kiplinger connection
The Economy • The Jet Set • Housing

The Economy: Slow growth but no recession for 2008.
The Jet Set: Airport delays will descend as tickets soar.
Housing: New IRS directions on foreclosures and second-home income.

The Economy
The peak buying season is near ...
And consumers will enter it straining under the combined weight of housing gloom, high energy bills, rapidly climbing food costs, and a tougher market for consumer credit.
But shoppers aren’t about to shut down.
Job gains, their key support, continue. September’s 110,000-job rise and August’s revision to a jump of 89,000 augur well for spending by consumers and the economy’s overall health.
We see holiday sales up nearly 3% vs. last year, marking the slowest pace in five years but in no way a real meltdown. We’d worry if the outlook were more like 1%-2%.
This should keep the economy growing, albeit at a tepid pace. The current quarter is likely to rack up growth of 1% to 1.5%. First-quarter 2008 will be a tad better. In other words ... just out of recession's reach.

Upper-incomers remain in good shape. Mortgage woes will hit mainly lower-incomers. Higher-earners aren't nearly as sensitive to energy cost fluctuations. And they also have a far easier time getting favorable terms on credit.
The top 20% of American earners spend more than the bottom 60%.
This imbalance will be reflected in holiday sales patterns. Upscale chains are poised for a healthy 5% average increase in revenue in November and December, against a 2%-3% range for most other types of stores. Specialty apparel stores such as The Limited and Gap will fare the worst as many of their middle-class customers opt for bargain chains instead.

Next year, the Federal Reserve's interest rate cuts will help. Expect another small one before year end. This, plus the previous cut on Sept. 18, is too late to have a significant impact this quarter. The full effect of such moves typically isn’t felt till six months later. It takes time for rates on most types of consumer credit to readjust.
Total consumer spending is likely to rise about 2% in 2008.

As for business spending, caution doesn't mean a sharp pullback is in store similar to how firms recoiled after the dot-com boom ended. Expect business outlays to expand a modest 3%, vs. 3.5% this year.
And America's export express is at little risk of slowing much.
Bottom line: Economic growth will average 2% or so next year, roughly the same as this year. But the second-half pace will be faster, once the housing slump reaches bottom and stops subtracting from GDP.

The Jet Set
As for year-end fliers...prepare for loftier ticket prices.
Holiday airfares will be up 5% on average from last year amid robust demand and steeper jet fuel bills. Flexibility will be key to paring costs. Try flying Thanksgiving Day instead of the day before.

There is hope for a decrease in flight delays next year, probably in time for the summer 2008 travel season. A plan is afoot to reduce air traffic at the major New York City-area airports: LaGuardia, JFK, and Newark Liberty. About three-fourths of chronic delays around the country can be traced to congestion at these three airports.
Expect airlines to voluntarily agree to cut back on flights through New York. A similar program worked wonders at Chicago’s O’Hare.
But on-time takeoffs will come at a big cost: Higher fares and reduced flying options as more travelers compete for fewer seats.

Security regulators are catching up with private aircraft. U.S. Customs and Border Protection is seeking much more information on flights across U.S. borders by business jets and other private planes: Passenger names. Plane ownership. The plane’s operator. Who’s responsible for security. In all ... 34 pieces of info, vs. only 13 required now.
Customs wants all flight details one hour before departure, as opposed to the current practice of at least one hour before arrival.
New rules are likely to be phased in starting around Nov. 2008. Businesses will scream, but it will be tough to get the feds to ease up.

Housing
Homeowners facing foreclosure will find a friend at the IRS. Congress is telling the tax collectors to take it easy on people who owe taxes on forgiven debt that exceeds the value of their homes. The IRS considers the excess to be income. Taxpayers in this situation can request a partial waiver of the tax owed or stretched-out payments.

Sellers of second homes face a tax hike. Currently, sellers can exclude gains up to $500,000 if they lived in the house for two years out of the five preceding the sale. But Congress will soon pass a law making some of those gains taxable. This will apply to sales after 2007.