said the market turmoil hasn't yet taken a toll on the advertising sector but that the outlook will become clearer in the coming weeks.

The next week and a half will be telling because that is when the majority of advertisers will firm their upfront commitments, Maltby said. That's when most advertisers have to firm up their long-term contracts.

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