(AP Photo/Elise Amendola)
Fears of sharp tax increases and government spending cuts set to take effect next week sent consumer confidence tumbling in December to its lowest level since August.
The Conference Board on Thursday said its consumer confidence index fell for the second consecutive month in December to 65.1, from 71.5 in November.
The survey showed consumers' outlook for the next six months deteriorated to its lowest level since 2011 -- a signal to Lynn Franco, the board's director of economic indicators, that consumers are worried about the tax increase and spending cuts that take effect Jan. 1 if the White House and Congress can't reach a budget deal.
Earlier this week a report showed consumers held back shopping this holiday season, another indication of their concerns about possible tax increases.
The December drop in confidence "is obvious confirmation that a sudden and serious deterioration in hopes for the future took place in December -- presumably reflecting concern about imminent 'fiscal cliff' tax increases," said Pierre Ellis, an economist with Decision Economics.
The decline in confidence comes at a critical time when the economy is showing signs of improvement elsewhere.
A recovery in the housing market is looking more sustainable. On Thursday, the government said new-home sales increased in November at the fastest seasonally adjusted annual pace in two and a half years.
The job market has made slow-but-steady gains in recent months. The average number of Americans applying for unemployment benefits last month fell to the lowest level since March 2008.
But political wrangling in Washington threatens the economy's slow, steady progress. President Barack Obama and members of the House returned to Washington on Thursday to resume talks just days before the deadline.
Mixed signals led to a rocky day on Wall Street.
Stocks plunged early after the weak consumer confidence report and a warning from Senate Majority Leader Harry Reid that the government appeared to be headed over the "fiscal cliff." At one point, the Dow Jones industrial average fell 150 points.
The market came back in the final hour of trading on a potential sign of movement in the talks: Republican leaders announced they would bring the House back into session Sunday evening. The Dow recouped nearly all of its losses to close down 18 points at 13,096.
A short fall over the cliff won't push the economy into recession. But most economists expect some tax increases to take effect next year. That could slow economic growth.
While consumers are more worried about where the economy is headed, they were upbeat about present conditions, according to the latest survey. Their assessment of current economic conditions rose this month to the highest level since August 2008.
A key reason for that is gas prices hit a 2012 low of $3.21 a gallon last week. Normally, that would prompt consumers to spend more on holiday shopping.
But the opposite happened. A report from MasterCard Advisors Spending pulse indicated sales grew at the weakest rate since 2008, when the country was in a deep recession in the two months before Christmas.
There were other distractions this holiday season. In late October, superstorm Sandy battered the Northeast and mid-Atlantic, which account for 24 percent of U.S. retail sales. That coupled with the presidential election, hurt sales during the first half of November.
Shopping picked up in the second half of November. But "fiscal cliff" worries dampened December sales.
The National Retail Federation, the nation's largest retail trade group, remains optimistic that sales won't be quite as bad as reports have suggested. It is sticking to its forecast that total sales for November and December will be up 4.1 percent to $586.1 billion this year. That's more than a percentage point lower than the growth in each of the past two years, and the smallest increase since 2009 when sales were up just 0.3 of a percent.
AP Retail Writer Anne D'Innocenzio contributed from New York to this report.