kiplinger connection
The Economy • Materials Costs • Small Business

The Economy: The expansion is on its last legs, but long ones. Expect a few more years’ growth.
Materials Costs: Steel will stay high, wood will up-tick, other materials should stay moderate and level.
Small Business: Good news for small-business borrowers and a couple of tips for business coaching.

The economy
Is this expansion on its last legs?
The latest figures make it seem so ... third-quarter economic growth of only 1.6%.
But the finish line isn't in sight.
We still see 2.5% growth for next year.
And close to that for a few more ... a third extended growth phase, following those in 1983-1990 and 1991-2000. Prior to the 1980s, expansions rarely lasted more than four years.

Of course, no economy is bulletproof. Damaging fuel price spikes will remain a risk. And the 2008 election debate may feed worries about Social Security and Medicare borrowing, sending interest rates higher and stocks lower.

But there's plenty to sustain growth:
Incomes buoyed by tight labor markets. That'll help sustain spending as housing fades.
More-balanced global growth patterns creating more demand for U.S. goods abroad as the economy here settles to a moderate pace.
Modest but steady gains in business spending as companies bulk up on labor-saving technologies and try to ease capacity constraints. They'll persist for the next few years, despite slower growth in demand.
And an ongoing flow of federal money. Even a rollback in Iraq, which we see as likely, would slice only a sliver from the spending pie. Odds of substantial budget cuts anytime soon are very low indeed.

Structural changes will also play a role in sustaining expansion.
Companies are managing inventories better. Real-time information for orders, costs and supply chain performance helps avoid overshooting on production, which in the past has generated boom-and-bust patterns.
Gains in energy efficiency reduce vulnerability to fuel shocks.
And monetary policy is functioning more smoothly. Over time, the Federal Reserve has honed its ability to head off inflation pressures before they can be halted only by quick, steep bursts of rate hikes.

Will this expansion feature the same late boom as the last two? They both posted annual GDP growth of 3.5%-4.5% in their waning years.
No, it won't. Inflation risks are rising as productivity gains and growth in the labor pool slow down at the same time. In other words, potential inflation pressure from wages will be greater in years ahead.
So the Fed will almost certainly keep interest rates fairly high, aiming for economic growth of 2.5% to 3%. We think it will succeed.

Materials costs
Cost declines brought on by the housing slump won't all last.
Lumber prices will head back up in spring, regaining a third of the drop experienced since a year ago. With big producers cutting back and a new U.S.-Canada accord limiting shipments from north of the border, prices will likely peak in summer at about $310 per thousand board feet.
Not so for gypsum and oriented strand board (OSB). Gypsum prices will slide by about 20%, while the cost of OSB is likely to be flat.
And expect a much more modest increase for cement next year ... about 3%, compared with 10%-or-greater annual hikes in recent years.

Steel users won't get any relief, despite the downshifting in the economy. Hot- and cold-rolled product will remain unchanged, while stainless prices will scoot up a bit.
One reason: Producers pack more market punch than they used to. Industry consolidation has put an end to the boom-and-bust cycles of past years. Now when demand slackens, the remaining steel makers have the ability to selectively shut down a furnace or two, paring production to match declines in demand.

Big demand for heavy-duty steel pipe helps, too. Nearly twice as much will be needed next year as in 2006, and nearly twice as much again by the decade's end. What's behind the surge? America's appetite for energy, especially natural gas and oil.

And don't expect the International Trade Comm. to end duties to ease pressure on automakers and others needing rustproof steel. Members fret that abandoning protections would spur a flood of imports. Stiff duties will remain till 2011, with prices climbing 10% in 2007.

Small business
Good news for potential borrowers: An increase in willing lenders, especially in distressed areas. Two Small Business Admininistration changes in the works will make more banks interested in participating in programs: Banks will be able to share the risk in loans made in poor rural regions and inner cities, selling part of them to community development groups. And a simpler way to determine if firms are eligible for SBA guarantees should lure more banks into the arena of small-business lending.

Business owners: Need a little help honing a particular skill?
Consider a coach. Part mentors, part consultants, coaches for hire work one-on-one with proprietors to improve one or more needed skills ... strategic planning, communications, marketing, motivating workers, etc. The going rate is about $200 an hour. Be sure to ask for references, and check whether a possible coach has relevant business experience.
For nuts-and-bolts advice, don't overlook two free sources: SCORE, the nonprofit group made up of retired execs, and, from the SBA, Small Business Development Centers. Both operate in all 50 states.