Energy
The bad news: Energy will remain costly at least through the end of this decade. Unlike the spike of the late 1970s-early 1980s, recent oil price gains will stick, not abate.
But there’s a good side to this story:
Pricey fuels are sparking investments in conservation and expanding energy sources. Both will temper the U.S. appetite for energy.
So pain now will yield gain later.

Energy firms are reviving many projects previously on hold. Sustained high fuel costs in the coming years will make them worthwhile.
Natural gas extraction from sand, shale, and coal beds will supply as much as a third of U.S. demand for natural gas in 10 years.
Oil produced from shale will supply 2 million barrels a day of the 25 million barrels a day of total U.S. oil demand by 2020.
Liquefied natural gas terminals will handle 4 trillion cubic feet of natural gas imports by 2015, up from 1 trillion cubic feet this year.
Wind power generation capacity is poised to rise 30% a year as R&D on blades, motors, wind sensors and batteries accelerates. Investments by GE, Vestas, American Superconductor and others ensure it.
Solar power is due for a lift, now that BP Solar is moving ahead with plans for thin-film, flexible solar cells for use on buildings.

Energy users are busily searching for savings, notably in the most-fuel-dependent industries:
Airlines will opt for more-efficient airplanes, such as Boeing’s 787, which is due out in 2008.
Truckers can use power packs instead of idling to run coolers, etc., when trucks aren’t moving.
Manufacturers will turn to heat-power systems, capturing waste heat from industrial processes.

Many firms are seeking to cut electricity use. “Super T8” lights reduce lighting bills by 15%. Tuning up HVAC systems and repairing leaky ducts improve heating and air-conditioning performance, lowering costs by 20%.
Consumers will favor energy-stingy appliances and equipment ... water heaters, AC systems ... bearing Energy Star high-efficiency ratings. Another popular move: Installation of programmable thermostats that reduce homeowners’ costs for heating and cooling by about 10%.
The economy’s energy efficiency is poised to rise 10% by 2010, meaning it’ll take 10% less energy to produce a given amount of GDP. Efficiency will have gone up 50% since the first oil embargo hit in 1973.

Economy
GDP will expand by about 3.5% in 2005, a quarter-point less than was expected earlier this year and down from 4.4% last year. Costly oil is showing up in slightly slower consumer spending growth and a widening trade deficit, both negatives in the GDP equation.
The trade gap is heading for another record this year ... about $654 billion, or 5.4% of GDP. But the gap will start to narrow in the second half as the weak dollar boosts demand for U.S. exports and Americans increasingly buy domestic goods over higher-priced imports.
Hopes are fading that China will let the yuan rise vs. the dollar later this year. China is bristling at recent threats from Congress to slap duties on all Chinese imports if the yuan isn’t allowed to go up.

The recent drop in mortgage interest rates isn’t here to stay. It’s just a pause after rates took a hasty turn higher in February and March.
But the decline does usher in a period of slower increases. The popular 30-year fixed-rate mortgage will end 2005 at an average 6.5%, low enough to keep home sales brisk at nearly 7.4 million this year.
Home prices are poised to gain a respectable 4% to 5% on average after last year’s 8% advance. However, some red-hot housing markets ... Los Angeles, San Diego, Las Vegas, Miami, Boston, and New York City ... still appear vulnerable to prices leveling off or declining soon.

Big companies are well-equipped to handle rising interest rates.
Most have plenty of cash on hand to tap for financing as needed. On average, larger firms’ liquid assets are 40% of their short-term debt, the highest level in 40 years and well above the 50-year average of 31%.
But small firms face a tougher haul. They’re more dependent on borrowing, and many have to borrow at rates indexed to the prime rate. As the Federal Reserve hikes the federal funds rate to 4% by year end, banks in turn will increase their prime rates to 7% from 5.75% currently.
Higher rates will hurt any firm with a large, expensive inventory that is financed with short-term credit ... auto dealers, home builders. But car dealers may receive some financial assistance from automakers, which want dealers to keep inventories readily available on their lots.

HR
Firms are adopting new strategies on pay raises as the job market heats up and competition for crucial employees increases. Companies are trying to balance the need to keep costs under control with the ability to continue to attract and retain the best workers.
Some businesses alternate annual pay hikes and lump-sum payments to save on the compounding costs of granting pay increases every year.
Others are stretching out the time between pay evaluations to 14, 16, or 18 months instead of a year, which has been the standard.
But the best employees will still get annual pay raises.

More employers are pooling sick and vacation leave for employees.
It’s a win-win situation. Employers save money on overtime and temporary help because workers don’t cheat as much on sick leave. Meanwhile, healthy workers gain flexibility and longer vacations.

Firms will rely more on personality tests to screen applicants. Long the norm for high-risk positions such as police and firefighters, the tests are now proving useful for retailers and others. The screening can help predict whether someone will be good at dealing with the public, will be honest in handling cash, or will be likely to change jobs often. For more about these tests, see the Society for Industrial and Organizational Psychology Web site.

© 2005 The Kiplinger Washington Editors, Inc.