business

A Rough New Year for Consumers

The U.S. economy's stalwarts will find themselves tested by higher prices for everything from bleach to natural gas in 2006

By Pallavi Gogoi

The American consumer has been the hero of the economy for the past few years, accounting for some 70% of U.S. economic activity. Even after gasoline prices spiked in the wake of Hurricanes Katrina and Rita -- causing a decade-low in consumer-sentiment indexes -- shoppers kept their wallets open. The U.S. economy grew at a 4.3% annual pace in the third quarter, with consumer spending accounting for 2.97 percentage points of the growth.

Indeed, it appears that consumers have regained their confidence. A report released Dec. 28 by research group The Conference Board shows its Consumer Confidence Index for December moved to 103.6, from the revised 98.3 seen in November and the 85.2 in October. And shopping-industry analysts and the National Retail Federation expect retailers to report an increase in holiday sales of 5% to 6% vs. a year ago.

But will consumers maintain their confidence and free-spending ways in the coming year, as they're hit with higher prices on such basics as paper towels and beer, as well as for energy, credit, and health care? Here's a look at some of the ways consumers will be getting squeezed.

Consumer Staples: Starting January 2, 2006, Clorox (CLX ) will increase prices on 40% of its portfolio. That means shoppers will be paying more for everything from Glad trash bags and Clorox bleach to Brita filters and Match Light charcoal. Kimberly-Clark (KMB ) is raising prices an average of 6% on its Scott bathroom tissue, paper towels, and Kleenex tissue and napkins to offset higher raw material and energy in the first half of 2006.

Kraft Foods (KFT ), the nation's largest food manufacturer, says it's increasing prices an average of 3.9% because of rising energy and packaging costs. By Jan. 2, expect higher prices to start rolling in for Oreo cookies, Oscar Mayer lunch meats, and Kraft Macaroni & Cheese. Prices for soft drinks may get harder to swallow if Coca-Cola (KO ) and Pepsico (PEP ) pass along price hikes from bottlers to consumers. Eastman Chemical (EMN ), the largest maker of plastic for soft-drink bottles, raised prices as much as 40% because of increased costs for petroleum, and in turn bottlers for the two soft-drink giants plan to raise prices 2% to 3%.

Anheuser-Busch (BUD ), the nation's largest brewer, plans to raise prices next year on such popular brands as Budweiser and Michelob. In 2005, it skipped an increase and used discounting to maintain its share of the U.S. beer market, but Anheuser doesn't plan any such concessions next year.

Credit: Home-equity loans and refinancing, which brought cheap money into homeowners' pockets, will no longer serve as piggy banks as interest rates continue to rise and growth in home value slows. Already the Mortgage Bankers Assn. is reporting less refinancing activity. In its latest survey, for the week ended Dec. 23, home purchases fell 11.3%, and the refinance index decreased by 11.2%. All kinds of adjustable-rate loans -- such as mortgages and school loans -- will likely go up.

Health Care: Employee contributions for health care will increase an average of 20%, to $1,612, from 2005, according to consulting firm Hewitt. In addition, workers can expect to pay more in out-of-pocket expenses for such things as co-payments, coinsurance, and deductibles. The average outlay will go from $1,366 in 2005 to $1,524, says Hewitt.

Utility Bills: According to the U.S. Energy Dept., people who heat their homes with natural gas can expect to pay 48% more on average this winter than last. True, gasoline prices dropped to around $2.19 a gallon in the latest week, down from over $3 in September, but the price of natural gas remains near record highs because of production interruptions in the wake of Katrina and Rita.

Signs of relief are apparent in a few areas. Both UPS (UPS ) and FedEx (FDX ) will reduce fuel surcharges starting the first week of January. Stretches of unseasonably warm weather in the Northeast have helped soften -- albeit temporarily -- the heating-bill blow.

And chances are that cereal prices won't climb. General Mills (GIS ) boosted them in 2005 to help offset a surge in what it paid for food commodities and fuel. But it admits that the increase hurt its market share as consumers turned to rival Kellogg (K ). In fact, you may even see discounts for General Mills products as it tries to grab back market share.

In other good news, troubled auto companies General Motors (GM ) and Ford (F ) are expected to reduce the list prices on many of their 2006 models. Unfortunately, such areas of respite are likely to be the exceptions, and that could make it harder for American consumers to maintain their economy-bolstering ways.

Gogoi is a reporter for BusinessWeek Online in New York

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