Academic journal article ABA Banking Journal

More Pain, but No Freefall

Academic journal article ABA Banking Journal

More Pain, but No Freefall

Article excerpt

WHILE THE HUMAN TOLL AND economic damage from hurricanes Katrina and Rita are still being tallied, it's clear that the economic impacts will stretch well beyond the Gulf Coast to all corners of the nation.

Of great concern is the mood of the consumer. Consumer spending accounts for more than 70% of economic activity, so even a modest pullback can have far-reaching impacts on the economic outlook. Consumer confidence has stumbled badly, as one might expect following dire media reports predicting more increases in gasoline and natural gas prices and possible shortages of heating oil.

Perhaps of more concern is the hit the labor market will take--at least temporarily. The unemployment rate rose in September and non-farm payrolls contracted for the first time in more than two years. Those reporting jobs hard to get rose markedly, and consumers appear to be scaling back big-ticket purchase plans, from automobiles to refrigerators.

Taking the hardest hit will likely be those least able to afford it. Lower income households that rent instead of own a house have missed out on the gains from the housing boom. They also tend to have higher debt to income ratios and are thus more vulnerable to Fed interest rate hikes and energy-price spikes. Overall, consumer spending in the fourth quarter is expected to drop to about 2% annualized growth after trending at nearly 4% over the last two years.

Moreover, consumer spending may not recover to previous trends next year. Home price increases and aggressive home equity extraction have helped cushion the blow from energy price increases over the past two years. Going forward, housing will be less of a support and could eventually become a drag on consumer spending growth sometime in 2006. …

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