Stalling job growth further darkened Americans' views of the economy, despite cheaper gasoline prices, according to the latest IBD/TIPP Economic Optimism Index.
It fell to 46.7 in June from 48.5 in May, marking a six-month low and the second straight decline. It was led by a steep drop in the six-month outlook subindex, which swung to a pessimistic reading of 46.8 from a slightly optimistic 50.4.
"Jobs are the key thing," said Raghavan Mayur, president of TIPP, a unit of TechnoMetrica Market Intelligence. "Without job growth, you cannot have positive sentiment."
Other factors that contributed to the latest drop in morale include a stock market correction and uncertainty over the eurozone crisis, he said.
Most of the polling took place after the Labor Department's May payroll report, which showed a gain of 69,000 jobs. That followed a rise of 77,000 in April and 143,000 in March, representing a sharp drop from the average of more than 250,000 from December to February.
The poll found 54% believe the economy is slowing down, in a recession or in a depression, while 43% say the economy is growing. The economy expanded 1.9% in Q1, down from 3% growth in Q4.
The gloom comes amid falling gasoline prices. Regular gas costs $3.54 a gallon vs. $3.73 a month ago and more than $3.90 in late March and early April, according to AAA.
The drop in fuel costs may have contributed to the personal finance outlook gauge edging down just 0.2 point to 56.1, still above the break-even 50 mark to indicate optimism.
But confidence in federal economic policies declined for the second straight month, falling to 37.1 in June from 38.7 in May. It was the first back-to-back drop since last summer's debt-ceiling debate, which was capped off by Standard & Poor's stripping the U.S. of its AAA credit rating.
At the end of this year, lawmakers must reach deals to avoid steep tax hikes and spending cuts as well as lift the debt ceiling again.
While some economists and central bankers say "fiscal cliff" uncertainty is already hurting business hiring and investment, Mayur said it's not yet at the forefront enough to reflect the lower sentiment in federal policies.
Meanwhile in June, investors' economic optimism reading tumbled six points to 42.9, a seven-month low, with stocks falling for the past two months. The 12.3% decline was the largest since last August, as markets buckled amid the debt-ceiling fight.
Meanwhile, morale among small businesses is stagnating at historically low levels. The optimism index from the National Federation of Independent Business ticked down to 94.4 in May from 94.5 in April, with little changes in plans to hire and invest.
Future sales, taxes, interest rates and credit availability as well as costs for labor, health care and regulatory compliance are uncertain, said NFIB Chief Economist William Dunkelberg in a statement.
"Most of this uncertainty is the result of what is happening — and not happening — in Washington," he said. "Investments in jobs or plants and equipment are not the priority, while people are still bracing for the worst."