How is 2007 Looking?

Standard & Poor's Ratings Services believes that in 2007 the biggest influence on U.S. corporate credit quality will continue to be corporate strategic and financial decisions rather than the economy's performance. S&P still expects efforts to enhance shareholder value, including leveraged buyouts, stock buybacks, and special cash dividends, as well as mergers and acquisitions—and the attendant execution issues—to drive rating activity. This dynamic should continue through next year, especially considering the anticipated continuing high activity of private equity firms and hedge funds.

Consumer spending, always an important part of the economy, should be relatively unaffected through the first part of 2007, despite a slumping housing market and higher interest rates. "Since the summer, lower energy prices have translated into solid sales performance for retailers. Money not spent at the gas pump goes straight to the shopping malls," says Standard & Poor's Managing Director John Bilardello. "But with a negative savings rate and higher levels of consumer debt, the momentum of consumer spending could slow in the latter part of the year, with negative implications for credit quality in some industries."

Further softening in the housing market could hurt building material manufacturers, specialty chemical companies, and forest product companies. A pullback in consumer spending could also temper expectations for higher profit margins in consumer-oriented sectors, as people become more realistic about their spending habits and curtail purchases of furniture, appliances, garden equipment, and other discretionary goods.

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