Rising Rates Pinch Consumers

Much of the extra spending in recent years came from home-equity loans, as homeowners found themselves in the midst of a dramatic boom in real estate prices. That source of funds is now drying up as rates rise and the housing market cools. In September, the balance of home-equity loans at commercial banks rose 40% from a year earlier. By February, such loans had just 5% year-over-year growth.

"Home-equity loans have floating rates, so they're moving up now," says McGranahan. "They're costing people more money now and those debt-servicing costs will continue to climb with interest rates."

Debt-service payments rose 9% year over year in the fourth quarter of 2005, the highest rate of growth since 2001. Growth in consumer credit has slowed to a crawl in recent months.

"We're not talking about a scenario here when the consumer rolls over and dies, but certainly, the steepening yield curve and the liquidity situation suggest that some slowdown in spending is probably in the cards," says McGranahan.

>To order reprints of this article, click here: Reprints