The economy
Interest rates will continue to climb. The question is, how much and how fast?

A quarter-point this month for sure.
By year end ... a 4% federal funds rate, with banks charging their best customers 7%.
Most likely: A stream of small hikes, continuing the quarter-point pattern. But ...
Don’t rule out more-aggressive tactics. The Federal Reserve will kick into high gear, ratcheting up rates by half-point increments if Fed officials think the economy is too hot.

The fact is, the Fed is already on edge about inflation prospects heading into 2006.
Greenspan & Co. fret about cheap credit fueling overbuying of homes and other assets, leading to crashes later on.
Also on monetary gurus’ minds: Slowing labor productivity growth. The annual gain, running at about 4% a year from 2002 through 2004, will slip to 2 1/2% this year. That’ll force wages up in a growing economy.
The weak dollar, raising prices for imports that businesses need.
And high raw materials costs, which may push up consumer prices.
Moreover, GDP growth is running a bit too fast to suit the Fed. A robust start to this year sets the stage for a first-half pace of 4%.

Higher rates will rein in growth during the second half of 2005. The Fed will aim for a GDP expansion pace of about 3 1/2% rather than 4%, and the central bank should succeed. Figure on full-year growth of 3 3/4%.
Meanwhile, long-term rates should continue their recent upswing. Look for the 10-year Treasury yield to end 2005 at around 5 1/4%, nudged up by Fed jawboning and Asian countries buying fewer Treasuries.

Overall, a pretty healthy picture is emerging for this year.
Businesses are building a solid foundation for future expansion as fat order books and improved pricing power bolster managers’ optimism.
The strong February jobs report sets the pace for hiring this year, with about 2.5 million new jobs likely, following 2.2 million last year.
Businesses will increase spending by a solid 9%. Recent spending on equipment and IT is at levels last seen during the 1990s’ boom years.

Consumers won’t overreact to higher rates, still relatively low by historical standards. Consumer spending should climb 3 1/2% this year.
Despite budget-cut talk, government spending will rise 2%, the same as last year. The trade deficit will trim GDP marginally.
And inflation isn’t an imminent danger. The Consumer Price Index will rise 2 1/2% this year after a 3.3% gain last year led by fuel costs.

Business costs
No increase in the minimum wage this year. It will stay put at the 1997 rate of $5.15 an hour. Democrats want a hike of $2.10 phased in over 26 months. Republicans favor a buck less and also insist on tying it to controversial changes in family medical leave or flextime.
Neither Republicans nor Democrats are likely to budge this year.
But chances of a compromise improve in 2006. Minimum wage boosts usually come in election years, when both sides are wooing voters.

Steel prices will edge back up by April. The modest winter dip reflects a seasonal slackening of demand from builders, automakers, and appliance companies plus decreased costs for scrap metal and coal.
Major steel users will pay about $670 a ton for hot-rolled steel, up $30 from now. Expect cold-rolled to rise the same, to $760 a ton. Buyers of small quantities of either will pay $150 to $250 more per ton.
Price increases are coming for stainless steel, too. Now at $3,100 a ton, it should jump about 10% by spring as global demand picks up.

Higher taxes on airfares won’t fly. Congress will kill a plan promoted by Bush to add about $3 per flight leg for security needs. Struggling airlines say price wars would force them to eat the charge.
Currently, a one-way ticket costing $150 includes $32 in taxes.

Shipping
Look for toll plazas to sprout up on highways as many states, faced with soaring road construction bills, seek financing help. The miles of pay roads will double to about 10,000 within a decade.
Expect haulers to pass along the added expense to customers already grappling with fuel surcharges and very tight shipping capacity.
Tolls will fund new superhighways for heavily traveled routes in Calif., Colo., Fla., Ill., Ind., N.J., N.Y., N.C., and elsewhere. The planned Trans-Texas Corridor will be the world’s longest toll road, spanning 4,000 miles when it is completed. Some states, led by Va. and Colo., will get a federal OK to put toll plazas on existing roads.
Private partners will help with up-front road construction costs in exchange for a portion of the toll proceeds over a number of years.

Ports are looking to inland cargo depots to reduce congestion. Built 20 to 50 miles from ports, the remote centers are reached by rail and speed container processing. They’ll be commonplace by 2010 or so.
Importers and exporters will be slapped with a fee of about $25 per container to help defray costs of building and running these centers.
Southern Calif. is first on the list for an inland facility at Colton, 50 miles east of the ports of Los Angeles and Long Beach. The Port of New York and New Jersey is eyeing sites in N.J. and Pa.

© 2005 The Kiplinger Washington Editors, Inc.