The unhealthy position of the big market rally has been exposed for the high-wire act it is by a sharp fall in American consumer confidence.

The fall, registered in the US Conference Board’s monthly survey, supports similar falls in the other monthly survey from Reuters and the University of Michigan.

After recovering from the very low levels at the start of the year when the end of the world as we know it seemed very real, the rebound has faded and the index fell to 47.7 in October from an upwardly revised 53.4 in September. Forecasts were for a reading of 53.5.

In Europe, tough news as well, with the first year-on-year fall in bank lending, a sign of just how weak demand is in the group for money. Even though loans to consumers rose in September, the amount was still down year-on-year, as was lending to business. Lending contracted by 0.3%, after growing by 0.1% in August. It was the first time the figure was negative since the ECB’s records began in January 1992.

Despite the European Central Bank’s unlimited liquidity provisioning of the eurozone’s banking system, there’s no sign of this translating into higher lending.

The ECB said loans to non-financial companies decreased by an annual rate of 0.1% in September, after gaining 0.7% in August. Loans to euro-zone households, meanwhile, fell at an annual rate of 0.3% after declining 0.2% in August. House lending fell sharply as well.

The slump puts America at odds with most other major economies where consumer confidence is still solid, or consolidating at levels well above the lows hit earlier in the year; even in the UK where the rebound helped fool economists into believing the economy was growing. It contracted in the third quarter. Even Europe has seen an upturn in confidence levels, though its clearly not being translated into greater demand for loans from households or business.

In the US confidence levels, consumer credit and lending overall remains tough. Most home lending is being done via Fannie Mae and Freddie Mac, who currently account for 95% of all (much lower) home loans.

The first reading on US economic growth is out tomorrow night (Australian time). It’s likely to be positive, unlike the UK, but some analysts and economists in the US now contend the data will be meaningless to consumers who are being influenced by the terrible state of the jobs market and the continuing toll of home foreclosures.

Driving confidence lower was a plunge in the way US consumers look at their current situation: it hit a 26-year low of 20.7, from 23 in September. The all-time-low reading was 17.5 in February, 1983, at the depth of that recession.

The fall surprised many commentators, helped push US stocks down (although the Dow was higher). It completely offset news that US house prices again rose in August, according to the respected Standard & Poor’s Case Schiller Home Price Index. The continuing flood of better than forecast quarterly profit results in the US, Europe and Japan did nothing to shake the negative trend in the markets.

US house prices rose by 1.2% from July to August, according to the S&P/Case-Shiller index. Compared with a year ago, house prices were off by 11.3% and the rate of annual declines has eased in each of the past seven months. But much of the strength has been put down to the impact of the $US8000 home purchase tax break, which expires in November. There are signs it may be renewed and then fall in a tapering fashion to try and ease the blow when it is finally withdrawn.

The confidence reading helped the US dollar rise for a third day, despite a successful bond auction.

“Consumers’ assessment of the present-day conditions has grown less favorable, with labor market conditions playing a major role in this grimmer assessment,” according to comments from Lynn Franco, director of the Conference Board Consumer Research Centre.

The percentage of those claiming that jobs are currently hard to get, reached new high of 49.6%, while the number of consumers claiming that jobs are plentiful hit a new low at 3.4%.

The expectation index, which measures consumers’ outlook over the next few months, declined to 65.7 from 73.7 last month. Similarly, the percentage of those expecting the job market to improve edged lower to 16.3% from 18%.