Economy
Three years into economic expansion... Many industries still face winnowing. Some have excess capacity left from the 1990s. In others, both cost and competitive pressures are spurring the trend toward consolidation.

It will eventually mean higher prices as players drop out ... in construction, banking, retail, airlines, auto parts, media, high tech, and other sectors. The survivors will finally gain the muscle to raise prices.
Consolidation will crimp job growth in the short term as struggling companies let staff go and merged firms get by with less.

Shakeouts will lead to more mergers, though they won’t return to the frantic pace of the 1990s’ tech boom. Deals will total about 8,000 this year compared with 7,580 in 2003.
Bank mergers aren’t over, despite seven megadeals since last October. The number of banks, now above 10,000, will keep falling as large lenders seek opportunities to grow, mostly in the South.
In financial services...fewer mutual fund firms. New regulatory costs and scant investment growth will drive many small firms out of business or into mergers, shrinking the number of funds.

The retail sector is bloated. Total floor space of 9 billion square feet is twice that of the 1980s.
The squeeze is on midtier chains ... Dillard’s, Bon-Ton ... from both low- and high-end stores.
Auto parts makers face some serious cutbacks in the next year or two as big U.S. carmakers scale down production and keep trimming costs.
A cost-driven shakeout is coming in the home-building industry. Expensive materials favor big builders that can get volume discounts. The top 10 will have 40% of the market by decade’s end, up from 20% now.

In IT, the ranks of semiconductor makers are thinning. Big firms that can afford R&D will prosper as demand shifts to consumer products, such as appliances and wireless gadgets, and away from business systems.
The demise of some of the high-cost airlines is also near. Travelers on some routes will lose service until low-cost carriers grow.

Industry consolidations strengthen the economy in the long term, yielding more-efficient firms better able to compete in global markets. Unfortunately, workers and investors bear the short-term costs.

Energy
Fuel costs will soar as oil hovers near $50 a barrel this winter.
Heating oil will rise an average of 30% over last year’s level, selling for about $2.10/gal. from December 2004-February 2005. In the Northeast and Midwest, tack on around 40¢ if there is a colder-than-normal winter.
Expect natural gas to cost nearly 20% more ... $7 per million Btu vs. $6 last December-February. In colder areas, prices will rise to $10 or more.
Prices for electricity are also in for a seasonal bump-up. At about 9¢ a kilowatt-hour, they’ll average 5% or so higher this winter. California and parts of the Northwest and Southwest may see a jump of 8-10%.

A new industrial technology can save energy and cut emissions. It captures volatile organic compounds, such as paint and ink fumes, and turns them into a fuel that can be used to generate electricity.
The fumes-to-fuel process eliminates special incinerators fed by pricey natural gas and means big savings for manufacturers of tools, autos, furniture, and consumer electronics. Developed by Ford and Detroit Edison, the system is sold by Climate Technologies Inc.

Tech
Business spending on information technology will grow 6% in 2005 as firms replace aging computers and the software that runs them. PC orders are up 11% this year and will rise about that much next year. Look for a more modest 3%-4% gain in software for PCs and servers.
Firms can probably get lower prices by holding out another year. The PC replacement boom should run out of steam about a year from now, deflating prices until Microsoft’s next big Windows update in 2006.

A new wireless system may revolutionize telecommunications. By 2007, laptops and PCs will come with the technology, called WiMax. It’ll replace Wi-Fi as the top choice for wireless hookups to the Web.
The big advantage? Range. WiMax can support high-speed Web links five or more miles away. Wi-Fi is good for only a couple of hundred feet. With WiMax, a handful of low-cost base stations can serve an entire city.
Another benefit: Cost. WiMax requires little infrastructure or customer service. That means local dial-up providers and start-ups can offer high-speed Web access and phone service for about $30 a month.

© 2004 The Kiplinger Washington Editors, Inc.