Confidence among consumers plunged in August to its lowest in more than two years following the country's loss of its top credit rating and heart-wrenching drops in major stock indexes.
The Conference Board, an industry group, said on Tuesday its index of consumer attitudes sank to 44.5 from a downwardly revised 59.2 the month before. Economists had expected a much less pronounced decline.
Concerns have grown that the U.S. might be heading toward a new recession. Consumers' flagging confidence might lead them to shut their wallets, although retail sales data hasn't pointed in that direction yet.
What we are effectively going through is a crisis of confidence, said Tom Porcelli, an economist at RBC Capital Markets in New York.
The U.S. lost its AAA credit rating earlier this month following a drawn out battle in Washington over spending that nearly led the country to default on its obligations.
U.S. Treasuries prices extended gains on Tuesday on fears a pullback in consumer spending could trigger recession, while U.S. stocks fell. The dollar hit a session low against the yen.
So far this year, data from industrial production to employment have been consistent with a slow-growth scenario rather than an outright contraction in economic output.
There is basically nothing for consumers to be confident about, said Gennadiy Goldberg, a fixed income analyst at 4CAST in New York.
Concern over the outlook led the U.S. Federal Reserve earlier this month to say it would hold interest rates at rock-bottom level for at least the next two years, a decision that drew three dissents.
Some Fed officials favor doing more to bring down the unemployment rate. A report on Friday is expected to show the jobless rate held at 9.1 percent in August.
The Fed releases the minutes of its Aug. 9 meeting later on Tuesday and investors will scour them for clues on whether the Fed is likely to do more for the economy.
Chicago Federal Reserve Bank President Charles Evans, who's considered to be less focused on inflation risks than some of his colleagues, said on Tuesday he favored strong central bank accommodation for a substantial period of time.
It's difficult to characterize the labor market as anything other than consistent with being in a recession, he told CNBC television.
I'm in favor of some of the most aggressive policy actions of anyone on the committee, added Evans, who votes on the Fed's policy-setting Federal Open Market Committee this year.
HOME PRICES WEAK
A separate report showed U.S. single-family home prices fell slightly during June in the latest sign the country's struggling economic recovery won't be able to count on any help from a moribund 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.
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 as Societe Generale in New York.
Prices in the 20 cities fell 4.5 percent from a year ago, better than expectations for a decline of 4.6 percent.
Friday's jobs report will give an idea of how much damage the stock market turmoil inflicted on the already wounded economy.
U.S. nonfarm payrolls likely increased 75,000 in August after rising 117,000 in July, according to a Reuters survey.
(Additional reporting by Emily Flitter; writing by Jason Lange in Washington; Editing by Neil Stempleman)