A "gathering storm" of economic pressures is threatening to depress consumer spending. The resulting slump in retail sales could have "a serious ripple effect" on the manufacturing supply chain, said trade-credit insurer Euler Hermes ACI. The consultancy believes that U.S. business conditions "will remain challenging for the foreseeable future." It cites recent figures showing that retail sales in September 2007 were at their slowest growth pace in five months, expanding by just half the rate of the previous September. The crisis in the housing market, coupled with higher energy prices, are major factors behind consumers' newfound caution. "Now that housing prices are falling, home equity is shrinking, and that source of funds for consumer spending has dried up," said Daniel C. North, chief economist with Euler Hermes.
Businesses, too, are feeling the impact of higher energy expense, and that could have a serious effect on the supply chain. The manufacturing sector posted losses of 1.3 percent in September, and the near future could bring more of the same. "Lower margins and profitability on the part of retailers could lead to longer payment terms to the manufacturers, which will in turn affect their ability to pay suppliers," said Steven Lapsley, risk vice president with Euler Hermes. "This ripple effect could be devastating to a company further down the supply chain selling on open account terms."
North predicted worsening business conditions through 2008. Up to now, he said, trade-credit conditions have managed to weather the storm that shook up public debt markets. But with slower growth ahead, businesses face "a more challenging environment" over the coming year, North said.
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