The Economy: Long-term interest edges up while foreign direct investments lag.
Industry Outlook: Housing begins turnaround, commercial continues shrinking.
Lifestyle Trends: Retiring in place increases demand for extended-care service.

The Economy
One downside of an economic rebound: Long-term interest rates edging up.
The yield on 10-year Treasuries may hit 4% soon as investors sell bonds and wade into much riskier areas. It skyrocketed in May to 3.6%, 1.4 percentage points higher than on Jan. 1. Expect more volatility, with a 3.5% floor for 10-year bonds.
Home sales and refinancing will sag as a result.
But not by much. Slightly higher home loan rates will be offset by bargain prices. And the tax credit of $8,000 for first-time buyers will continue to charge up demand.
The Federal Reserve will let interest rates rise as long as mortgage rates remain in the 5%-5.25% range, as we expect. That’s still pretty low by historical standards. And if the Fed bought more Treasuries to lower rates, it would spark inflation fears. Buyers are already edgy over a budget deficit that will top 12% of GDP, the highest percentage in 60 years.

Uncertainty about the future of Fannie Mae and Freddie Mac will also linger. They’ll remain in conservatorship until home prices stabilize ... probably next year.
The options are limited in any case. Full privatization is off the table. When the housing downturn ends and credit loosens, private lenders will come back to the market. But they won’t offer 30-year fixed rate loans ... a political imperative ... without at least the same kind of implied federal guarantee that such loans enjoy now.
Outright government ownership would provoke a political battle royal, since it would amount to a huge expansion of Uncle Sam’s role and put taxpayers on the hook for mortgage guarantees. But most of the fighting will be for show.
The most probable bet in the end: A hybrid model, akin to a public utility and not too different from the firms’ previous status as government sponsored entities. Government backing of bonds would be explicit, and regulation much tighter, however.

Overseas companies are losing their enthusiasm for U.S. investments.
Foreign direct investment in the U.S. will keep plunging this year and next. Most firms looking to buy up American businesses or expand U.S. based operations are reluctant to take risks, keeping funds at home to hedge against fresh bad news. Others, seeking to purchase assets at bargain prices, have trouble getting credit. Autos, backed by the government, are an exception ... hence China’s buy of Hummer.
The result: A sharp comedown from last year’s record $325.3 billion in FDI. The decline won’t be as steep as the 30% drop in global cross-border investment flows, but it will hurt. With deals often taking years to negotiate, recovery will be slow.

The recession isn’t over yet, but the job market is pointing in that direction. Job gains are even possible before year-end. May’s loss of 345,000 jobs was a lot better than the average 643,000 lost in the previous six months.
Not so good, however, is the jobless rate. It’ll hit 10% by early next year, rising from 9.4%, already the highest since 1983. That means more delinquencies on mortgage payments and more foreclosures. They won’t level off until next year. It also spells less consumer spending, which is critical to a strong recovery. And firms continue to cut wages and salaries, which further dampens spending.

Industry Outlook
We expect the economy to turn around by fall, registering mildly positive growth in the fourth quarter. But recovery in 2010 will be slow and uneven. And the leaders and laggards, a bit unusual. Financial services, for example, typically benefits early from an economic pickup. But badly lamed this year, it won’t exhibit the usual post-recession vigor.

Information technology will be at the fore. After cutting way back on such investments this year, businesses are penciling in spending hikes for 2010 in anticipation of their own rising orders and sales. After a 25% decline in 2009, semiconductor makers, for example, should see a 25% production increase.

Look for housing to set a fast pace as well.
But it’s starting furlongs behind the gate. Though housing starts will streak from about 500,000 this year to 825,000 in 2010, that’s still running 45% below the long-term trend of 1.5 million starts a year. Still, the increase spells welcome news for roofers, carpenters, masons, plus wood products manufacturers, hardware stores, real estate, and mortgage businesses.

For autos ... much the same story. We expect about a 23% increase in output next year, with production climbing from about 5.5 million vehicles to 6.8 million. A much improved performance, but no winner, considering the 35% drop since 2007.

Little change for health care ... a perennial top performer even when the course slows or trips other industries. A boost, too, from biotech research and development.
A better year for pharmaceuticals, but not enough to make up 2009 slippage.
A mixed outlook for education services: Growth at postsecondary institutions as recent grads and laid off workers forgo a sick job market for continued education. But local and state budget woes spell teacher and other staff cutbacks at K-12 schools.
Variable prospects, too, for food processors and grocery stores ... strongest for private-label makers and sellers, which cater to more budget minded consumers.

Facing more shrinkage in 2010: Commercial real estate and construction. Office, shopping center, and hotel vacancies are mounting more swiftly these days.
Also down again: Chemicals, plastics, industrial metals, apparel & textiles, leather goods, legal services, and advertising plus magazine and newspaper publishing.
High inventories will hobble oil & gas refining and other fossil fuel industries. Demand isn’t likely to rebound much till economic recovery becomes widespread. But for alternative energy ... wind, solar, biofuels, etc ... a continued upswing in 2010.
Other laggards: Industries that rely heavily on overseas growth ... equipment for construction, transportation and energy development, machinery, and so on.

Lifestyle Trends
Remember when retirees headed in droves to the Sun Belt? No more.
Recent retirees seem to prefer aging in place, caring less about the weather and more about staying in their homes, close to their friends, family and community. City dwellers are also reluctant to give up cultural and entertainment opportunities. Overall migration from large cities fell on average by over 40% from 2007 to 2008. The recession is likely to compound the trend, but it’s far from the biggest factor.
The change presents problems for cities and states in some regions. Many aren’t equipped to provide the housing and services that older people need. Look for a realignment when the economy picks up, creating business opportunities from retrofitting homes so they’re senior friendly, to leisure and health care services.