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 the housing crisis taking its toll.
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.
While not all economists are convinced a recession is inevitable, most agree that the housing downturn will put a serious damper on spending as Americans feel poorer.
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 was down more than 108 points at 13,213 in late morning trade.