kiplinger connection
The Economy • Financial Services • Small Business

The Economy: Construction spending will lag in second quarter, then strengthen again.
Financial Services: As balloon-loan terms expire, expect mortgage delinquencies to hit 5 percent.
Small Business: Smalls can expect more access to government work and lower SBA loan fees.

The Economy
This year is starting out with a bit more oomph than expected
Credit the decline in energy prices...driven by warm spells in the U.S. and Europe... as well as brisk employment gains. The result: Nudges for consumer spending and construction. We're upping our forecast for economic growth in this quarter by half a percentage point.
The second quarter will be weaker, the slowest of the year, as consumers pull back a little in the face of rising gasoline prices and a slow upturn in long-term interest rates. Also, some of the early-year building activity represents just moving up spring projects. Expect that to be offset somewhat later on.
A buoyant second half is in store as businesses take the lead. Firms will ramp up spending and investments as they become convinced that the economy has avoided a slump and will expand for a while longer. Housing's drag will also be largely wrung from the economy by fall.
For the year...a respectable 2.5% rise in gross domestic product.

January retail sales will exaggerate consumer spending's strength. Many retail chains are likely to rack up sales gains in the 4%-6% range. Sure, cheaper fuel and nice weather get more people into stores. But...
The main driver is abundant gift cards sold over the holidays. Shoppers generally hoard these cards until post-holiday sales begin. Also, this January will look peppy in comparison to a ho-hum Jan. 2006.
We still see 2007 retail sales rising 3.5%, vs. 4% last year.

Inflation should cool again with the sharp drop in energy. Higher oil prices kept inflation high in December, but the recent decline will bring the rate down when the January numbers are released next month.
Look for this year's inflation rate to fall to about 2%, the lowest since 2003. But core inflation, which omits food and energy, will be about 2.2%...still above the Federal Reserve's ceiling of 2%.
So the Fed will hold interest rates steady well into the year.

Financial Services
The rate of mortgage delinquencies will reach a lofty 5% around the middle of this year...the highest since late 2002. That'll still be well shy of the record of 6.07% in first-quarter 1985.
Blame the high volume of adjustable rate loans this time around. Lots of folks face payment troubles as low introductory fixed rates on adjustable rate loans are reset to current market interest rates. Many homeowners also face higher payments on home equity lines of credit.

Certain states stand out on the delinquency rolls: Mississippi and Louisiana, as the effects of Hurricane Katrina linger. Michigan, hurt by auto woes. Florida and California, where investor buying hit fever pitch during the boom.
Foreclosures won't balloon, however. Three of four late payers typically find a way to avoid them...refinancing the loan, cutting a deal with the mortgage lender, or selling the house before foreclosure occurs.

Mortgage lenders will stay busy this year, despite fewer sales. Plenty of loan refinancings will feed new-loan volume of $2.3 trillion this year, about $200 billion less than the total registered in 2006. Even so, this year will be well below the record $3.8 trillion in 2003.

Small Business
Small firms seeking government contracts will get more help.
New rules aim to eliminate unfair competition for set-asides from firms that have grown a lot or been acquired by bigger businesses. Companies will have to be certified as small at least every five years.
Plus smalls can get a hand from the Business Matchmaking program run by the Small Business Admin. It’ll grow by 25% this year, with a goal of serving 4000 smalls at five regional events. Companies are matched with federal, state, or local agency officials or with large contractors looking for subcontractors. Registration is required for the free events.
Smalls can also expect lower fees on SBA 7(a) loans. Last year, the agency collected millions more in fees than it actually needed. Democrats will make the SBA use that money to cut fees on new loans.