Falling stock markets and corporate accounting scandals have shaken the confidence of the American consumer, according to new figures from the Conference Board.

The Consumer Confidence Index for July came in at 97.1, down 9.2 points from June’s reading of 106.3. The July figure is the lowest in five months and was much worse than the 101.5 to 102 figure that economists had been expecting.

“The erosion in consumer confidence represents a significant deterioration in consumer attitudes,” said Lynn Franco, director of The Conference Board’s Consumer Research Center. “The continued decline in the value of stock market portfolios, coupled with ongoing reports of corporate scandals, have taken a toll on consumer confidence.”

Consumer confidence is now at its lowest level since February of this year. And while the current reading is not alarming by historical standards, the Conference Board said a continued slide could very well jeopardize the economic recovery.

Consumers’ expectations for the next six months have soured. Those expecting business conditions to deteriorate increased from 7.1% to 9.2%. Those anticipating an improvement in the months ahead fell from 23.7% to 20.9%.

The employment outlook also slid in July. The percent of consumers expecting fewer jobs to become available in the next six months increased from 14.3% to 17.1%.

The drop in consumer confidence “is clear evidence that financial market volatility is weighing importantly on consumer psychology,” says BMO Nesbitt Burns. “Both the current conditions and the expectations sub-indexes took a big tumble.” BMO notes that respondents believing business conditions were bad rose to 22.1% from 19.5%.”

“The marketplace is prepared to believe that confidence is weakening, and other countries have also registered similar problems in consumer and business confidence lately. So, the figures tended to weigh on already soft stocks this morning and will likely underpin the bid for bonds today,” says BMO.

RBC Financial agrees that the decline was larger than expected, and it says that it likely reflects the impact of the recent corporate accounting scandals and volatile stock markets. “While this release is likely to spark renewed anxiety about consumer spending intentions for the remainder of this year, slower consumer spending this summer and fall should come as no surprise. The hectic pace of consumer spending earlier this year was never expected to last into the second half of the year. Right from the start, the key to a sustainable recovery was — and still is — a rebound in business investment.”

“The Conference Board’s July survey was somewhat weaker than companion ABC and Michigan surveys. It still may be the “right” answer. We look for more weakening in confidence in the months ahead,” BMO concludes. “Bear in mind that chairman Greenspan is fond of saying that a “break” in consumer and business confidence is a development that would really worry him.”