The economy
Look for monthly inflation to spike in May after it cooled a bit in April. Gasoline, diesel fuel, and other energy costs soared in the first half of this month, which will boost May’s annualized rate of inflation to about 2.5%, from 2.3% last month. But energy prices are near their peaks for the year, so inflation will slow a bit by fall.
Will the May increase make the Fed hike interest rates in June?
It’ll certainly raise the odds that Greenspan and Co. won’t wait until later in the summer to increase rates a quarter-point. But the Fed, knowing that higher oil prices already act as a brake on growth, won’t hike rates too fast in response to energy-led inflation gains.

Expect first-quarter GDP growth to be revised up to about 4.5% from the earlier estimate of 4.2%. The change will be made May 27, but it’s already clear from monthly figures that construction spending and inventory growth were stronger than what had been assumed previously.
It’s likely second-quarter growth will at least match the pace set in the first quarter, despite disappointing retail sales last month. Industrial output remains quite robust, posting a 0.8% pace for April.
For the year, we see GDP gaining 4.3%, up from 3.1% in 2003. The pace in the second half will be slightly slower than in the first, as the stimulative effects of tax cuts fade and interest rates edge up. But that’ll be offset somewhat by a pickup in business spending.

More and more home buyers will find themselves in bidding wars, forced to pay way above the asking price to get the house they want. In many cities, buyers are bidding 10% or so above the listed price.
Fewer homes are going on the market in Washington, D.C., Southern California, and other areas where home values have soared. Home prices rose 7.5% on average in 2003 ... will go up 5.5% this year. Rising values are putting many owners of midlevel homes in a bind. They’re staying where they are because they can’t afford to trade up.
Other curbs on housing stock: Rapidly rising property taxes in many regions plus zoning limits that restrict new home building.

Tech and telecom
Small businesses will spend up to 8% more on IT this year, roughly twice the growth of IT spending by large corporations. Similar or even larger increases for small firms are likely through 2008.
Factors fueling the growth: Cheaper high-speed Internet access, falling prices for local area networks, and new software for small firms.
More vendors are catering to small companies. Microsoft, IBM, and others all have new products that are affordable and easy to install.

Wireless phone service is about to get cheaper for businesses. Major phone carriers are wooing firms with highly customized contracts, including guaranteed performance, bundling, and lower overall costs. In this highly competitive market, customers are in the catbird seat.
Camera phones can be an effective business tool for many firms. Examples: Insurance adjusters, field service reps, construction foremen, and many others use them to speed up decision making on claims, etc. They’ll also become a big help in diagnosing home and auto repairs. Within four years, most cell phones will come equipped with a camera.

Trade
This time around, Japan’s economic recovery is the real McCoy. Sure, Japan’s economy has rebounded before, twice, since tanking in 1990, when property values crashed, saddling banks with bad loans. But both recoveries were brief, inviting skepticism about this comeback.
The difference? Its consumers and businesses are spending more. Their confidence is buoyed by strong demand for Japanese goods in China, real estate prices stabilizing in Tokyo, and a healthier job outlook. In previous aborted recoveries, government provided the main stimulus.

Many U.S. exporters are poised to benefit: Makers of medical devices, semiconductors, software, power-generating gear, Rx drugs.
Boeing is a BIG winner. All Nippon Airways wants 50 7E7 jets, the largest order ever taken by Boeing for a brand-new model. Boeing also has orders for 737s and 777s from All Nippon and Japan Airlines.

Another plus for firms exporting to Japan:
They’ll get to keep more of their profits under a new tax treaty, effective July 1. It’ll abolish withholding rates on royalty, interest, and dividend income, providing an extra shot in the arm for trade and investment in Japan.

Look for our overall trade deficit to hit $525 billion this year, up about 7% from last year. Measured in dollars, that will be a record. But as a percentage of GDP, the deficit will be up just a bit from 2003.
Costlier oil imports account for much of the increase this year, widening the trade gap mainly in the first half of the year. Later on, strengthening economies in key U.S. markets, including Canada, Mexico, and East Asia, will lift U.S. sales abroad and slow the deficit’s growth.
For the year, U.S. exports will jump 9% versus a 5% gain in 2003. Import gains will remain fairly strong at 7% after an 8% rise last year.

© 2004 The Kiplinger Washington Editors, Inc.