Economic growth disappointing in 2005 Q4; Predicted to be slower in 2006

The economy only increased 1.6 percent in the fourth quarter of 2005, but that was an improvement upon the preliminary estimate of 1.1 percent. However, growth is expected to slow in 2006 compared to the full year 2005 rate because of stagnating housing prices and rising interest rates. Those two facts are likely to significantly hurt consumption and could also hurt those who are highly indebted, as their disposable income after servicing their loans will be lower and their capacity to borrow further constrained:

"But for all of 2006, they [economists] believe consumer spending won't be as strong as it was last year. The cooling housing market and the expectation that owners won't be seeing huge gains in the value of their homes figure prominently in this scenario of a more subdued consumer. The toll of rising interest rates and elevated energy costs also play roles."

With lower growth next year, there isn't a large chance of an economic crisis, but in the future the risk will be higher as lower growth will translate into lower tax revenues and higher deficits. The servicing costs of the deficit should not rise much because it can be financed by international borrowing. However, this creates a higher vulnerability of the U.S. to future adverse economic news. If holders of American debt begin to believe that the U.S. will not be able to repay the debt, they will demand higher interest rates, which could spiral into a self-fulfilling crisis. The economy is on modest footing today, but the high indebtedness, overvalued housing market, low wage increases and high government deficits projected well into the future are all quite troubling.