Investors received a dose of economic reality on Tuesday as a slew of indicators sent a reminder through the markets that while the U.S. economy is staying afloat better than some had feared, it is hardly going gangbusters.

This reminder was delivered through new data that showed U.S. home prices in metropolitan areas recently tumbled to February 2003 levels, consumer confidence took a surprise retreat in January and a Chicago-area manufacturing index moderated this month.

At the same time, the Congressional Budget Office said the U.S. budget deficit will clock in at nearly $1.1 trillion in fiscal 2012, up from earlier estimates and marking the fourth-consecutive year of 13-digit shortfalls.

While economic hopes helped drive the Dow to what will likely be its strongest January since 1997, Tuesday’s gloomy news weighed on equities. The benchmark index was off almost 0.5% in early afternoon action.

“The improvements we’ve seen in many indicators are encouraging,” said Russell Price, senior economist at Ameriprise (AMP). However, Tuesday’s news “shows that the pace of improvement is not going to be as robust as people were hoping maybe just a few weeks ago.”

Stocks hit session lows after the Conference Board said its consumer confidence index slipped to 61.1 in January, missing forecasts for a rise from December’s 64.8 to 68.

The decline in confidence could spell trouble for retailers like Amazon.com (AMZN) and Gap (GPS) that rely on healthy consumer spending. Shares of the S&P retail ETF retreated 1.65%, compared with a 0.25% decline on the broad S&P 500.

However, analysts pointed out that confidence remains above November levels and said December’s surge in sentiment may have been overstated.

“We continue to perceive consumer confidence to be on a positive trend and expect it to rise modestly as labor market conditions improve,” Cooper Howes, research analyst at Barclays (BCS), wrote in a note.

Recent hopes that the U.S. housing market may be in the process of bottoming out may be hurt a bit by the new S&P/Case-Shiller Home Price Indices, which hit a new crisis low in November.

A composite of 20 metro areas revealed a 1.3% decline in November on a non-seasonally adjusted basis, missing forecasts for a 0.8% drop. Seasonally-adjusted, the home price index slipped to the lowest levels since February 2003, marking a 33% plunge from its 2006 high.

The disappointing housing news knocked down shares of home builders like KB Home (KBH), Pulte (PHM) and Toll Brothers (TOL).

“We are now five years into this corrective phase for the housing market. I do think we are bottoming in home prices, turnover activity and sales rates,” said Price. “We’re at the bottom. The path ahead is a lot more bright than looking into the rearview mirror.”

Ahead of Wednesday’s closely-watched Institute for Supply Management manufacturing index, a new report showed Chicago-area manufacturing fell in January to 60.2 from 62.2 in December. Production, new orders and employment components of the index also slipped. While the drop marked the second-straight month of slowing activity, it did remain within the six-month average.

“I’m not too worried about that number,” said Price. “It still showed a relatively robust amount of growth from that region of the country that is still benefiting from improvements in automobile sales.”

While Tuesday's data may have been disappointing, there will be plenty of other indicators for investors to digest later this week, including the ISM report, weekly jobless claims and Friday's crucial monthly jobs report. 

Follow Matt Egan on Twitter @MattMEgan5