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OWINGS MILLS, Md. -- As a "gathering storm" of economic pressures continues to negatively impact the nation's economy and slow consumer spending, it could cause a serious ripple effect on the manufacturing supply chain, according to research and analysis from leading accounts receivable insurer Euler Hermes ACI.
U.S. retail sales in September increased at the slowest pace in five months, and the gain was 50 percent of that in September 2006. Experts, including Euler Hermes ACI chief economist Daniel C. North, attribute the slowing retail sales to a "more conservative consumer" that is facing negative pressures from several fronts, particularly the decimation of the housing market and higher energy prices.
"Now that housing prices are falling, home equity is shrinking, and that source of funds for consumer spending has dried up," said North in a statement. "Because two-thirds of all economic activity is driven by the consumer, this lack of funds could be a serious headwind against the economy. Furthermore, having tapped all the value in their houses for cash, consumers might now increase their credit card use and, given the already record high levels of consumer debt, this shift could lead to even more pressure on the consumer."
Businesses, including retailers, are also feeling the effects of higher energy prices, squeezing already thin profit margins and tightening business credit conditions, the company's analysts noted.
Euler Hermes ACI's risk v.p. - industry manager Steven Lapsley said that the combined effects of energy costs and lower sales could cause a negative ripple effect down the supply chain. "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," he said. "This ripple effect could be devastating to a company further down the supply chain selling on open account terms."
Because of the continued headwinds on the economy, North expects business conditions to continue to worsen through next year. "So far, trade credit conditions seemed to have weathered the storm which recently roiled the public debt markets. Slower growth and more difficult business conditions almost certainly lie ahead, and businesses that have done so well keeping problems to a minimum up until now might find a more challenging environment in the rest of 2007 and into 2008," he concluded.