The economy
There’s another soft patch on the way:
Early in 2005, the economy will slow.
Blame it on energy costs ... $50 a barrel or thereabouts for oil at least through summer. What’s more, the highly volatile combination of brisk world demand for oil and natural gas, U.S. refiners’ trouble building inventories, and the political ills of producer nations spells huge risk. Odds of prices spiking higher are a whole lot greater than odds they’ll drop.

First-quarter GDP growth ... less than 3% as high heating bills slam consumers and businesses take a rest after a buying spree in late 2004 before some key tax breaks expire.
By spring, the pace will pick up a bit as heating costs abate. But relief from fuel cost woes won’t be complete. While other fuel prices are easing, the tab at gasoline pumps will head higher into the summer.
For 2005 as a whole, growth still won’t edge much higher than 3%, about the same as in 2003 and a full percentage point below this year.

Flagging consumer spending accounts for most of the slowdown, with the pace of growth slipping under 3%, the slowest rate since 2001. In addition to being burdened by sky-high fuel bills, American consumers will lose the lubrication that fresh tax cuts have given to spending each year since 2001. And with mortgage interest rates likely to climb from 5.7% to 7% by year-end 2005, cash-freeing refinancings will be rare. Although job growth will quicken, it won’t be enough to offset the drags.

Energy woes also mean business spending can’t play the rescuer. Shipping surcharges and price hikes for energy-intensive raw materials, plus the cost of fuel itself, will sap business investment strength. And in the face of subpar consumer spending, there’s waning enthusiasm for expanding. So business spending growth will shrink from 10% to 7%.
Compounding the problem: Reined-in export markets, as fuel prices erode demand in Europe and Asia, limiting increases in exports to 8%.

Some particular industries will take the brunt of the blow:
Makers of energy-intensive goods, of course. Global competition means that manufacturers of paper, plastics, chemicals, and aluminum, for example, must absorb most of the cost hike rather than pass it on. Industrial equipment and IT manufacturers, as potential buyers reapportion their budgets and delay nonessential upgrades and expansions.
And retailers, who’ll be hit up for surcharges on shipping costs.
Rural economies are also vulnerable as farmers face rising bills for fossil-fuel-based fertilizers, vehicle fuels, livestock heating, etc.

Business costs
A welcome respite from rate hikes for SOME insurance coverage:
Property and liability policies won’t cost much more, on average, next year than this year. After increasing by 15% in 2003 and a whopping 25%-30% the year before, property insurance rates are finally stabilizing.
Areas hit by hurricanes are in for more bad luck, though ... another set of rate jumps of about 10%.

Still headed up: Medical malpractice, directors’ and officers’ liability, and workers’ comp.
And prospects for terrorism insurance are iffy. Some insurers will balk at extending coverage beyond 2005, when legislation requiring the feds to help pay losses on huge claims expires.

Finances
Small businesses are being wooed by national and regional banks seeking a bigger piece of a market once ruled by community banks. Already, nearly half of smalls’ loans are held by the 58 largest banks. And the bigger banks are pushing corporate credit cards for small firms. Card numbers will top 12 million by year end, up from 4 million in 2000.
Higher fees are back for some 7(a) loan guarantees from the Small Business Admin. The fees were lowered after 9/11 to spur growth. The SBA also stopped piggybacking other loans on those it guarantees. The practice effectively lets banks lend more money to a given creditor. If Kerry takes the White House, fee hikes will probably be reversed. Bush, however, wants the higher fees to wean the program from subsidies.

Prepaid gift cards issued by banks will soar in popularity, from sales of $700 million in 2002 to more than $30 billion in 2007. Because they can be used everywhere credit cards are accepted, gift cards can replace cash advances for employee travel and be used as rewards. The cards come with fraud protection and, if lost, are easily replaced. But be careful ... purchase and account maintenance fees erode their value.
Increased credit card competition spells better reward programs. The Supreme Court ruled that MasterCard and Visa can’t stop banks affiliated with them from offering American Express and Discover cards. As a result, look for card issuers to grant more points per dollar or expand options for redeeming points as they vie for customers.

© 2004 The Kiplinger Washington Editors, Inc.