Economy: Healthy, but Caution Is Suggested

The U.S. economy is healthy but there are signs that retailers might want to temper their expectations for holiday 2005 and beyond with a dose of caution.

The Clear Thinking Group LLC, a Hillsborough, N.J.-based retail/consumer products manufacturing consultancy, says the U.S. economy is healthy but will likely not be as strong as it was in 2004. The firm is predicting GDP growth to slow to 3.1% for 2005, compared with 4.4% in 2004. In the retail sector, the firm predicts moderate growth in the second half of the year, with holiday sales possibly not matching 2004 levels.

Lee A. Diercks, a partner and managing director of the firm, says consumer sentiment regarding the economy is growing stronger. Housing starts are strong, as well. On the downside, gasoline prices are unlikely to drop below $2 per gallon, despite falling crude oil prices.

Separately, an article on economy.com says that many homeowners are highly leveraged and increasingly using nontraditional mortgages that leave them open to financial risk from interest rate fluctuations or declines in housing value.

Economy.com said that according to the Federal Reserve, homeowners' financial-obligations ratio stands at 16%, near the all-time peak of 16.2%, hit in 2002. But the type of leverage that households are using (such as adjustable-rate mortgages, hybrid ARM's, interest-only mortgages, etc.) makes this a riskier environment than 2002. Nontraditional mortgages have existed for a long time, but today's rapidly rising home prices would prevent many Americans from owning a home without them. But any correction in the housing market or even a small increase in interest rates could push some of these already-stretched buyers into default or, at best, place a very heavy burden on them to keep up with house payments.