1729 H St. NW, Washington, DC 20006-3938 Dear Client:

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1729 H St. NW, Washington, DC 20006-3938 • kiplingerbiz.com • Vol. 88, No. 19
Dear Client:
Despite the plodding pace of the economy,
Price increases are starting to spread.
Some prices are surging. In 12 months,
airfares have climbed nearly 12%. Used cars…15%.
Hospital bills, up 5.4%. Beef, 9%. And pork, 16%.
The cost of many raw materials…chemicals, rubber,
iron ore, grains, etc…is higher. About three-quarters
of purchasing managers for manufacturers say
that their firms are paying more for materials today
than last month. In January, 64% reported hikes.
As for the recent commodity price easing…
THE
ECONOMY
Look for a modest rebound later this year,
as demand rises with more vigorous economic growth.
Oil and gasoline prices will remain high
by historical standards, though down from the peak.
Washington, May 13, 2011
ECONOMIC FORECASTS
GDP
Increasing to 3% growth in ’11
after averaging 2.9% in ’10
Interest rates
10-year T-notes modestly higher
in ’11; prime, no change
Inflation
NEW
About 3% in ’11,
from 1.5% in ’10
Unemployment
Bouncing a bit,
but finishing ’11 under 9%
Crude oil
Settling into a
$95-$105 trading range
Soon, the cost of money will rise as well,
Retail
NEW
as the Federal Reserve moves from a policy of easing
High prices for gasoline and food
to neutral and then to tightening the money supply.
divert dollars from other sectors
Odds are, it will raise short-term interest rates
Complete economic outlook at
in early 2012, triggering a hike in banks’ lending rates.
kiplingerbiz.com/outlooks
Landlords have their eye on sweeter returns.
Rents on top-quality offices are on the rise, while other properties have bottomed out.
Next year, the uptrend will spread to warehouses, storefronts and other office space.
Companies that can are passing on at least some of their higher costs
to their customers. From detergent makers to pasta peddlers, manufacturers
are adding pennies to price tags or reducing package sizes but holding prices steady.
Service businesses…in health care, education, entertainment, finance, hospitality…
are testing the waters as well, cautiously adjusting upward their menu of prices.
Of course, not all firms can recoup their increased expenses. For instance,
makers of diapers and breakfast cereals will find that shoppers shift to store brands
rather than pony up more for brand-name goods. And sales at many small businesses
aren’t strong enough to let them raise prices, rather than see profit margins squeezed.
All told, consumer prices will likely climb about 3% this year…not bad,
but nearly double the rate of increase last year. And it may seem like more than that.
Prices for gasoline and food…very visible indicators…will increase much faster
than the average. Core inflation, which doesn’t include them, will run under 2%.
And declines in consumer prices…for apparel and telephone services, for example…
are less noticed. The cost of shelter, too…measured as rent…won’t climb by much.
With the economy still in low gear, an inflationary spiral isn’t a huge risk.
Unemployment is so high that workers won’t be able to demand big wage hikes.
But expectations of inflation are running high and can’t be dismissed.
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page 2
May 13, 2011
The U.S. will reach its borrowing limit any day, but default isn’t imminent.
Treasury boss Timothy Geithner says the government can pay bills till Aug. 2
without violating the statute or risking financial ruin if the debt ceiling isn’t raised.
With the cost of not acting so high, lawmakers will reach a compromise
to avoid default. Republicans will win White House support for some spending cuts.
But they won’t get President Obama to back big Medicare and Medicaid changes.
FEDERAL
SPENDING
In a good sign for the economy, loan demand looks to be on the rebound.
More and more banks are starting to pay higher interest rates on deposits,
an indication that more liquidity is needed to keep up with growing loan demand:
On certificates of deposit. The largest increases can be found in Alaska, R.I.,
Ky., Ariz. and S.D. In Alaska, for example, rates are up 18 basis points since Jan. 1.
Money market accounts. Biggest hikes are in Ky., Del., Alaska and Kansas.
And savings deposits. Banks in Va., Ala. and Maine are paying higher rates.
FINANCIAL
SERVICES
Credit cards with embedded computer chips in the U.S.? Not in a big way…
Though JPMorgan Chase and Wells Fargo will debut them this summer,
offering such cards to select clients. They’ll be handy for people who frequently travel
to Europe, where the EMV integrated circuit format is the widely accepted standard.
Most U.S. card issuers will continue to rely on magnetic strip technology.
Both merchants and issuing banks balk at the cost of replacing cards and readers.
Changes are more likely to come on the mobile payment front via phones.
New technology in this area will move quickly enough to eclipse credit card evolution.
To stem the flow of red ink and shore up a dwindling direct mail business…
The U.S. Postal Service will give large advertisers money-back guarantees
to participate in a pilot program aimed at reversing the drop in business mailings.
The program, dubbed Mail Works Guarantee, will initially offer 16 companies
the postage-back offer. The firms and USPS will choose metrics to use as a measure
of success and if the mailings don’t pass muster, USPS will refund postage paid…
as much as $250,000 per company. Each firm will mail up to 1 million pieces.
The test program will likely expand to include some small businesses
over its two-year run. Companies will also benefit from the experiment
by seeing in which scenarios direct mail can be more effective than online marketing.
USPS gets just 3% of the $90 million a year spent by top advertisers
on marketing their products. Social media are a growing segment of the competition.
SELLING
Qualifying for a franchise is getting tougher in the postrecession world.
Franchisors want prospective franchisees to have deeper pockets,
top-notch credit scores, as well as a solid track record in business management.
The restaurant chain Popeyes, for example, now requires its potential franchisees
to already own a restaurant of some sort in order to be considered for a Popeyes.
Firehouse Subs, meanwhile, demands a 30% down payment. Before the recession,
30% was the suggested down payment, but franchisees often put down much less.
SMALL
BUSINESS
On tap…a far-reaching decision by the National Labor Relations Board.
It will rule on whether union organizing efforts must target all employees
at any given firm or be permitted to focus on a smaller group within a company.
The case at hand: A bid by the United Steelworkers to organize
only certified nursing assistants of the Specialty Healthcare & Rehabilitation Center
of Mobile, Ala. The employer objects, saying the entire staff should be included.
A ruling in favor of the USW could make organizing easier and cheaper,
by letting unions cherry-pick smaller groups that may be most amenable.
Employers fear such a change could lead to multiple unions
at a work site, resulting in a costly hodgepodge of different benefits and policies.
LABOR
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page 3
May 13, 2011
RUNNING
FOR
PRESIDENT
For historic parallels to the GOP’s slow-to-gel White House field...
Try 1952, when Dwight Eisenhower had to be coaxed into running,
and had to overcome frequent criticism that he was a one-dimensional candidate.
Eisenhower, of course, had serious military chops but was light on the economy.
This year’s reluctant Republican warrior: Indiana Gov. Mitch Daniels.
He’s set to fight government spending battles but lacks foreign policy credentials.
A one-sided résumé didn’t hurt Eisenhower because of the hostilities in Korea,
growing concerns about communism and still-fresh memories of World War II.
Daniels is in a similar situation now. His reputation as a big league cost-cutter…
in Indiana and in Washington as President George W. Bush’s budget chief…
gives him an edge over other GOP hopefuls. They can talk about budget cutting,
the top issue on many voters’ minds, but Daniels has actually done it.
Daniels’ candidacy would guarantee a serious airing of spending policies,
both in the primaries and, if he wins the nomination, against Obama.
He’s the person most likely to loosen Obama’s grip on the White House,
as long as the economy and jobs remain the top priority for voters in 2012.
So why isn’t the GOP rejoicing? Because Daniels won’t say if he’ll run.
Expect an answer this month, and don’t be surprised if he sits out.
That’s the answer his family wants, but his party hopes to change his mind.
As automakers grapple with making vehicles much more fuel-efficient…
They’re eyeing carbon fiber as a way to cut the weight of cars and trucks.
High-strength steel and aluminum…the current industry standards…are promising,
but meeting future government mileage standards will require even greater reductions.
Carbon fiber is about 50% lighter than steel and can easily be joined
to metallic body parts. It’s already common in race cars and high-end sports cars.
The catch? Cost. A slow and energy-intensive production process
is what keeps it out of mainstream vehicles. Even pricey sports cars use it sparingly.
TECH
At least one company, BMW, figures it can work around the cost issue.
For its forthcoming electric car, BMW has teamed with German specialty firm SGL
to manufacture carbon fiber sheets, woven like textiles and then covered in plastic.
Frames made from the sheets may spell a 10% cut in the weight of electric vehicles,
enabling more miles between recharges, while still holding the price within reason.
Among the first users of carbonization: Luxury and other premium cars.
Their high-power engines could net a 7% mileage gain if paired with lighter bodies.
It’ll take at least a decade to filter through to lower-end models, however.
Minuscule materials are becoming commonplace in a variety of items…
everything from smart phones and computers to cosmetic products and golf clubs.
That has regulators worried about the impact on health and the environment.
Use of nanomaterials is largely unregulated now, except in Calif. and Mass.
But that will change in coming years, following scientific investigations
by the Environmental Protection Agency, the Consumer Product Safety Commission,
the National Institute for Occupational Safety and Health, as well as private groups.
Growing fears about nanomaterials could lead to product liability suits,
akin to those involving tobacco and asbestos claims that have been in courts for years.
Tapping unused UHF digital channels will give rise to more Wi-Fi coverage.
The Federal Communications Comm. has approved use of such channels
to make Wi-Fi more readily available over larger distances than is now practical.
Houston is testing a system using UHF, and other cities are likely to do so soon.
TELECOM
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page 4
May 13, 2011
Amid much rhetoric about America’s need for energy independence…
The U.S. is quietly assuming a new role on the world stage: Energy exporter.
Exports of refined petroleum fuels recently eclipsed imports of fuels from abroad.
And sales of U.S.-mined coal to overseas customers are approaching historic highs.
Driving the shift: Lower domestic demand and thriving emerging economies,
where power-hungry factories are running full-tilt and newly minted middle classes
are buying cars. Sales of U.S. motor fuels are strong in Latin America and Europe,
while Asian power plants and factories have developed a voracious appetite for coal.
In China alone, coal consumption has tripled since 2001 and will continue to surge.
Lots of opportunities for U.S. firms. Domestic refiners have ample capacity,
and unlike many overseas competitors, they can handle crude oil of varying qualities.
And as utilities slowly cut back on coal for power generation in favor of natural gas,
more of the nation’s vast coal reserves are available for export. U.S. coal shipments
will likely exceed 100 million short tons this year, up from about 80 million in 2010.
ENERGY
The U.S. nuclear reactor fleet is in for a tune-up, courtesy of a partnership
consisting of government research laboratories, universities and private enterprises.
In the wake of Japan’s nuclear crisis, the group is studying ways to increase safety
at the U.S.’ 100 or so existing plants, while extending their useful operating lives.
A reactor simulator will help tweak fuels to bolster efficiency and safety.
Improving the chemical packaging of uranium fuel could allow plants to run longer
while protecting against the sort of explosions that struck Japan’s damaged plant.
Perfecting new fuels is time consuming, but virtual modeling will speed the process
and pay valuable dividends in the quest to develop more reliable nuclear power.
While high oil prices are mostly bad for U.S. and global economic growth…
They’re a boon for oil-exporting nations in the Middle East and North Africa.
Overall, the Middle East could see 5.8% growth this year. North Africa, about 1%.
Most oil-exporting countries, like Saudi Arabia, will enjoy the upswing,
if oil prices remain above $100 a barrel. Even Iraq, which grew just 0.9% in 2010,
will see its economy expand by a whopping 11% this year, and 11.5% next year.
The exceptions are Libya and Yemen, both still racked by internal turmoil.
And regional oil importers Egypt and Tunisia will see growth dip because of oil prices
as well as pressures to reform economic policies in light of recent regime changes.
THE
WORLD
Another sign of growing friction between members of the European Union,
coming on the heels of infighting over the euro, the EU budget and other issues:
More border checkpoints will re-emerge in Europe, at least temporarily,
as the EU struggles to deal with the thousands of refugees from Libya and Tunisia.
About 50,000 refugees fleeing the turmoil in North Africa have already landed
on the tiny Italian island of Lampedusa. Worried about the huge social strains,
Italy is giving them temporary resident permits, which allow them to move freely
throughout Europe. But other European nations don’t want the refugee burden, either.
Look for Germany, Greece, the Netherlands and others to reinstate controls
on their borders, joining France, which has already done so along its border with Italy.
Yours very truly,
May 13, 2011
THE KIPLINGER WASHINGTON EDITORS
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