2007 Economic Outlook:
Consumer Spending Will Remain Solid

The U.S. economy slowed markedly in the second half of 2006. Several key indicators of economic performance showed signs of weakening, including job growth, industrial production, home sales and construction, and vehicle sales. Despite the second half slowdown, 2006 will actually come in relatively positive overall, with gross domestic product and employment growing at their second-strongest rates since 2000.

Looking ahead to 2007, economic growth is expected to continue at a moderate rate, and the risks of recession will remain relatively small. Most importantly, consumer spending is expected to remain solid, which is vital to the success of the professional beauty industry.

Although a slowdown is expected in the durable goods sector, which includes big-ticket items such as automobiles, overall consumer spending will remain healthy. In particular, consumer spending on services, which includes salons and spas, is projected to accelerate in 2007 and post its strongest growth since 2000.

The Upside. Several factors will influence consumer spending in 2007, in both positive and negative directions. While the volatility and unpredictability of gas and energy prices were well illustrated during the last year or two, it appears that households may potentially benefit from slightly lower energy prices in 2007.

To begin the year, consumers are expected to get a break on their home heating bills, according to the U.S. Department of Energy's Energy Information Administration (EIA). For the first time in five years, the average prices for the major home heating fuels are expected to be lower than the previous year's level. Most significant is the price of natural gas, the fuel used to heat about three out of five homes, which is expected to be about 14 percent lower in the 2006-2007 winter season.

Gas prices are also expected to remain below 2006 levels. After rising to a near-record of $3.04 on August 2006, just slightly below the all-time record of $3.07 registered in September 2005, the nationwide average retail price for a gallon of regular gasoline trended sharply downward in subsequent weeks. Average pump prices were in the $2.20 range by early November, down more than 80 cents from the strong August level.

Overall, the price of regular gasoline is expected to average $2.48 a gallon in 2007, down slightly from $2.57 a gallon in 2006. If realized, these lower gas prices in combination with smaller home heating bills should help funnel more disposable income into consumers' pocketbooks.

The Downside. Throughout the housing boom in the first half of the decade, many households were able to supplement their income and support additional spending through home-equity borrowing and cash-out refinancing. However, this option is no longer available for many households, which dampens their ability to finance additional spending.

Another potential damper on consumer spending is the estimated $1 trillion of mortgage debt that is scheduled to reset to higher interest rates in 2007. This will cause monthly mortgage payments to increase by several hundred dollars in many cases, which will result in a smaller pot of disposable income that these households will have available for discretionary spending.

Overall, as long as energy prices remain relatively stable and the bottom doesn't fall out of the housing sector, 2007 will be another good year for consumer spending.