kiplinger connection
The Economy • Taxes • Selling

The Economy: Sluggishness persists; recession still unlikely.
Taxes: IRS eyes government contractors for tax slackers.
Selling: New marketing options: Web and subleasing retailer space.

The Economy
On the economic horizon ...
Fading odds of a second-half pickup.
Current sluggishness will persist, with growth of 2% to 2.5% for the year.
But a recession is still unlikely.

The problem is business investment. Consumers continue to spend freely. Governments are pouring money into the economy. And export demand is thriving. But...
Businesses just aren’t stepping up. And the vigorous jolt needed now seems unlikely in coming months as well. For the year, we expect capital investment to climb only 4% or so, versus a more than 7% jump in 2006.

Firms are jittery about order flows. By now, most had expected a clear uptrend, after the air pocket they hit late last year. Instead, they’re seeing just spotty gains.
Profit growth is downshifting quickly as costs for labor and raw materials stay high.
And regulatory concerns are mounting, fueled by talk of a crackdown on greenhouse gas emissions and worries about an antibusiness slant developing in the Democratic-led Congress.

Also spooking managers: The lack of clear signals on housing.
Some fear a summer meltdown in consumer spending if the usual rise in warm-weather fuel costs, added to housing woes, proves to be too much.
Though this grim scenario can’t be ruled out ... a big price spike in oil and gasoline could indeed sink consumers ... we don’t anticipate it. Average summer energy prices should actually be lower than last year’s.

Moreover, we continue to expect some improvement later this year.
Companies will loosen purse strings a bit, once the midyear hump is safely in the past. After months of shaving inventories to the bone, managers will have to step up business orders in the second half.
And hiring will stabilize, averaging around 110,000 jobs a month and yielding net employment growth for the year of about 1.3 million. Demand for labor should remain strong enough to sustain wage gains, which in turn will help keep consumer spending sufficiently buoyant.

Finally, we expect flat interest rates ... no change up or down from the Federal Reserve. Chairman Ben Bernanke and colleagues see no reason to cut rates, viewing sluggish GDP growth as an antidote to inflation. But it’s worth noting that they also see no cause to goose growth.

Taxes
The Internal Revenue Service is eyeing government contractors. Firms bidding on federal contracts face new disclosure rules on whether they owe any federal taxes or have outstanding tax liens. The regs take effect later this year. Uncle Sam decided to tighten up after government watchdogs discovered that millions of dollars were being awarded to contractors that owed tax money to the government.
The agency is also cracking down on tool reimbursement plans, ordering audits on car repair shops as well as aircraft maintenance and construction firms. Workers who don’t document tool expenses and return excess allowances will owe income tax on the stipends. And their employers can expect to be on the hook for payroll taxes.

Selling
Video ads on local Web sites can help pump up your sales. Newspapers and radio and TV stations offer 15- to 30-second spots on their Web sites to showcase local firms’ products and services. Companies are also having good luck using such ads to attract workers.
The ads are relatively inexpensive, with fees as low as $50 per month. Moreover, fairly simple ones cost next to nothing to produce.

Department stores will try a new tack to win back customers lost to specialty merchandisers, big-box stores, e-tailers, and others.
They’ll sublease space in their stores to a variety of vendors at prices much below what vendors typically pay to open outlets in shopping malls or strip centers. The goal: Jazz up department stores with products and services that complement their own offerings.
Among the first likely to do this: Macy’s, Neiman Marcus, JCPenney, and Bloomingdale’s. Other stores are also mulling the notion.