Kiplinger Connection
The Economy • Federal Spending • Energy

The Economy: A rundown of the signposts that will presage a coming upturn.
Federal Spending: The next stimulus package will benefit small businesses most.
Energy: Watch the ARPA-E to come of its own in slashing alternative energy costs.

The Economy
Here’s how you’ll know a bottom is near, in a recession turned far uglier than anticipated:
First-time unemployment claims will drop.
Consumer spending will have more oomph, boosting retail sales for a few months in a row.
Stock market rallies will last for weeks. Typically, stock markets foreshadow recoveries. This time, though, investors may wait and watch for signs that the government’s efforts are working.

The seeds of growth are only being sown ...
And it’ll be summer before they sprout, nurtured by Washington’s massive efforts to help.
It’ll take months to get stimulus cash spent: $50 billion in infrastructure funds for all 50 states.
But paychecks are already getting bigger, with $116 billion headed to workers over two years, thanks to an adjustment in federal tax withholding that was part of the $787 billion stimulus package.

Schools will get $44 billion by April ... with $56 billion more disbursed this year and next.
Up to $75 billion in mortgage aid is ready, to be used as early as April both for refinancings and to modify loans on homes at risk of foreclosure. Thirty-year fixed-rate mortgages are already low at 5% ... even as low as 2% for those who qualify for loan modifications.
Private equity groups will team with Treasury in April to remove toxic assets from banks’ books, a key step toward thawing credit and encouraging borrowing.
By late spring, the Fed will start doling out more of the $5.6 trillion it pledged in loans and loan guarantees to firms and consumers, easing credit flow.

Faint glimmers of a brighter tomorrow: Energy prices remain low ... so average weekly pay gains continue to outpace the rate of inflation. Retail sales gained in January and again in February, excluding auto sales. The dollar remains relatively strong, which is a negative for exporters, but it allows Uncle Sam to continue selling billions of dollars of Treasuries in a currency favored by investors.
Plunging home prices are luring buyers, modestly lifting home sales. That will persist through 2009 as more of the overhang in home inventory is reduced.
Investors are beginning to test the waters and wade back into equities. With trillions of dollars sitting on the sidelines, the rally that began on March 10 in major indexes hints at the impatience of some investors to put more cash to work.

There will be plenty of bad news between now and when a recovery begins: Failure of a big bank or the collapse or takeover of a major automaker, for example.
The 8.1% jobless rate will keep climbing, even after recovery starts. Jolts to confidence will trigger setbacks. When recovery comes, it will be uneven.

Federal Spending
Another stimulus? A growing chorus of economists say we’ll need it, even though it’s too soon to know whether the one just passed will work. The concern: 2 million jobs lost in three months ... more than half what the stimulus was designed to save. Obama and key congressional Democrats won’t rule it out, though there is opposition to adding still more to the huge federal budget deficit.
It depends on whether the economy shows improvement by summer.
A second bill, if there is one, would likely be heavy on business tax cuts.
Smalls would be the biggest winners, with the Small Business Admin. getting more for a host of lending programs. Additional tax cuts are probable, too. Many breaks for small companies were ultimately dropped from the earlier stimulus.

Larger firms also hope for tax breaks that were denied in the stimulus bill when Republicans insisted on keeping the cost down. There’s a big push on now to add them, either in the fiscal 2010 budget legislation or in a second stimulus.
Topping the list is a five-year carryback on losses incurred in 2008 or 2009. Now only firms with $15 million or less in annual sales can carry back 2008 losses that long. The change would mean a potentially huge tax refund for thousands of businesses. Obama included it in his fiscal 2010 budget, and it has lots of support, but it would add to the deficit.
Bottom line: Don’t spend the money just yet.

Good odds for several other items when the new budget is approved:
An expansion and improvement of E-Verify, a program that lets employers check the legal status of prospective job candidates. A more reliable system is almost a prerequisite for a later move toward comprehensive immigration reform.
$5 billion for high-speed rail, on top of the $8 billion already approved.
About $4 billion in EPA grants to states to use for water treatment efforts.
A $250,000 limit on total crop payments per farmer per year. No chance, though, on Obama’s plan to phase out direct payments to farmers with gross sales over $500,000 a year. Farm state lawmakers in both parties are raising a stink.

Energy
Expect relatively stable fuel prices this year. Demand has stopped falling, and OPEC is enforcing production limits, essentially setting a price floor. Oil will range between $40 and $50 a barrel for a few months, then rise somewhat.
Gasoline prices will move up a little ... from $1.90 per gallon this spring to about $2.10 during the peak summer driving season ... before easing in the fall.
Diesel will drop to $2 a gallon by late spring, from $2.15 now, then jump to $2.50 in the summer. By the end of the year, it’ll slip back down to about $2.35.
Retail heating oil will hold around $2.20 a gallon, rising to $2.40 by Dec.

Obama is tapping the brakes on development of shale oil. He’s moving to rescind Bush policies to jump-start production of the U.S.’ big untapped reserves in federally controlled fields in the West, mainly Colorado, Utah, and Wyoming. There are an estimated 1.5 trillion barrels ... a 200-year supply at current usage rates.
Obama is voiding regs that let private firms secure leases with low royalties for commercial sales from oil collected from these fields. But he is going back to the status quo, removing the extra incentives, rather than halting production cold. The administration wants to proceed slowly to make sure oil can be extracted without causing a lot of water and air pollution, two concerns of environmentalists.
Oil execs fear the window on private land exploration may also close. A crackdown on pollution could disrupt plans by ExxonMobil, Royal Dutch Shell, EGL Resources, Brazil’s Petrobras, and others eyeing development of oil shale.

ARPA-E may never be a household name, but you’ll be hearing it a lot more.
The agency will play a lead role in funding new energy technology research to cut costs and boost efficiency. It got $400 million in the stimulus bill, with more to come later. Congress chartered the Advanced Research Projects Agency-Energy almost two years ago, but it was denied any funding by then-President Bush.
ARPA-E will help private industry develop new materials and processes to slash the cost of alternative fuels, improve efficiency, and cut plant emissions.

States are also getting into the green power game. Ind., Mich., Minn., N.C., Ore., Wash., and Wis. will soon join Calif. in offering some kind of incentives to firms and even consumers that install solar, wind, or biomass electricity generators and sell power to local utilities. The incentives come in the form of a guarantee, for periods of up to 20 years, of relatively high prices for any electricity they sell. Utilities that buy the electricity will get state permission to increase rates.