Economic optimism is hitting lows not seen since the August 2011 debt ceiling and budget showdown, as Washington sinks once again into bitter stalemate.

The IBD/TIPP Economic Optimism Index plummeted 16.5% in October to 38.4. Subindexes for the six-month outlook, personal financial outlook, and satisfaction with federal economic policies also dived to two-year lows. The survey was conducted Sept. 28-Oct. 2, capturing the first two days of the partial federal government shutdown.

Respondents are usually upbeat about their own financial future, but that reading fell 6 points to 48.3, below the neutral 50 level for the first time since November 2011. The six-month outlook fell 22% to 35.8. Satisfaction with federal economic policies tumbled 17.5% to 31.2.

The Financial Related Stress Index picked up 4.1% to 63.1, the highest since November 2011.

"The recent gridlock in Washington, primarily the government shutdown and the stalemate in debt ceiling talks, don't inspire confidence," said Raghavan Mayur, president of TIPP, a unit of TechnoMetrica Market Intelligence, IBD's polling partner. "Fifty-eight percent think that the U.S. is still in a recession. While 53% feel the economy is not improving, 43% think the economy is improving."

Catastrophic Reaction

Such a sharp monthly decline in the overall index — 7.6 points in October — usually follows catastrophic events such as Hurricane Katrina, or the Mideast turmoil of March 2011, Mayur said.

The shutdown is more than a week old, with neither President Obama nor congressional Republicans budging. The U.S. government runs out of borrowing authority on Oct. 17, raising the risk of a sovereign default if the debt ceiling isn't raised by then.

Short-term Treasury bill rates spiked Tuesday as investors fretted. That helped send stocks sharply lower.

All 21 demographic groups IBD/TIPP tracks had lower confidence in the latest survey, all with readings below 50.

Allen Sinai, chief global economist at Decision Economics, said he's very pessimistic about the Washington impasse, and not surprised that consumers are too. Lawmakers couldn't agree on a budget in 2011 or 2012, Sinai pointed out, and the country is stuck with the same cast of characters for a third year in a row. That helps make consumer sentiment "anemic," he said, and holds down the stock market.

"Without this we might be at new highs," Sinai said. "New highs in the stock market mean more wealth, more consumer confidence, more spending."

Small Businesses Downbeat

Optimism among small businesses dipped in September, the National Federation for Independent Business said Tuesday. Small business owners are "skeptical" about the future, with a net 10% expecting the economy to worsen.

As the Washington standoff intensifies and investors and consumers begin to seriously consider the possibility of a U.S. sovereign default, the IBD/TIPP gauge on the direction of the country dived 21% to 28, lower than at any time since November 2011. Together with the sharp decline in the Economic Optimism Index, the overall National Outlook Index fell to August 2011 levels.

"What about the rest of the way the world views us?" Sinai said. "What about the credibility of this great country?"

Submit to DeliciousSubmit to DiggSubmit to FacebookSubmit to Google PlusSubmit to StumbleuponSubmit to TechnoratiSubmit to TwitterSubmit to LinkedIn