Biggest drop in consumer confidence since Katrina

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U.S. consumer sentiment took its sharpest plunge in nearly two years during August while home prices swooned in the second quarter, according to reports that show a heavy toll from the housing crisis.

As Wall Street was gripped by a credit squeeze, the Conference Board's index of confidence dropped nearly 7 points to 105.0, its lowest reading in a year.

For a country that relies on consumers for two-thirds of its spending, the figures suggested economic growth will remain subdued for the foreseeable future.

My guess is we're heading for a consumer-led recession beginning in a few quarters, said Michael Metz, chief investment strategist at Oppenheimer & Co. The consumption boom is over.

Most economists agree the housing downturn will put a serious damper on spending, but a majority still believe a recession can be avoided.

A report from S&P/Case-Shiller on Tuesday showed house prices across the nation declined by 3.2 percent in the second quarter compared with the same period last year. It was their worst decline in 20 years.

At the very least, though, falling prices appeared to be making home purchases more attractive. An index of home-buying intentions in the Conference Board's survey rose to their highest in a year.

WORST DROP SINCE KATRINA

The confidence decline was the steepest since just after Hurricane Katrina devastated the Gulf Coast in 2005.

But the troubles dimming Americans' perceptions of the economy were man-made this time around.

The crisis that began in subprime mortgages -- loans made to high-risk borrowers -- has spread to other parts of the financial sector, crimping lending and stoking a generalized aversion to risk.

While stocks had since recovered the losses they suffered in August, the market was once again in turmoil on Tuesday as fears resurfaced that some key banks might have more exposure to the subprime mortgage sector than previously believed.

The Dow Jones industrial average was down more than 150 points at 13,164 in afternoon trade.

Worsening credit conditions were certainly getting attention from officials at the Federal Reserve. Minutes from the central bank's last meeting on Aug. 7 showed it foresaw the need for a shift in policy if the situation deteriorated further.

Things have indeed gotten worse since then, and the Fed has responded by cutting the rate it charges to banks, known as the discount rate. It has also pumped more cash than usual into the banking system in an effort to revive lending.

Many believe it may have to cut benchmark interest rates to prevent the situation from getting out of control.

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