kiplinger connection
Energy industry • Federal buying • The economy

Energy industry: Push for alternative fuels continues
Federal buying: Government procurement to double in FY2007
The economy: Is the Fed done with hiking rates?

Energy industry
With oil prices holding at still-lofty levels in coming years ... The push to develop alternative fuels will go full bore. Investors will write big checks to build scores of ethanol plants and fund other projects aimed at reducing America’s dependence on oil.
Several states are leading the way, with regs and incentives aimed at stoking acceptance of renewable fuels and sparking investment. Of course, many farm states have been out in front for several years in promoting the use of biofuels, but others are jumping in now, too.
In Calif., the governor is the biggest cheerleader for biofuels. He wants 4% of the state’s electricity to come from biomass by 2010.
Congress is itching to prime the pump ... again. By 2008, lawmakers will require the use of about 10 billion gallons of ethanol in the U.S. by 2012 and about 14 billion by 2015. Just last year, lawmakers set a mandate of 7.5 billion gallons of ethanol by 2012. They will also require the use of 3 billion gallons of biodiesel by 2015.
Green energy measures enjoy fairly broad bipartisan support.
Federal and state programs will also boost coal liquefaction ... the chemical process of turning coal into liquid fuel. The Air Force is particularly keen on developing jet fuel that’s derived from coal. Illinois plans to spend $775 million to build 10 coal liquefaction plants. Such fuel would augment oil-derived fuels in public-transportation use. Indiana and Montana are also pushing to build so-called coal-to-fuel plants.

Federal buying
Another big jump in government procurement is on tap in FY 2007, putting spending at twice what it was in Bush’s first year. Uncle Sam will shell out about $480 billion ... 11% more than in FY 2006.
Robust military orders top the list, followed by security goods and services as well as post-Katrina spending along the Gulf Coast.
Lots of smaller stuff, too, sold by a wide variety of vendors.
Visit Grants.gov and FirstGov.gov to find out what’s needed.

The economy
We think the Federal Reserve is finished hiking interest rates, despite Fed officials’ continued hand-wringing over inflation. The step-down in energy costs will help sustain the cooling price growth, which was already under way before oil prices took their turn south. Meanwhile, the chill through the housing market will bar a resurgence in economic growth anytime soon. Higher rates don’t fit in this scenario.
When will the Fed downshift on rates? Probably around mid-2007, and certainly not before spring. Chairman Ben Bernanke and his colleagues will err on the side of caution when it comes to easing monetary policy. But odds are that inflation will probably have eased enough by midyear for a quarter-point rate reduction, with the prime dropping to 8%.