1100 13th Street NW, Washington, DC 20005 Dear Client:

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1100 13th Street NW, Washington, DC 20005 kiplinger.com Vol. 90, No. 48
Dear Client:
The use of federal contractors is under fire.
Critics say they failed to protect the U.S. ambassador
in Libya and didn’t flag mental health problems
in one of their own before he went on a shooting spree
that left 13 dead at the Navy Yard in Washington, D.C.
They also can’t get HealthCare.gov running right.
Meanwhile, they are being squeezed by budget cuts.
But Uncle Sam won’t abandon contractors.
And efforts to rein in their use will fizzle,
as they have several times since U.S. contract use
exploded in the decades that followed World War II.
Though the Pentagon and Dept. of Homeland Security
are hiring additional employees to replace contractors,
other agencies will have trouble taking that route
amid budget cuts and calls for smaller government.
FEDERAL
BUSINESS
Washington, Nov. 27, 2013
CREDIT AVAILABILITY
Through March 2014
Commercial & industrial
Terms continuing to ease a bit;
rates essentially flat
Commercial real estate
Limits on size and maturity
becoming more favorable
Small business
Terms easing, but standards
still tight, limiting borrowing
Home mortgages
Rates flat to up slightly
till Fed acts; terms still strict
Credit cards
Credit limits climbing;
The feds will reduce spending on contracts.
more approvals overall
But cuts will barely make a dent. Hundreds
of thousands of contractors will remain on the payroll
Auto loans
to protect diplomats, mow lawns and fix computers.
Favorable rates
And to provide goods...from pens to planes. In fact...
and terms continuing
Uncle Sam will dole out about $3 trillion
to contractors over the rest of the decade, even if annual payments are trimmed
from the roughly $517 billion the U.S. government spent on them in fiscal 2012.
Costs for contractors won’t dip much below $500 billion a year, in any case.
And they’ll eventually bounce back from that as computers, weapons systems, etc.,
need replacing and spending for programs now being deferred kicks back in.
The fact is, contracting doesn’t curb spending. It may even drive up costs.
Some contractors are paid nearly double what Uncle Sam pays federal workers
performing comparable tasks. All told, spending on service contracts jumped by 79%
from fiscal year 2002 to fiscal year 2012, while federal payrolls rose by just 34%.
Much of the run-up came during the extended twin wars in Iraq and Afghanistan.
But reliance on contractors is standard procedure in nearly every civilian agency, too.
The Defense Dept. will continue to award the lion’s share of contracts...
about $350 billion a year. In one day in mid-Nov., the Pentagon announced 14 pacts
valued at $1.38 billion. Keeping tabs on contractors is, in itself, a growth industry.
The military will hire a few hundred accountants to monitor thousands of contracts.
Plus, the scope of federal contract work will continue to expand. For years,
contractors did work that Uncle Sam wasn’t equipped to handle. The first contract,
for example, was to deliver provisions to points on the western frontier...in 1798.
Now, contractors even conduct security clearance checks on other U.S. contractors,
and they have replaced much of the government’s information technology workforce.
Those decisions and many others are too time consuming and expensive to reverse.
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page 2
Nov. 27, 2013
One reason holiday spending might come in stronger than expected this year:
Household net worth is rising well…the biggest increase since 2005.
Robust stock market gains this year…with the S&P 500 up about 29% so far…
and a double-digit climb in housing prices in many major markets mean consumers
are feeling much better off these days. Typically, that spells more sales being rung up.
Every $100 rise in home equity spurs consumers to spend about $3 more
and contribute less to savings. For every $100 in gains on stocks & bonds owned,
they’ll typically increase overall spending by about $1.50. Over the course of a year,
that adds billions, and it may well give retailers a greater-than-expected boost in Dec.
Continued gains in wealth should also spell better spending growth in 2014.
THE
ECONOMY
Encouraging news on debt servicing loads, too.
The share of homeowners’ personal income dedicated
to paying off auto, credit card and other consumer loans
is hovering around 5%…last seen in the mid-1990s. So…
Plenty of room to increase, buoying spending,
as consumers gain confidence and incomes rise.
Also, delinquent loan balances are sliding…
down by over 40% since 2009, from $1.45 trillion
to $830 billion. Plus fewer loans are going bad; the share
of loans that are newly delinquent is headed below 1.6%,
about half of the 2009 share and the lowest since 2006.
ROOM TO EXPAND
7%
6%
5%
Share of
homeowners’
FORECAST
personal income
used for consumer debt
4%
’00 ’02 ’04 ’06 ’08 ’10 ’12 ’14
Sources: Federal Reserve, Kiplinger
Meanwhile, there’s evidence that Americans are getting smarter about saving.
About 45% of folks who get a lump sum from an employer-sponsored retirement plan
after changing jobs roll the entire sum into another tax-advantaged savings plan.
That’s double the share who did so in the early 1990s, when lump sum distributions
often prompted job changers to splurge on a new car or make another costly purchase.
The trend should ease worries about a coming plunge in consumer spending
as baby boomers with inadequate resources dramatically cut back after retirement.
Look for more oil- & gas-rich states to build hefty trust funds for the future,
socking away billions from oil & gas royalties and leases as well as energy
and extraction taxes. The Texas and Alaska funds take in about $1 billion a year,
while N.D.’s fledgling fund soared from $446 million in 2012 to $1.3 billion this year.
By law, the fund can’t be tapped till mid-2017. Public education is one likely use.
Next to jump on the bandwagon: W.Va., which expects to use trust funds
to offset cuts in federal aid over the next few years and, possibly, to support towns
suffering from lower demand for coal as natural gas replaces it at power facilities.
Other states headed in the same direction: Ark., S.D., Wyo. and Mont.
CITIES &
STATES
Cities have long competed to host big-name sports events by offering security
and other services gratis, sprucing up stadiums, roads to and from arenas and so on.
Now they’re upping the ante, purchasing the events themselves. For example,
the state of Conn. is the new owner of the Women’s Tennis Assn.’s New Haven Open
and is hoping to turn it into a moneymaker. Tucson, Ariz., is mulling the purchase
of a prestigious dog show. San Diego is interested in owning a rugby tournament;
Princeton, N.J…a lacrosse event. Riverside, Calif., is in talks with the U.S. Polo Assn.
They’re banking on big returns from tourism, sponsorship deals and more.
Meanwhile, star college athletes may soon get a cut of merchandise deals...
part of the NCAA’s likely settlement of a lawsuit over the matter. But expect the NCAA
to severely limit video games, jerseys and other merchandise that depict individuals,
entitling them to a share of sales proceeds. There’ll be more focus on teams as a whole.
So Texas A&M, for example, won’t have to pay future Johnny Manziels a small fortune.
Remember, your subscription includes The Kiplinger Letter online
page 3
Nov. 27, 2013
Expect greater scrutiny of workplace safety violations. Newly proposed rules
from Uncle Sam would require firms with 250 or more workers to file reports
on their illness and injury records each quarter...for posting on a new, public website.
Firms with 20 to 249 employees and operating in certain high-risk industries,
such as construction and agriculture, would be required to post annual summaries.
Increased disclosure of safety issues is sure to spell tougher enforcement.
Regulators with the Occupational Safety and Health Admin. will devote extra attention
to firms with above-average rates of injury and sickness. And the feds expect disclosure
to spur companies with the highest rates to step up safety efforts on their own.
REGS
The feds will get stingier with aid to firms in workplace safety programs...
an example of the Obama administration backing away from a cooperative approach.
Companies that volunteer for extra OSHA inspections...getting advice on safety...
and vow to act on the recommendations will see several key program benefits dropped.
Due to be cut: Discounts on fines for noncompliance, currently set at 10%.
And inspection deferrals. Firms now have up to six months to fix violations
or seek agency guidance before OSHA inspectors return for regular inspections.
The changes are sure to drive away firms. Of the 1,700-plus participants,
mostly in construction, more than 50% may drop out as incentives are reduced.
But look for Uncle Sam to take a softer line on job discrimination lawsuits,
following a string of court rulings against the feds’ aggressive application of the law.
Several judges have faulted the Equal Employment Opportunity Commission
for suing firms based on false or flimsy evidence. As a result, the agency will be slower
to file suits for alleged discrimination and will conduct investigations more carefully.
Congress is likely to weigh in, too. GOPers in the House of Representatives
will dig into cases where EEOC overreach has cost the government big legal fees.
Commercial drivers face new rules on medical exams next year. As of May 21,
truck and bus drivers who operate across state lines must undergo a health exam
from a practitioner specifically certified to test and examine drivers. At present, drivers
can get their every-two-year exam from any practitioner qualified for routine physicals.
Safety advocates say that’s not sufficient: Medically unfit drivers are causing accidents.
Carriers worry there won’t be enough certified health professionals in some regions.
A slew of new drugs promise to tackle ailments that resist today’s medicine:
A cure for staph-related skin infections, from Cubist Pharmaceuticals.
It’s on track for approval as soon as early 2014. The firm is also working on a drug
for complicated abdominal and urinary tract infections, with approval a few years off.
Two new treatments for hepatitis C. Look for the first, from Gilead Sciences,
to get the go-ahead from regulators in 2014. The second…being developed by AbbVie
and Enanta Pharmaceuticals…is being expedited for approval as early as 2015.
Also expect a breakthrough heart failure treatment next year from Novartis.
And a major pneumonia drug, in late-stage tests at Cempra Pharmaceuticals.
HEALTH
Workplace wellness programs are poised to go high-tech, as more businesses
invest in monitoring systems that encourage workers to stay active and lose weight.
A new generation of small, wearable sensors can track workers’ physical activity levels
and keep them motivated to stay fit, while saving company health plans big bucks.
Expect a surge in sales of wearable fitness monitors by 2018. Tens of millions
will be in use nationwide vs. a few hundred thousand now…a boon for both vendors
and manufacturers. Among them: BodyMedia, Jawbone, Fitbit, ShapeUp and FitLinxx.
For firms trying out a health incentive program, worker engagement is key.
Employees tend to lose interest unless the monitors offer interactive features…apps
for smart phones, games that involve hitting health goals and reminders to use them.
For instant online access and searchable archives, go to kiplinger.com/start
page 4
Nov. 27, 2013
A big increase in mailing costs, come late Jan...as much as a 3.7% hike
for Postal Service delivery of first-class mail and other printed materials.
A 1.7% increase is already in the bag, and by Christmas, the Postal Regulatory Comm.
will announce that it’s giving the nod to a special additional jump of about 2%.
Standard flats...large envelopes...may get a bigger increase than other products.
BUSINESS
COSTS
Automated online ad buying promises to cut costs for both publishers
and advertisers in coming years. Now less than 20% of digital ad buying, it’s likely
to grow swiftly as the quality and quantity of available data skyrocket. Computers
will accurately and automatically assess the value of ads to be placed on websites,
determining optimum distribution and minimizing costs for advertisers. Meanwhile,
publishers will need fewer sales reps, reserving them for sales of premium spots.
In time, such programmed buying will spread to other media, especially TV.
A new mechanism for small and midsize businesses to make use of data.
Buy a supercomputer time-share. Companies that can’t afford…or justify…
the tremendous cost of buying a supercomputer can increasingly tap the services
of one through the cloud. IBM, for example, charges retail, banking, health care
and other client companies a recurring fee for limited access to its supercomputer,
Watson. Look for demand for other such services to soar over the next year or two.
High-performance computing via the cloud doesn’t match the performance
of a physical computer, but it’s no slouch. Amazon’s cloud computing system,
for example, is ranked 64th of the 500 fastest computers in the world. Number one?
China’s Tianhe-2, at 33.86 petaflops…that’s quadrillions of calculations…per second.
Need to upgrade your building security? Consider an electronic doorman…
A camera/software system using biometric, behavior and facial recognition
to check for multiple matches in just seconds. For instance, gait, height, typical head
and hand position, plus behavior such as typical times of day that entry is sought
and whether the person is usually alone or accompanied, are assessed accurately
and rapidly. If the scan checks out on enough points, doors are opened automatically.
One such system is already on the job…at a Manhattan apartment building,
some Homeland Security offices and an industrial warehouse. From FST21 America,
it is competitively priced with other, less sophisticated digital security systems.
SPYING
BLOWBACK
As if it weren’t hard enough to negotiate market opening trade deals…
The Edward Snowden affair is spurring demands for “no spying” clauses
to be included in at least two proposed international pacts. Angela Merkel,
Germany’s chancellor, is demanding stringent new privacy protection rules
as part of a proposed U.S.-European Union free trade deal. And some participants
in 12-nation talks on the Trans-Pacific Partnership are making similar noises.
Pending trade deals aren’t likely to come to fruition quickly in any case…
late next year at best for the TPP, probably 2015 for the deal with Europe.
Yours very truly,
Happy Thanksgiving
Nov. 27, 2013
THE KIPLINGER WASHINGTON EDITORS
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