Energy
It looks as if the U.S. will avoid big power outages this summer.
And probably next. Regulators are doing a good job riding herd on utilities, minimizing chances of blackouts and cascading failures.
But come 2008, blackouts may be all too common. With electricity use climbing steadily higher but few power plants starting up, outages will likely plague much of New York and Connecticut, parts of the Upper Midwest, and Southern California.

It’s too late to catch up with demand growth, building the extra cushion of supply needed to ensure sufficient amounts at peak times.
Most new power plants won’t fire up till 2010 or later. One reason: Financing for utilities dried up following the Enron debacle.
Transmission capacity is behind the curve, too, making it tough for power-hungry regions to buy from others with surpluses. Although regulators now have the clout to muscle through not-in-my-backyard objections to large power lines, it’ll still take five years or more to catch up with transmission needs.

Pipeline problems in Alaska spell more pain at the gas pump. The national average price of gasoline, which had been poised to ease from its summer peak, will instead go up about 25¢ to $3.25 a gallon by Labor Day. Diesel fuel will likely pick up 20¢ to around $3.30.

Russia has its eye on the huge U.S. market for natural gas, eagerly anticipating a big role in supply and distribution of the fuel. State-owned Russian powerhouse Gazprom aims for 25% of the U.S. market for liquefied natural gas by about 2020. It’s already a top provider.
The good news: That’ll help temper rising prices of natural gas. They have been climbing steadily as U.S. production continues to slide.
The bad news: Russia has proved itself willing to play politics with supplies, sometimes putting them ahead of its own economic interests.

Taxes
Congress will reinstate expired tax provisions retroactively, even though Senate Majority Leader Bill Frist (R-Tenn.) says no. Taxwriters won’t adjourn this year before extending current tax breaks, including the R&D credit and tax credits for hiring the disadvantaged. The college tuition deduction will also receive new life from Congress.
Many more S companies will undergo intensive audits this year. The IRS is doing line-by-line exams of about 5000 S firm tax returns from 2003 and 2004. Agents are watching out for cases where businesses paid little or no salary to owners to minimize tax liability. The exams will help the IRS fine-tune outdated audit selection formulas.

Need help recouping long-distance phone taxes for your firm?
Hire out the job. New services will comb your phone records to determine the exact amount due your business on its 2006 tax return. The IRS is returning the 3% telephone tax collected after Feb. 28, 2003, after losing many court battles. Taxpayers are owed about $13 billion.
Some options: INI Global checks wired and wireless phone bills. Wireless Watchdogs examines phone bills for all wireless devices...it estimates a $40 refund per BlackBerry and other wireless units. Avotus offers to check your records or sell you do-it-yourself software.

The Economy
Businesses face a squeeze on profit growth through 2007. Though the economy will slow, prices of energy and raw materials remain expensive, and an upward trend in wages declines only gradually.
There won’t be much relief on financing costs. Interest rates will hold near current levels. The Fed appears ready to shift gears after raising rates, but there won’t be much room for cuts next year. Why? Inflation isn’t going to disappear. It will only dip to around 3%. Though most companies can’t raise prices fast enough to match increases in their costs, the price hikes will keep inflation from dropping much.

Expect earnings to increase an average of 7% to 8% next year for companies in the S&P 500, after four years of double-digit advances.
Firms will respond by trimming investment, limiting the growth in business spending to about 6.5%. That, combined with a slower increase in consumer spending, will hold gross domestic product to a 2.5% gain... almost a percentage point below this year and the slowest since 2003. They’re also going to rein in hiring to offset rising costs. Net employment growth will average about 117,000 a month next year, down from an average of 140,000 in the current year through July.

Blame brisk global demand for boosting prices of raw materials...oil plus steel, aluminum, copper, iron, nickel, zinc, and other metals.
Supply uncertainties also are increasing for several metals, fueling speculative buying. For example, a growing number of strikes at key Latin American copper mines are sending the metal’s cost skyward. For most metals, the best-case scenario is price declines of 5% or so. Even that would be cold comfort, given the huge price run-ups in metals so far this year...51% for copper, 35% for titanium, 25% for aluminum.

Pricey copper and zinc will penalize producers of heavy equipment plus makers of fittings and fixtures used in both offices and residences. Also...makers of batteries as well as anything using stainless steel, such as large appliances, aerospace parts, and outdoor cooking equipment.
Construction firms will take a hit from costlier copper wiring as well as grapple with global competition for cement and steel.

Makers of chemicals, plastics, and fertilizer face plenty of pain as a result of continued high prices for energy, especially natural gas.
Auto parts firms won’t feel any relief from their ongoing woes. With steel likely to average close to its current $650 a ton next year and automakers in no mood to accept price hikes, parts makers are stuck.

And for all types of companies...no letup in transportation costs as the combination of costly fuels and capacity constraints persists, with the latter giving transport firms relatively strong pricing power.

© 2006 The Kiplinger Washington Editors, Inc