The economy
Count on continued good economic growth despite the May job slump. Average job gains are a robust 180,000 a month so far this year. The current economic expansion still has legs to carry it through next year, if not longer.
GDP growth will ease only a bit in 2006 to a still respectable 3%. In the first half of this year, GDP rose at a rate of about 3.5%. We expect that to be the average for the year.

One reason: Higher interest rates. With wages rising, we think the Fed will continue to push up the federal funds rate until it reaches 4.25% or so early next year. By then, the prime rate will be about 7.25%, up from 6% now. Fixed-rate 30-year mortgages will average around 6.5% by next spring.
That’ll take some froth off housing. Figure that by mid-2006, some of the heat in the national housing market will dissipate, with red-hot regional markets fading sooner. But it would take mortgage rates topping 7% to seriously chill demand in most areas.

Slower hiring next year will also play a part. As expansion plans are completed, payroll additions will drop off, holding 2006 job growth to about 1.9 million, down from 2.2 million both this year and last year.
Another factor: Sluggish global growth, tempering foreign demand for U.S. goods and services. Export growth will be limited to about 5%.

Expect growth in U.S. consumer spending to slow next year as well, slipping from 3.5% this year to about 3%. The momentum that has come from soaring home values should start to fade by the second half of 2006.
Businesses will dial back spending growth from the robust 11% this year to a more modest 7% next year as profit gains decelerate, wages creep up, and orders don’t. Investment in commercial structures ... factories, warehouses, and offices ... will lose steam starting next summer.
But governments will keep the tap open. Deficit worries won’t keep them from lifting total outlays by 2%, twice last year’s gain.

The silver lining of slower growth: Modest inflation, a few tenths of a percent below this year’s 3%. That’ll let the Fed stop raising rates by next spring. Only signs of a slump would make it reverse course.
It also improves the odds for a prolonged expansion beyond 2006. Tackling inflation now, at the cost of a modest slowdown, lessens the need to boost interest rates faster later on, risking a dramatic slowdown.

Energy
Good news for motorists: Gasoline pump prices will be lower during the peak summer driving season than this spring and winter. That’s the opposite of the usual pattern ... gasoline prices averaging 5¢ to 10¢ a gallon more in the summer than early in the year. The reason? Prices were sky-high this past winter because of supply woes.
Prices are still bound to spike in some regions, stirring charges of price-gouging. But it won’t be because anyone is taking advantage of consumers. Very stretched refinery capacity will be largely to blame.

Building
The push for “green” buildings will raise construction costs by more than 20%. But over the long haul, the buildings will save on energy costs. New York state; Cook County, Ill.; Washington state; and Marin County, Calif., are some areas requiring energy efficiency. Other state and local governments will adopt similar requirements.
Waiting lists for remodeling contractors are sure to get longer before they get shorter. Homeowners will spend a record $155 billion this year to fix up their homes, 6% more than last year. That’s good news for vendors of building items, flooring, cabinets, appliances, and so on.

© 2005 The Kiplinger Washington Editors, Inc.