The U.S. economy is being choked by a crisis of confidence, increasing the odds of another recession.

After a stellar start to the year, a growing stack of indicators suggest something snapped in late spring and early summer, causing home buyers to retreat and executives to return to the safety of the sidelines.

Orders for durable goods rose a mere 0.3 per cent in July and purchases of new homes plunged 12 per cent to the slowest annual rate since records began in 1963, separate reports showed Wednesday.

The fresh data adds to evidence that the world’s largest economy stumbled badly toward the end of the second quarter, raising questions about whether the recovery can be sustained without fresh stimulus. Last week, new claims for unemployment benefits rose to 500,000, explaining the lack of demand for homes. On Tuesday, a report said that sales of existing homes plunged 27.2 per cent in July to the lowest rate since the National Association of Realtors began counting in 1999.

“The concern is that the economy is losing so much momentum so rapidly,” said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto. “In March and April, things were looking okay. Then, really for no discernible reason, the wheels have just fallen off.”

Mr. Ashworth said his best explanation for the slump is the fragile psyche of American consumers and executives who remain shaken by the financial crisis.

With the unemployment rate at 9.5 per cent, there’s little enthusiasm to spend and as a result there’s little incentive for businesses to rehire and invest. Those who have jobs are plowing more of their incomes into savings as they seek to replenish wealth lost during the crisis. Lenders, facing tighter regulatory restrictions and an uncertain economy, are restricting credit, creating another barrier to consumption and investment.

The dilemma for policy makers is deciding whether they can bolster confidence with further stimulus.

Federal Reserve chairman Ben Bernanke, who is scheduled to speak at a conference in Jackson Hole, Wyo., on Friday, showed earlier this month that he is ready to toss a lifeline if necessary.

The Fed’s policy-setting committee, led by Mr. Bernanke, said on Aug. 10 that it would continue to purchase a limited amount of Treasuries in order to keep downward pressure on interest rates, reversing a previous plan to get out of the debt market and begin the long walk back to a more normal policy stance.

But “disappointing” economic indicators suggest the Fed will have to step up its Treasury purchases even more, Goldman Sachs chief economist Jim O’Neill said Wednesday.

“If we carry on with data like this, yes, it’s coming,” Mr. O’Neill said on Bloomberg Television, referring to a fresh round of asset purchases, an approach to monetary policy called quantitative easing because central banks increase the money supply by creating new cash and flushing it into the financial system.

“September might be a little bit soon, but by October I would say for sure, if the data carries on being as disappointing as it’s been,” he said.

The pressure to manage the recovery is on Mr. Bernanke because the political system is all but paralyzed. With midterm elections barely two months away, Republicans sense they can use the anxiety over the economy to help their campaign to retake control of Congress.

When lawmakers return from their summer break after the Labour Day weekend, President Barack Obama wants them to pass a bill that the White House says would help smaller businesses by offering tax breaks on investment and creating a $30-billion (U.S.) pool that the Treasury would use to make capital available to community banks. But co-operation appears unlikely. The Republicans have little to gain by working with Mr. Obama, and everything to gain by blaming him for the economy’s woes. Earlier this week, John Boehner, the top Republican in the House of Representatives, called on the President to fire Lawrence Summers, his top economic adviser, and Timothy Geithner, the Treasury Secretary.

To be sure, predicting a double-dip recession in the U.S. remains the riskier bet. Mr. Ashworth puts the odds at less than 50 per cent as does Goldman Sachs. Nouriel Roubini, the economist who rose to prominence by predicting the financial crisis, said on Twitter Wednesday that the risk of a new recession was greater than 40 per cent.

Investors appeared to tire of assuming the worst. The Standard & Poor’s 500 index recovered from a 1.1-per-cent decline after the durable orders and housing data were released to close marginally higher along with the Dow Jones industrial average. The S&P 500 has fallen 13 per cent since its high for the year in April.

For Mr. Ashworth, the only cure for the current funk in the U.S. is time. Borrowing rates already are low, so there’s little to be gained by the Fed resuming quantitative easing, he said. Instead, consumers, executives and investors might just have to get used to economic growth that likely will be sluggish for at least a couple of years, he said.

“Recoveries can be stop-and-start,” Mr. Ashworth said. “This is clearly a stop.”

New requests for unemployment benefits in the United States fell sharply last week, the first decline in a month and a hopeful sign after a raft of negative economic reports.

New claims for jobless aid dropped by 31,000 to a seasonally adjusted 473,000, the Labour Department said Thursday. Still, claims remain much higher than they would be in a healthy economy. Employers are reluctant to hire as economic growth appears to be slowing.

The drop comes after a steep rise the previous three weeks that sent claims to their highest level in nine months. Those increases raised fears that businesses were starting to layoff more workers.

Wall Street economists had expected a smaller drop, according to surveys by Thomson Reuters. Stock futures rose immediately after the report's release.

Even with last week's decline, the four-week average, a less volatile measure, rose to 486,750, the most since November, 2009.

The department also said the total unemployment benefit rolls are climbing steeply, as more people join extended unemployment aid programs that were renewed last month by the U.S. Congress. During the recession, Congress added up to 73 weeks of emergency aid on top of the 26 weeks typically provided by the states.

All told, about 10.1 million Americans were receiving unemployment checks in the week ended Aug. 7, the latest data available. That's up about 260,000 from the previous week.

The economy has grown for four straight quarters. But the pace has slowed from a five per cent annual rate in last year's fourth quarter to 3.7 per cent in the January-to-March period. It has weakened even further in the past several months.

Many economists expect the government Friday to revise lower its growth estimate for the April-June quarter to below 2 per cent. That's weak in normal times and even worse after such a steep recession.

The housing sector, which usually helps power economic recoveries, is now acting as a drag. New home sales fell 12.4 per cent in July to the lowest level in nearly a half-century, the government reported Wednesday. And another report this week showed that sales of previously occupied homes fell to their lowest level in 15 years. Sales are plummeting after a popular homebuyer's tax credit expired April 30.

Jobless claims fell steadily last year as the economy began expanding, dropping from a peak of 651,000 in March 2009 to about 460,000 at the beginning of this year. After fluctuating around that level for most of this year, claims started climbing again last month.

In a healthy economy, claims generally fall below 400,000.

Some companies are still cutting workers. Northrop Grumman Corp. said Wednesday that it will lay off 642 workers at its shipyard in Pascagoula, Miss., by the end of the year. The shipyard currently has 11,000 employees.

And in late July, a NASA private contractor, the United Space Alliance, began telling 1,400 employees that they would be laid off in the fall as the U.S. space agency ends the space shuttle program.

The United Space Alliance is owned by Boeing Co. and Lockheed Martin Corp. and has 8,100 employees.