Monday, March 27, 2006

Risks of Consumer-Driven Economy

Obviously, the U.S. economy is being driven by consumer spending. The housing market has a lot to do with the money that has flowed into the economy as consumers have refinanced their homes in order to buy their "stuff." However, the outlook going forward is not so clear. In order for the economy to keep on advancing consumers have to spend. The question is, will they?

With the current account deficit at an all time high, if there is a small change in foreign investors' willingness to buy U.S. debt (also at a record high) there could be major implications for interest rates. The housing market is already slowing, so rising interest rates will not help.

Add to this the rising cost of energy and rising gas prices, which may very reach $4.00/gallon in parts of the country and the impact on consumer spending should be obvious. Let's see what happens.

No comments: