Consumer confidence unexpectedly dropped to its lowest level in two-and-a-half years in October, while house prices were unchanged at low levels in August, suggesting the consumer is still struggling.

Taken along with recent regional manufacturing data that hinted at stabilization in the sector in October, Tuesday's U.S. data underscored the view that the economy should avoid another recession, though growth will be slow.

Confirmation of a growing but sluggish U.S. economy is expected from U.S. gross domestic product data for the third quarter on Thursday, but the surprising drop in consumer confidence suggests the recent bounce back from a weak first half year may not be sustained.

U.S. third quarter GDP due on Thursday is expected to show the economy grew at an annualized rate of 2.5 percent, up from 1.3 percent the prior quarter, according to a Reuters poll of economists.

For everybody that's excited that growth is going to be somewhere in excess of 2.0 percent in the third quarter, you should not think that's sustainable, said Anthony Chan, chief economist at JPMorgan Private Wealth Management in New York.

A lot of that is going to come off as we go into the fourth quarter.

The Conference Board said its index of consumer attitudes in October fell to its lowest level since March 2009 as consumers fretted about job and income prospects. However consumer confidence does not always correlate well with consumer spending or retail sales, economists noted.


The Conference Board's index of consumer attitudes fell to 39.8 from a upwardly revised 46.4 the month before. Analysts had expected a reading of 46.0.

The expectations gauge was also at its lowest level since March 2009, just before the economy officially crawled out of recession.

Consumer attitudes have soured since the spring, hit by fears of a renewed recession, political gridlock, high unemployment and volatility in the stock market.

With consumer spending accounting for about 70 percent of the economy, economists say the recovery will be hard pressed to make significant headway until confidence improves.

Consumer spending has slowed because confidence has deteriorated, and these numbers are very, very consistent with that view, said Hugh Johnson, chief investment officer of Hugh Johnson Advisors LLC in Albany, New York.

You can't look at these numbers and be optimistic about growth in 2012.

Earlier this month the Thomson Reuters/University of Michigan's preliminary reading of sentiment for October also showed consumers' attitudes sagged, though not as sharply.


In Tuesday's other main economic report, the S&P/Case Shiller composite index of house prices in 20 metropolitan areas was flat compared with the month before on a seasonally adjusted basis, frustrating expectations for a gain of 0.1 percent.

On a seasonally adjusted basis, prices fell in 14 of 20 cities, with Atlanta and Las Vegas among the biggest losers, according to the S&P/Case-Shiller data.

The annual rate of decline slowed, however, with prices in the 20 cities down 3.8 percent compared with a year-over-year decline of 4.1 percent the month before. That still was a bigger drop than the expected 3.5 percent decline in August.

Analysts said the weaker-than-expected home price data was disappointing but not altogether shocking as the market struggles to get out from under a glut of unsold homes and ongoing foreclosures that are holding prices down.

While prices are forecast to remain depressed for some time, any further declines are expected to be modest.

This has been a five-year process and I think we are at least closer to the end of the hemorrhaging in housing prices than we've been in a long, long time, said Chan.

The struggling housing market continues to be one of the biggest hurdles for the economic recovery as attempts to bolster the sector have had limited success.

In the latest efforts, the Obama administration said on Monday it would expand a mortgage refinancing program in a step that could help up to a million borrowers.

I'm glad that they're trying. This was a clever idea. But more needs to be done, Yale economist and index co-founder Robert Shiller told Reuters Insider.

A separate home price index from the Federal Housing Finance Agency showed prices declined 0.1 percent in August from July.

The index is calculated using purchase prices of houses financed with mortgages that have been sold to or guaranteed by Fannie Mae or Freddie Mac.

In other U.S. economic data on Tuesday, the Federal Reserve Bank of Richmond showed manufacturing in the region was unchanged in October with the composite index at minus 6.

New orders improved to minus 5 from minus 17, but employment gauge worsened to minus 7 from positive 7.

U.S. stock prices dipped and U.S. Treasury bond prices rose after the weak consumer confidence data, but in financial markets, the day's data was eclipsed by the cancellation of a meeting of European finance ministers that added to doubts about the region's efforts to tackle its debt crisis.

However, European leaders still planned to hold a summit on the issue on Wednesday as scheduled.

(Additional reporting by Chuck Mikolajczak)