Business costs
Don’t expect much relief on costs next year, despite slower economic growth. The markets for labor, business services, raw materials and other necessities are tight and will remain so at least through 2006.

Wages and salaries will rise 3.5% on average, a bit more than this year. As the jobless rate hovers around 5% in 2006, skilled workers will become harder to find.
Expect more pain on health costs, though not quite as acute as in recent years. The average rise for health insurance premiums will slow to about 8% from this year’s 12%. As workers bear more of their own health bills, they’ll be more cost-conscious about services.

And energy will be an ongoing drain. Demand for fuels by China and other countries with fast-growing economies will buoy prices. Gasoline ... $2.20-$2.25 a gallon on average, up from about $2.10 a gallon this year. Electricity costs ... about 4% higher than 2005.

Borrowing money will get more expensive as the Federal Reserve boosts interest rates a few more times between now and early 2006. Bank prime rates are likely to average 7% next year, up from 6.25% now. Inflation concerns will send long rates higher, with the 10-year Treasury at 5.25% by the end of next year. That’ll carry over to longer-term loans businesses use to finance acquisitions and major capital investments.

A small rise in rents for industrial properties ... warehouses, factories, etc ... of about 2% is on tap after holding flat this year.
Office rents ... gaining about 5% between now and the end of 2006. Both suburban and downtown vacancy rates are declining at a gradual pace. The burbs will probably attract faster demand as firms seek more room.
A 2¢ jump in first-class mail rates to 39¢ is in store.
Business rates on bulk and presorted mail will rise about 5%.
Shipping rates will increase at a slower pace than this year. Trucking costs will rise 5% while ocean freight will cost 8% more.

Road warriors face a mixed bag. They’ll see a modest 2% increase in business airfares but no change in leisure fares due to expanded use of low-cost carriers and alternatives to travel such as videoconferences. But hotel rooms will cost 6% more, accelerating from this year’s 5%. New hotels aren’t being built fast enough to meet growing demand.

The economy
Slower productivity growth will pinch companies’ profit gains. Increases in output per hour worked will trail hikes in wages this year and next. The opposite was true in the past few years, allowing firms to hold down cost per product, which proved to be a boon for profit margins.

The trend raises inflation risks. Companies will be inclined to lift prices to offset higher wages eating into profits.
The Fed’s rate hikes are a response to this danger. The Fed aims to curb demand, making it harder for companies to boost prices.

The stronger-than-expected July job numbers are no fluke. The 207,000 new jobs highlight employers’ growing economic optimism.
The U.S. will add 2.3 million jobs in 2005, a bit more than 2004 and the biggest gain since 1999. Employment creation is likely to slow a bit next year, in line with a modest downshifting of GDP growth.

Revival of the 30-year bond is a big financial help to Uncle Sam. The government can lock in currently low interest rates on public debt.
The 30-year also reduces rollover risk ... instances when holders of bonds don’t purchase successor bonds when their current ones mature, forcing the government to offer higher interest rates to lure new buyers.
That’ll help keep rates lower over the longer term for borrowers taking out mortgages and other types of loans linked to Treasury rates.

Building trends
Regs on access for the disabled will cover only new buildings, not existing ones...a big relief for owners of small businesses. New rules from the Justice Department, likely to take effect in mid-2006, will require the inclusion of more van-accessible parking spaces, lower light switches, bigger bathroom stalls with grab bars, etc.
More states are enforcing rules on customer access to restrooms. Check state and local ordinances to be sure of their requirements.

Count on a peppier nonresidential construction market next year, led by a 10% spending gain on public projects ... roads, schools, etc. That’ll be up from a 7% increase this year, thanks to a new highway bill from Congress and the improved finances of state and local governments.

© 2005 The Kiplinger Washington Editors, Inc.