Consumer confidence plunged in August to its lowest since the 2007-2009 recession, after a bruising battle over the budget slammed stock prices and pushed the nation to the brink of default.
Tuesday's data kept alive concerns the United States could slide back into recession, spurring investors to buy government bonds on bets the Federal Reserve would try harder to push down borrowing costs.
The private-sector Conference Board said its index of consumer attitudes sank to 44.5, from a downwardly revised 59.2 in July. The August reading was the weakest since April 2009, when the country still languished in recession, while the drop was the largest since October 2008.
What we are effectively going through is a crisis of confidence, said Tom Porcelli, an economist at RBC Capital Markets in New York.
Economists had expected a much-less-pronounced decline.
Consumers' flagging confidence might lead them to shut their wallets, although retail sales data has not pointed in that direction yet.
So far, data from industrial production to employment have been consistent with a slow-growth scenario rather than an outright contraction in economic output. But economists are watching closely for signs of a fresh downturn and will focus sharply on a reading on employment in August on Friday.
There is basically nothing for consumers to be confident about, said Gennadiy Goldberg, a fixed income analyst at 4CAST in New York.
Stock markets slid sharply in early August as investors were shaken by the politically contentious fight over cutting the U.S. budget and raising the nation's debt limit. Discouraged by the political process, Standard & Poor's stripped the nation of its top-notch AAA credit rating.
The consumer sentiment data weighed on stocks for most of Tuesday's session, although the Standard & Poor's 500 Index closed higher.
FED EYES STEPS TO SUPPORT RECOVERY
Worries over the economy led the Fed in early August to consider new steps to support growth, like tying the path of interest rates to a specific unemployment level, minutes of the central bank's August 9 meeting released on Tuesday showed.
At that meeting, the central bank decided to announce that it expected to hold rates near zero until at least mid-2013.
While that decision drew three dissents, the most in nearly 20 years, the minutes showed some officials wanted even bolder action. Chicago Federal Reserve Bank President Charles Evans made clear in an interview with CNBC that he would have preferred a stronger course of action.
The high level of joblessness is weighing on sentiment and holding the economy back. Friday's jobs report is expected to show the unemployment rate held at 9.1 percent in August.
The Conference Board data suggested things may be getting worse, not better, with an index gauging how difficult it is to find a job hitting its highest level since November 2009.
HOME PRICES WEAK
A separate report showed U.S. single-family home prices fell slightly in June, the latest sign the economy's recovery will not be able to count on help from the housing sector.
The S&P/Case-Shiller composite index of 20 metropolitan areas slipped 0.1 percent from the previous month on a seasonally adjusted basis. A Reuters poll of economists had expected prices to be unchanged.
Prices in the 20 cities fell 4.5 percent from a year ago, better than expectations of a 4.6 percent decline.
An excess supply of homes, ongoing foreclosures, tight credit and weak demand have kept the housing market on the ropes and helped to mute the broader economic recovery.
Basically this is just more confirmation that housing is moving sideways, said Brian Jones, an economist at Societe Generale in New York.
(Additional reporting by Emily Flitter in New York and Pedro Nicolaci da Costa in Washington; Writing by Jason Lange in Washington; Editing by Neil Stempleman and James Dalgleish)