Major Forces Shaping the U.S. Economy Essay

Three issues go out shape the economys performance the next 18 months. To what extent will consumer using up tiresome? What is the outlook for business expenditures? Will the provideeral Reserve go in any case remote in raising rank? Commentators and pundits ar prone to secernate that consumers are in great shape, still going whole, resilient, and so on. small-arm it is easy to get caught up in this optimism, there is a unavoidableness to focus more on the finances that underlie this spending.On a basic analysis, it will quickly become apparent that household finances are stretched to the point where slowdown can be judge, perhaps a significant slowdown, in consumer spending the next 6-12 months. Some of the reasons behind such a possibility are care Rates With the overall speak to of credit rising since 2004, Americans with large bang-up balances on their credit cards, dwelling equity loans, and adjustable rate mortgages are starting to feel the pinch. The blowup in Household Debt. For twelvemonths, Americans stick been spending far more than what they pose been earning.With borrowing costs historically low and home equity set increasing, consumers piled up on debt to finance a level of consumption that far exceeded their income growth. In the last five years, Americans have increased their total outstanding debt by $5 million. (To put that number in context, corporate firmament debt jumped by about $1 trillion in that time frame, small-arm federal government debt rose by $1. 3 trillion). That $5 trillion in additional liabilities brought total outstanding household debt to a magnetic disk $11.8 trillion. Servicing this massive liability was certainly easier when interest rates were low. But after a steady rally of rising rates, the consign of carrying those IOUs has now gotten much harder. Gasoline Costs. In addition to servicing that colossal debt, Americans will need to part with more money for gasoline in coming months. A few o ther reasons on this line are Rising Healthcare Costs Marginal Growth in substantive Income Tougher Personal Bankruptcy Laws A Boost to Savings because of Rising Interest RatesThe cumulative effects of these factors will depress consumer spending the plunk for half(a) of the year and probably through the first half of 2007. What is the prospect for Business Expenditures Since consumer outlays make up 70% of all U. S. economic activity, the expected slowdown in household spending will have a palpable impact on the economy. Fortunately, what will keep the economy out of any serious trouble is business spending. Driving capital expenditures this year will be strong profits, high capacity utilization rates, strong foreign demand for U. S.products, global competitive pressures, and that the cost of capital body relatively low. Will the Federal Reserve Go Too off the beaten track(predicate) in Raising 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 threat of quoin 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.Of course, should the economy unawares be sideswiped by a serious external shock, the threat 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 closemouthed watching such as the war in Iraq, the Israeli-Palestinian talks, North Korea, 2006 hurricane season, Venezuela, Nigeria the threats that have the greatest probability of materializing involve Iran, a terrorist strike on Saudi-Arabian oil facilities, and an Avian flu human pandemic (Baumohl).