kiplinger connection
The Economy • Energy • Heavy Industry

The Economy: Severely slower 2008 growth, still, no recession.
Energy: Demand for renewable sources outstripping supply.
Heavy Industry: Steel up, construction equipment going overseas.

The Economy
A confusing series of economic events:
Third-quarter growth comes in at nearly 4%. Oct. job gains are a surprisingly big 166,000. But the Federal Reserve cuts interest rates, and housing and credit woes appear to worsen. No wonder the stock market is gyrating wildly.
The economy IS going to lose momentum. In fact, the slide is already under way. Growth will probably slow to about 2% this quarter.
Consumers face strengthening headwinds. Oil's rise ... up $15 a barrel since Oct. 1 ... is reversing gasoline's usual late-year drop. Housing's drag is intensifying as the volume of unsold homes mounts, weighing on prices.
Manufacturers are ramping down output, reacting to more-sluggish profit growth and anticipating even slower times ahead. Exports continue to be a bright spot for sales, but factory operators worry about the ability of key markets, notably Europe, to stay hot.
Government stimulus is scant. Uncle Sam is spending freely, but states and localities are tightening their belts. Most are required to balance their budgets.
The result: Growth in the first quarter of 2008 will be dismal, probably no more than 1%, and maybe even flat, as the stimulus from holiday spending ends and winter energy bills burden consumers.

There are also a couple of menacing jokers in the economic deck.
A crippling oil price spike is a clear and present danger, the biggest in years. Escalated tensions between the U.S. and Iran and Turkey's attacks on oil-producing northern Iraq are roiling oil.
And credit markets will remain strained. Signs of improvement, which emerged early in Oct., are now giving way to renewed jitters. The root problem ... the slumping value of mortgage-backed securities and other asset-backed paper ... shows no sign of resolution anytime soon.

Is all this likely to usher in a recession sometime next year?
We still don't expect one. There is a danger that even if risks don’t become realities, a psychology of fear could bring a big chill. But housing's negative economic impact will level off around midyear. Moreover, the Federal Reserve's interest rate cuts will have an impact on the economy by the second quarter of 2008, spurring investment. The Fed also would trim again if economic signals were to worsen. Plus export sales won't simply dry up, even if Europe hits the skids. The weak dollar's benefit to exporters is only just kicking in.

Energy
Shortages of renewable power loom in coming years as demand mandated by state and local governments for electricity produced from wind, solar, geothermal, and biomass sources outstrips production.
The shortfall will likely be as much as 25% in 2010, even if there is no expansion of state mandates. Currently, 25 states and Washington, D.C., have such rules in place, and other states are considering them.

There are two main reasons for the supply gap:
Restrained investment in alternative energy. Alt-energy firms fret about Congress’ resolve to continue tax credits for years to come,
making it much tougher to turn a profit.

And a dearth of materials, such as blades for wind turbines and silicon for making solar cells. That’s limiting new capacity.
Bottom line: You’ll have to shell out more for green power as utilities pay a premium to buy enough alt-energy to meet mandates.

Heavy Industry
Another wave of price increases for steel products is on tap. Automakers, appliance manufacturers and others will pay 10% more for cold-rolled steel in 2008 ... about $670 a ton, on average. Hot-rolled steel will also go up around 10%, to $575 a ton from $525. Higher nickel and chrome prices will push the cost of stainless steel to about $5000 a ton from an average $4650 this year. Small firms that buy from wholesalers instead of directly from mills will pay more.

Sellers of construction equipment are looking abroad for a lift to counter sagging sales in the U.S. After two strong years in the U.S., in 2005 and 2006, sales this year are down 2% and will gain less than 3% in 2008. The struggling housing industry is the biggest culprit.
Strong growth in China, India, eastern Europe, and Latin America is creating a healthy demand for earthmovers, cranes, hydraulic tools, and other machinery. Overseas sales overall will climb 8% next year, with a 12% increase for building cranes and forklifts setting the pace.