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With the holiday shopping season officially under way, the nation's retailers are once again counting on consumers to dig ever deeper into their pockets to make the season a happy one.

Early indications are that consumers once again won't disappoint. Chicago research outfit ShopperTrak said retail sales on Friday were almost 11% higher than a year ago, while Visa International also reported a double-digit increase in purchases over the weekend. On average, economists are looking for consumer spending to rise by 3% in the fourth quarter, compared with a year ago.

The one thing economists have been able to count on the past few years is the unfailing spirit of the U.S. consumer to keep spending. But rising interest rates and energy costs probably will crimp discretionary spending in the coming year.

Any pullback by the consumer, of course, would be bad news for retailers, regional banks and credit card companies such as


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Wells Fargo

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Capital One

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In particular, the

Federal Reserve's

move to raise interest rates will make it increasingly difficult for homeowners to squeeze any more cash out of their biggest asset. Historically low interest rates the past two years prompted homeowners to refinance their mortgages at a record clip and in the process turn their homes into cash-gurgling ATMs.

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Last year alone, borrowers took $312 billion in cash out of their homes, mainly through so-called cash-out refinancings, according to the Federal Deposit Insurance Corporation. This year, the total is expected to reach $260 billion, with homeowners taking out a greater chunk of that cash through home equity lines of credit.

Much of the equity liquidated by homeowners was pumped directly into the economy, as homeowners used the money to refurbish homes, buy cars, purchase stock, pay for vacations and pay down some of their credit card debt.

In all, mortgage-related debt accounted for 90% of the $1.7 trillion in consumer debt accumulated during the past two years.

Next year, however, the amount of cash homeowners will be able to extract from their homes is expected to fall well below the $260 billion figure, with the refinance market grinding to a halt. Though the home equity market is booming right now, that too is expected to fall off as interest rates continue to rise and the escalation in home prices levels off.

"The consumer has been living off of monetary fiscal stimulus for the last few years," says Richard Brown, the FDIC's chief economist for risk analysis. Brown says that with the refinancing boom now over, it's not clear worker salaries will rise fast enough to fill in the gap.

Brown says many of the optimistic forecasts for consumer spending next year are banking on a continuing robust home-equity market. But he says those forecasts are assuming the housing prices in most of the country will continue to rise.

"If home prices drop a bit or just level off," says Brown, "it will have an impact on the ability of people to tap home-equity lines of credit."

A drop in housing prices reduces a homeowner's equity stake in his house and his ability to borrow against it.

To be sure, Brown isn't talking about a housing crash or the bursting of the housing bubble that many doomsayers have been predicting for months. All he's talking about is a leveling off of housing prices, something that seems plausible after several years of soaring home values in much of the country.

But if consumers are unable to turn to their homes for cash, this could have some tough consequences, particularly for those living on the margins and struggling to make ends meet.

No doubt, many consumers will resort to running bigger balances on their credit cards as a way to keep spending. Indeed, there are some early indications that that already may have begun. In the third quarter, revolving consumer debt, credit card debt that isn't paid off each month, rose by $10 billion, after falling by $6 billion in the second quarter, according to the Federal Reserve.

Yet with the average household already carrying $7,500 in credit card debt, taking on more debt isn't necessarily a good thing, except for the card companies that can collect higher finance charges. Moreover, rising interest rates mean higher credit card rates, something that also could cause consumers to think twice about buying a big-ticket item with plastic.

Brown says he's most worried about consumers who basically are living from paycheck to paycheck and are most likely to have taken out a variable-rate mortgage. The interest rates on these mortgages rise in response to a surge in bond yields, which usually move in sympathy with actions taken by the Federal Reserve.

Brown says two-thirds of the so-called subprime mortgage market, mortgages sold to individuals with poor credit histories and lower incomes, are variable-rate mortgages.

"These people are very vulnerable to higher interest rates," says Brown.

In the worst-case scenario, homeowners on the margins could lose their homes to foreclosure, or file for bankruptcy protection to avoid paying their other debts. At best, a surge in monthly mortgage payments will mean homeowners will rein in their discretionary spending.

Either way, there's a good chance Wall Street and Washington won't be able to look to the consumer as the economic savior in 2005.