• Dear Client: Washington, Jan. 18, 2013

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1100 13th Street NW, Washington, DC 20005 • kiplinger.com • Vol. 90, No. 3
Dear Client:
Washington, Jan. 18, 2013
Bank on this: Big spending cuts are coming.
$1 trillion or so over a decade, starting Oct. 1
and touching nearly every agency in government.
The deficit must be addressed, and it will be.
ECONOMIC FORECASTS
A massive, messy fight will come first
over raising the debt ceiling and funding programs
through Sept. 30, the end of the current fiscal year.
A short government shutdown is possible…
probably in late March…before deficit talks begin
in earnest between President Obama and Congress.
GDP growth
Though slowing in early ’13,
around 2% for the year
Interest rates
Little change through mid-’13.
10-year T-notes at year-end, 2.25%
Inflation
Rising slightly this year,
to about 2.3%
Unemployment
BUDGET Automatic cuts are likely to kick in this year.
Falling gradually over ’13,
CUTS
There’s little time for a deal to avoid them.
to around 7.5%
Expect 40% of cuts from defense, 60%...nondefense,
Crude oil
instead of the 50-50 split Congress first settled on.
Holding steady at $90-$95/bbl.,
Reductions will average 5% per department.
at least through early spring
What’s not clear is whether they’ll be across the board
Manufacturing growth
or whether the president will have any flexibility
After a post-Sandy bounce,
to trim some programs more while sparing others.
a slower pace of gain in ’13
Exempt from the ax: Entitlements, federal pensions
Click here for exclusive, Web-only details
and other programs with spending mandated by law.
of these Kiplinger forecasts
The robocuts may turn out to be temporary...
replaced later in 2014 by a package of negotiated cuts that more precisely aim at fat
and incorporate legislated policy changes. Chances of that are about 60-40.
Sure to happen: Consolidating federal programs that duplicate services.
Information technology jobs, for example, will be centralized, with some eliminated.
Pay freezes for nonunionized federal employees are also likely to be considered.
Hints at other cuts can be found in recent budgets from Obama and House GOPers.
Potentially headed for the chopping block on the domestic spending side:
Grants to states for drug abuse programs, radon inspection and education.
Funding for the National Institutes of Health and for community service.
Some payments to farmers. Plus money for green energy initiatives
and energy efficiency projects. One example: A wind energy tax credit could blow away.
On the defense side of the equation, national security will not be imperiled.
There are enough research and development programs and long-range projects to cut
without upsetting troop readiness. Also, the Pentagon can shift funds to war efforts,
if the need arises. Still, expect some job losses, especially among private contractors
that provide security and other services abroad and at companies that build planes,
submarines and weapons. For the most part, orders will be scaled back, not scrapped.
Entitlements…Social Security, Medicare, Medicaid…aren’t in play. Yet.
The same for additional revenues…closing tax loopholes and the like.
A deal including them faces long odds, but it can’t be ruled out.
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Jan. 18, 2013
RETAIL
A variety of businesses will feel the sting from the end of the payroll tax cut
this year. Expiration of the two-year tax holiday will slice $18 to $20 a week
from most U.S. families’ incomes, dropping early-2013 sales below year-ago levels.
Odds are shoppers will cut back on nonessentials, opt for store-label products
rather than pricier versions and beat the bushes for lower prices wherever possible.
Among those to see sales crimped: Brand-name consumer goods makers,
such as Procter & Gamble, the parent of Tide, Crest, Pampers and other big names,
and Unilever, maker of Lipton soups, Breyers ice cream, Dove skin care products, etc.
Midlevel department stores…Macy’s, Kohl’s, JCPenney and the like.
They’ll have a tough time holding on to customers attracted by lower prices
from mass-marketers, which are increasingly offering the same or similar goods.
Small, independent retailers. They can’t slash prices to stay competitive.
But the squeeze won’t last all year. Retail sales in the second half of 2013
will pick up steam as hiring improves, pushing growth for the year to a solid 5%.
And some businesses either won’t be affected much or will reap some benefit.
Off-price retailers, such as T.J.Maxx and Stein Mart, are likely to draw more shoppers
seeking bargains. Makers and sellers of high-end goods…jewelry, designer clothing
and accessories, etc...won’t be pinched; typically, their upper-income clientele
are better able to absorb the blow of increased taxes. And the dent in take-home pay
won’t sway most households from plans to buy big-ticket items, such as new cars.
Sluggish consumer spending will also intensify restaurant competition,
despite overall sales growth of about 3% for the year. In the thrift-minded climate,
fast-casual eateries…Five Guys, Panera Bread, Chipotle, etc…will continue to thrive,
prompting more full-service restaurants to launch less-expensive, quick-serve offspring
along the lines of IHOP Express and Denny’s Cafe. Meanwhile, fast-food chains
will seek to lure more customers through their doors by improving the quality
and variety of their offerings, venturing into premium ingredients and organic foods.
HOUSING It may get a bit easier to snag a mortgage, now that the feds have issued rules
on which mortgages will qualify for legal safe harbor, protecting the lenders
from lawsuits if borrowers meet the requirements. Uncertainty about pending regs…
aimed at curbing overly risky lending…has contributed to the tightening of credit.
In fact, only 10% of mortgages made last year fell outside the new rules’ parameters,
though 15% of jumbo and subprime loans did. It may be a bit harder or more costly,
with higher interest rates or down payments, to get those types of loans in the future.
The rise in home values is broadening across the country, with increases
in home prices, more single-family building permits and job gains in 242 metro areas.
One reason: As prices rise, so does labor force mobility. More people are able
to sell and move for jobs in other areas, spreading home price gains to other regions.
Several states are starting to attract migrants again: Fla., Texas, Utah, Colo.,
Nev., Ariz. and the Carolinas, in particular, are seeing increased population influxes.
The most popular metro areas: Atlanta; Charlotte, N.C.; Orlando and Sarasota, Fla.;
Dallas, Houston, Denver, Phoenix and Seattle. The East Coast from Mass. to Va.
is growing slowest, with Conn., N.Y. and the D.C. metro area at the back of the pack.
Along with the pickup in construction activity come employment headaches.
There’s a growing shortage of skilled labor. Carpenters, masons and others
are in high demand, especially in northern Calif. and southern Texas, where the tech
and energy industries are expanding. Also up: Construction of university classrooms
and dorms, hospitals, retail shopping centers and assisted living complexes.
Another reason for labor shortages: Mandatory drug testing for many jobs
is shrinking the pool of available workers. Some won’t take the test. Others flunk it.
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Jan. 18, 2013
ECONOMIC
DEVELOP
MENT
Can catchy branding help midsize and small cities bring in revenue?
Many leaders of such places say yes, noting that branding raises profiles,
helping to draw in new businesses, create jobs and increase the tax base.
Slogans, symbols and logos are commonplace in the corporate world, of course,
and everyone knows that the Big Apple means NYC and Motor City means Detroit.
More and more towns and regions that are less familiar hope to spur similar buzz.
Among areas spearheading the branding trend: Hickory, N.C. A top center
of furniture building a century ago, it gives a nod to its past and puts a spotlight
on its medical equipment and appliance firms with the phrase “Life. Well Crafted.”
The region stretching from Cedar Rapids to Iowa City, Iowa, which is home
to the well-known Iowa Writers’ Workshop, many arts organizations and more,
has adopted “Iowa’s Creative Corridor” as its slogan. Glendale, Calif., a hub
of movie and television animation work, is eyeing the saying “Your Life. Animated.”
Petersburg, Alaska, a town with Norwegian roots, has seen a boost in tourism
since 2011, when it began describing itself as “Little Norway. Big Adventure.”
HUMAN
A government crackdown on pay and hiring discrimination is in the works…
RESOURCES the focus of a four-year effort by the Equal Employment Opportunity Comm.
and the Office of Federal Contract Compliance Programs. The EEOC is especially keen
on finding discrepancies in how employers run criminal and credit background checks,
concerned that they have a disparate impact on African-Americans and Hispanics.
Employers can avoid problems by being consistent in their hiring practices…
don’t exclude one job candidate with a conviction but accept another, for example.
And consider conducting pay audits to uncover any cases of dissimilar pay,
and remedy them or document the reasons (a person’s unique qualifications, etc.).
A resurgence of workplace class action litigation is a good bet this year,
after a falloff stemming from a Supreme Court ruling in 2011 that makes it harder
for plaintiffs to show that many members of a group have circumstances in common.
Plaintiffs’ lawyers are rebooting…narrowing their scope. New cases
will feature statewide or regional groupings that make it easier to show commonality
than megasuits involving folks from all over the country. For example, lawyers
in the 2011 case…Wal-Mart Stores v. Dukes…are refiling their one large case
as four separate ones in federal courts located in Calif., Tenn., Fla. and Texas.
TECH
Expect more-widespread mobile phone service and fewer dropped calls,
once AT&T and other mobile carriers deploy a slew of new, small cell towers.
AT&T alone plans to rely on 40,000 small towers equipped with Wi-Fi in coming years.
Such structures have less range than the big towers that dominate the landscape now.
But they will make it possible for more mobile phones to use the available spectrum,
and they’ll greatly increase the capacity of LTE networks (4G wireless service).
Over the next five years or so, small cell towers will carry one-third of mobile traffic.
Stuck in a cell phone dead zone? Consider a signal booster from firms
such as Wilson Electronics and Cellphone-Mate. Prices start at around $200.
The boosters amplify existing signals from the nearest available cell phone tower.
Wilson also makes a booster that will pick up signals for travelers on the move.
Uncle Sam wants telecoms to be better prepared for extreme weather events.
The Federal Communications Comm. will press them to install more backup power,
upgrade their Internet-based emergency systems and keep more-detailed records.
Carriers are concerned that new regs would be too onerous and costly to implement.
But given widespread failures after recent storms, the FCC isn’t about to back down.
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Jan. 18, 2013
BUSINESS Many key metals are going to get pricier over the course of the year.
COSTS
Steel. Look for hot-rolled steel, used to make cars, trucks and much more,
to sell in a range between $650 and $700 per ton, up about $50 from 2012 prices.
As the economy continues to improve into 2014, steel costs will increase further.
Aluminum. Expect an average price of about $2,100 per ton, a slight hike
from 2012, courtesy of strong auto sales and improving industrial activity.
Nickel. Its per ton price will average $18,000, compared with $17,300 today.
Large nickel stocks plus new supplies hitting the market will prevent a steeper rise.
Tin. Though the current price of $25,000 per ton could drift a tad higher
in the short term, it probably won’t stray too far from that for much of the year.
Copper. Figure on a lot of volatility for the red metal. There’s lots of supply,
but much of it remains tied up in China as collateral on loans. Copper consumption
looks tepid, which should tamp down costs but could also discourage new mines
from coming on line. Look for prices to fluctuate between $7,200 and $8,500 per ton.
BUSINESS Auto sales will continue their strong run in 2013, extending the string
OUTLOOKS of annual sales increases since the recession in 2008 and 2009. By year-end,
dealers are projected to sell around 15.2 million cars and light trucks, a hike of 5%
over the 14.5 million sales made last year, and approaching prerecession highs.
Among the factors driving growth: There’s a lot of pent-up demand, with cars
on the road today averaging more than 10 years old. Plus a slew of attractive models
are just hitting dealerships in large volumes, and auto loans remain affordable.
But note that the pace of sales gains is slackening. After growing 10% or so
each year since the recession, sales are shaping up for only about half that rate.
Solar power is poised for another big leap this year, surpassing the record
that was set in 2012, when three gigawatts of capacity…equal to three nuclear plants
in terms of generating capacity…came on line. Fueling the growth: More price drops
for panels and related gear...about 10% to 15%...as manufacturing costs decline.
Going solar will become easier for businesses and homeowners. Leasing deals
are coming on fast, with customers paying little or nothing up front and buying power
from solar panel installers at a fixed rate that undercuts their power utilities’ prices.
But manufacturers will continue to struggle as fierce competition from Asia
keeps driving down prices. More consolidation among solar installers is in the works…
firms with low costs and favorable economies of scale will absorb their smaller rivals.
DEFENSE The pace of troop withdrawal from Afghanistan will pick up this spring,
with the pullout of 20,000 U.S. soldiers. About 46,000 troops will remain
in the nation until the end of 2014, when most of them will leave as well,
turning over nearly all combat and village patrolling missions to Afghan forces.
Defense Secretary nominee Chuck Hagel strongly supports pulling out
and putting pressure on the fragile Afghan government to take the reins.
But the U.S. is hardly wiping its hands clean of Afghanistan altogether.
Special operations forces will stay, running clandestine terrorist eradication programs
alongside CIA paramilitary experts and contractors. Pentagon and CIA drones
will continue to hunt and strike at terrorists in Afghanistan and nearby Pakistan.
Yours very truly,
Jan. 18, 2013
THE KIPLINGER WASHINGTON EDITORS
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