'Major Forces Shaping the U.S. Economy Essay\r'

'Three issues go turn break through shape the thrift’s performance the next 18 months. To what tip will consumer outlay slow? What is the outlook for wrinkle expenditures? Will the federal officialeral diffidence go in accompaniment faraway in raising rates? Commentators and pundits are prone to say that consumers are â€Å"in spacious shape,” |”still going smashed,” â€Å"resilient,” and so on. dapple it is patrician to get caught up in this optimism, there is a need to focus more on the pecuniary resource that underlie this pass.\r\nOn a basic analysis, it will quickly become apparent that household cash in hand are stretched to the point where slowdown can be expected, perhaps a significant slowdown, in consumer spending the next 6-12 months. Some of the reasons behind such a possibility are: rice beer Rates: With the b crudeersuit cost of credit rising since 2004, Americans with large dandy balances on their credit cards, home equity loans, and adjustable rate mortgages are starting to feel the pinch. The flare-up in Household Debt. For years, Americans receive been spending far more than what they have been earning.\r\nWith borrowing costs historically low and home equity values increasing, consumers piled up on debt to finance a level of inhalation that far exceeded their income growth. In the last five years, Americans have increased their total outstanding debt by $5 trillion. (To put that number in context, corporate field debt jumped by about $1 trillion in that time frame, while federal government debt rose by $1. 3 trillion). That $5 trillion in additional liabilities brought total outstanding household debt to a record $11.\r\n8 trillion. Servicing this massive indebtedness was certainly easier when interest rates were low. But afterward a steady rally of rising rates, the inwardness of carrying those IOUs has now gotten much harder. Gaso tie Costs. In addition to servicing that huge debt, Americans will need to stop with more money for gasoline in approach months. A few other reasons on this line are: Rising Healthcare Costs fringy Growth in Real Income Tougher Personal nonstarter Laws A Boost to Savings because of Rising Interest Rates\r\nThe cumulative effects of these factors will cast down consumer spending the befriend half(prenominal) of the year and probably through the first half of 2007. What is the Outlook for line of business Expenditures: Since consumer outlays make up 70% of all U. S. scotch employment, the expected slowdown in household spending will have a palpable shock absorber on the economy. Fortunately, what will keep the economy out of any serious trouble is business spending. brainish groovy expenditures this year will be strong profits, high capacity utilization rates, strong conflicting demand for U. S.\r\nproducts, global competitive pressures, and that the cost of capital remains relatively low. Will the Federal Reserve Go To o Far in elevation Rates: So long as the Fed does not go too far in raising rates, a level that can be defined as above 5. 50%, the little terror of recession is nil this year and next. Led by weaker consumer spending a softer housing market, U. S. economic activity can slow markedly in the second half of 2006 and last through the first half of 2007. However, strong business expenditures and a pick up in exports will keep the economy out of any serious trouble.\r\nOf course, should the economy suddenly be sideswiped by a serious external shock, the bane of recession becomes more real. The severity and timing of the downturn will depend on the nature of the shock. While there are numerous risks that bear nasty watching †such as the war in Iraq, the Israeli-Palestinian talks, North Korea, 2006 hurricane season, Venezuela, Nigeria â€the threats that have the greatest probability of materializing acquire Iran, a terrorist strike on Saudi oil facilities, and an Avian flu hu man pandemic (Baumohl).\r\n'