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Are American Consumers Tapped Out?
By Peter Koeppel

Over the past 25 years, in every quarter except one, American consumer spending rose over the previous year, according to a November BusinessWeek article. Consumers have continued to shop through both good and bad times. Access to easy credit has been responsible for this spending spree. BusinessWeek sees the subprime crisis as the "beginning of the end for the long consumer borrow--and buy--boom." A recent New York Times report explores the possibility of an impending recession and notes, "It may be an unavoidable step toward purging the U.S. and...global economy of a major source of instability: an unhealthy dependence on the willingness of American consumers to keep buying even as debt mounts." Since the DR industry is heavily dependent on consumer spending, a pullback by consumers could have a big impact on our industry.
 
THE CRUX OF THE PROBLEM
 
First, let's look at the housing slump and its possible effect on spending. Cheap credit from 2004 to 2006 allowed Americans to take out more than $800 billion a year from their homes, according to the New York Times. So the decline in home prices could definitely impact consumer spending. Christopher Carroll, a Johns Hopkins economist, told BusinessWeek that every $1 decline in housing prices cuts about 9 cents off of spending. The report further shows that a 10- to 15-percent decline in home prices will decrease spending by $200 to $300 billion, which is about two to three percent of personal income. This decline in income is likely to diminish consumer discretionary purchases of apparel, automotive and certain luxury goods. Retailers and marketers of these types of goods could be hit hard if consumers cut spending.
 
Next, let's look at consumer credit card debt. Not everyone believes that consumers have exhausted their ability to spend. They have about $14 trillion in unused borrowing power left on their credit cards, which should be enough to buy a few more Magic Bullets or Little Giant ladders. However, credit card issuers are being more cautious about extending credit and some feel the next financial crisis will be the issue of mounting credit card debt, as reported by BusinessWeek.
 
It's important to note that not all the news is bad regarding the economy. The Wall Street Journal reports a surprising and broad-based surge in retail sales for November. The New York Times notes, "...the American economy has a history of unexpected resilience..." and that many experts feel we will only experience a slowdown or mild recession. Some believe that rate cuts by the Fed and a plan to keep adjustable mortgage rates from re-setting higher may cushion the impact on consumers.
 
No one can predict exactly where the economy is headed, but insights from those who track economic trends provide some possible scenarios for 2008 and beyond.
 
 
 
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