The U.S. consumer is in a foul mood, and the effects on investors and the economy are likely to be harsh.

The Conference Board said on Oct. 28 that its consumer confidence index has dropped to an all-time low, from 61.4 in September to 38 in October. Americans were partly reacting to what they saw on the news in the past month: A plunge in the stock market, the dysfunctional credit markets, the failure of major financial firms, passage of a $700-billion bailout package in Washington, and a Presidential campaign focused on the economic crisis.

The impact on the economy from this crisis of confidence may be even more doom and gloom. “When people believe there will be a recession, there will be a recession,” says Jerry Webman, chief economist for OppenheimerFunds.

Americans can be expected to cut back on spending and to augment their savings accounts for tough times ahead. But that saving, however virtuous, will rob the rest of the economy of important revenue. That’s a phenomenon economist John Maynard Keynes called the “paradox of thrift.”

But because of declining confidence and other factors such as the tough job market, many economists say they expect consumer spending to fall by 3% or more in the third quarter of 2008. That would be the worst drop in consumption since 1981.

The timing of the recent market turmoil couldn’t be worse for U.S. retailers, which are highly dependent on the holiday season. “It’s going to be a tough holiday season,” Hembre says. “Every indication is that people are not inclined to spend,” Webman adds. The stocks of department stores Macy’s and Nordstrom  have lost nearly half their value in the past month, partly reflecting those holiday worries.

Discount stores such as Wal-Mart and Target also have taken their lumps, with Wal-Mart down about 9% in the past month and Target off 25%. “We continue to expect consumers to migrate toward discounters, off-price, and mass-merchant retailers during the upcoming holiday spending season. However, we believe that even these retail segments will experience slower trends relative to recent month run-rates,” wrote Brian S. Postol, senior retail analyst at Jesup & Lamont earlier this month.