The economy
The economy isn’t about to stall, although recent news may give that impression.
The current quarter will be the low ebb for the year, with GDP likely to grow only 2.5% after a slower than expected 3.1%, January-March.
Count on a modest second-half revival as easing fuel prices encourage consumers and businesses to pick up the pace of spending.

Overall ... GDP growth of 3.3% this year after a boomy 4.4% in 2004. The economy is downshifting to a more sustainable speed, roughly the average of the past three decades.
The Fed will keep hiking interest rates with a view to containing inflation in 2006.

Businesses are maintaining a strategic course for expansion. Most company managers aren’t fazed by jittery consumers and investors.
Firms are encouraged to see their price hikes finally stick. Sure, renewed pricing power will add modestly to the rate of inflation. But higher prices also are critical for improving the profits outlook. Firms need to be able to recoup the high costs of many raw materials.

Mostly good first-quarter profits point to a 12% gain this year for S&P firms, well above the 7% average increase of the past 50 years.
That’ll underpin business spending ... on track to advance 8.5%, somewhat slower than in 2004. Leading the spending charge are companies in telecommunications, health care, utilities, lodging, and packaging.
And hiring should perk up again soon after a worrisome slowdown in March. Odds are April’s numbers, due out May 6, will set the pace for about 2 million additional jobs this year, a bit less than last year.

Continued consumer spending gains will also fuel economic growth, even if wallets are strained by costly energy and rising interest rates on short-term credit. Also, the impetus from earlier tax cuts is fading.
Consumer spending ... up 3.3% this year, shy of the 3.5% pace that had been expected earlier this year and the 3.8% increase in 2004.

The trade deficit is going to weigh on GDP throughout the year.
Costly oil is mostly to blame: It balloons the cost of imports, which is a negative in calculating GDP. The trade deficit is on track for another record this year at 5.4% of GDP, rising from 5.3% last year.
However, the danger of a crippling oil price spike has eased. Major oil producers, notably Saudi Arabia, are working hard to keep oil near $50 a barrel. Higher levels would choke off economies worldwide and trigger an oil price plunge later on, which oil exporters don’t want.

Energy
High fuel costs are spurring Congress to pass an energy bill, although not in time to provide any price relief this summer for businesses, homeowners, and motorists.
Supply bottlenecks will be eased by next year as refiners get more leeway on blending gasoline with additives to meet clean air regulations. Lawmakers will also make it easier and faster to reopen old refineries and build new ones.
Energy conservation gets a big push in the bill, which earmarks a tax credit of up to 20% for homeowners who install windows and doors that make a residence more energy efficient. Also, a 15% credit for solar water heaters, as long as the water heated by the sun isn’t used for hot tubs or pools. Both credits are capped at $2000.

Other provisions in the bill will take years to bear fruit:
Tax breaks for energy firms. They’ll get to write off some costs for oil and natural gas exploration over two years instead of 10 or more plus new incentives to produce oil from shale and natural gas from sand. Firms will also get tax credits for developing biomass and landfill gas.
Faster construction of power lines. Congress will pave the way by giving the Federal Energy Regulatory Commission more power to OK them.
New liquefied natural gas facilities. Permitting will be faster.
And more energy from Alaska. After several years of debate, drilling in the Arctic National Wildlife Refuge will get the green light. A new natural gas pipeline to the lower 48 states is also in the cards.

Roads and rail
Good news for road builders and state transportation officials:
Congress will beef up highway funding with an extra $30 billion in bonds issued by the soon-to-be-formed Transportation Finance Corp. Bond sales will provide punch to the $284 billion likely to be approved for federal highway spending over six years, well below early estimates.
But lawmakers won’t approve a mandatory truck fuel surcharge that would lead to even more increases in companies’ trucking costs.

Higher rail freight costs loom for farmers, automakers, steel mills, heavy-machinery manufacturers and chemical and other firms. By fall, the Department of Transportation will sign off on a plan to let Norfolk Southern turn over some routes in the Northeast to a competitor, Canadian National Railway. Other rail carriers may make similar arrangements, cutting competition and pushing up prices.

© 2005 The Kiplinger Washington Editors, Inc.