US consumer confidence plunged to the lowest level in a year, as fears grew on Thursday night that the world's largest economy will fall over the so-called fiscal cliff in days.
The steep drop in confidence intensified the pressure on President Barack Obama and Republican leaders to reach a deal that avoids the cliff, shorthand for $600bn (£373bn) of spending cuts and tax rises due to take effect from January 1.
On Wall Street, investors reacted with alarm to the first evidence that the political paralysis in Washington is sapping the confidence of consumers whose spending still makes up the lion's share of the American economy. The Dow Jones Industrial Average closed down 0.1pc at 13,096.31, while the S&P 500 also fell 0.1pc to 1,418.09.
The well-respected survey from the Conference Board showed that consumers' expectations for the next six months tumbled to 66.5, the weakest reading in a year, from 80.9 in November (Xetra: A0Z24E - news) . The overall confidence index dropped to 65.1 in December from 71.5 in November.
"The scale of the drop really intensifies the concerns about the potential economic implications from the $600bn of tax rises and spending cuts due to hit in less than a week," said James Knightley, an economist at ING. Unless a deal is reached "a return to recession is a realistic possibility".
The Congressional Budget Office, a leading independent forecaster, has warned that if all of the tax rises and spending cuts are allowed to happen, then the US will sink back into recession for the first time since 2009. Signs that consumers are becoming more pessimistic come on top of evidence that corporate America is delaying any investment decisions until the uncertainty over tax rates and government spending levels is resolved.
The bitter dispute between Democrats and Republicans over the fiscal cliff is the second time in as many years that the world economy and financial markets have been held hostage by Washington. Despite the growing pressure, Thursday offered few indications of progress as President Obama returned early to the US capital from a Christmas holiday in Hawaii.
Democrats insist that any deal to avert the so-called cliff must involve tax rises for households earning more than $400,000 a year, while Republican leaders argue that only those with annual income of more than $1m should be hit. As it stands, Americans will see their tax bills go up by an average of $3,446 next year after tax cuts first introduced by George W Bush expire on New Year's Eve.
The need for the US to avoid it is magnified given much of Europe remains in recession. Chancellor George Osborne said last week that he remains confident that a deal will be reached in Washington but, with four days to the deadline, it was not an optimism widely shared in the capital. On Thursday night, the US Treasury was making plans to take "extraordinary measures" to help finance the government for the next two months because the US is also due to reach its debt ceiling of $16.4 trillion on Monday.