Kiplinger Connection
The Economy • The States • The Cities

The Economy: No end in sight yet, but stimulus actions will help … stay calm.
The States: States taking the lead on climate change, mortgage protection, infrastructure.
The Cities: Cities face hefty infrastructure repair costs, and consumers will pay.

The Economy
So just how bad will the economy get? That’s the question being asked today, from paneled boardrooms to modest living rooms, as markets worldwide gyrate in near panic.
Policymakers are acting aggressively to restore confidence and limit the damage.
It’s helping some, but more problems are undoubtedly lurking beneath the surface.
This is a time for measured caution, with careful consideration of key questions ...
Is the U.S. already in a recession?
No, but it is teetering on the brink. Some regions and industries are contracting, and even healthier sectors are beginning to feel the slowdown, as many businesses and more consumers rein in their spending.

Will rate cuts and the stimulus help?
Yes, but not until late this year. The Federal Reserve’s three-quarter-point slash in benchmark interest rates January 22 and half-point cut at its Jan. 29-30 meeting may lift confidence and lower loan rates quickly, but it’ll be many months before businesses find it easier to borrow. Plus lower rates add to concern about inflation and the dollar. And while Congress and Bush are acting with unusual speed to pass a stimulus package, tax rebates, which account for two-thirds of the $150-billion plan, won’t begin going out till May at the earliest.

Will businesses benefit from the stimulus, too? You bet. Tax breaks of about $50 billion will be included to encourage investment. Limits on expensing assets will soar to $250,000 for small companies. Large firms can take an up-front deduction for 50% of an asset’s cost.

Is the end in sight? Far from it. The credit crunch has a ways to go. Defaults are spreading from housing to credit cards, auto payments and student debt, forcing banks to add to reserves and delay some loans.
A quick rebound in the second half of 2008 is highly improbable. The huge inventory of unsold homes is likely to weigh on housing markets for many more months. Expect tepid job growth for most of the year, as construction, auto, retail, and banking firms take a cautious approach.

So what’s an investor to do? Stay calm and remember why stocks attracted you in the first place. Keep your focus on long-term goals. Other investors’ fears are a "buy" sign for those with a long view ... not a sign to dive in, but a time to look for bargains in quality stocks.

The States
States are again taking the lead in shaping domestic policy. Governors and legislatures aren’t willing to wait for Congress, not with the 2008 elections all but guaranteeing gridlock. For example ...
Climate change. Three carbon-reduction pacts across 24 states in the Northeast, Midwest, and West will call for cutting emissions and eventually include cap-and-trade plans. Separately, Fla. And, Hawaii,will reduce emissions to 1990 levels by 2025. Va., Alaska, Idaho, and S.C. are mulling similar plans. Twenty states will delay or end construction of coal-fired plants. Congress won’t pass a federal bill before 2010.
Mortgage protections. Pa., Calif., Ohio, Maine, and Minn. all aim to provide help to those homeowners threatened with default. Several states are imposing restrictions on subprime lending practices. In Nev., home buyers will be able to sue brokers for misleading advice. And the Fla. legislature has made mortgage fraud a third-degree felony.

Immigration. Colo., Ga., Okla., and Ariz. will deny benefits to illegal immigrants and impose stiff sanctions on firms that hire them. Kan. and S.C. are also expected to pass tough new laws later this year.
Water. With drought plaguing the Southeast, lawmakers in Ga., Miss., Ala., and Fla. are looking to build up reserve water storage, cut waste, and require cities to tighten local water use ordinances.
Infrastructure spending. Ill., Va., Calif., and several others are looking at public-private plans to run toll roads and public works. It's a way to raise money quickly without having to impose new taxes. Ill. has boosted sales taxes to avoid service cuts and fare hikes on mass transit. Ark. will raise a natural gas tax to pay for roadwork.

The Cities
Expect cities to levy hefty rate hikes for wastewater treatment. The Environmental Protection Agency says much-needed repairs to the nation's infrastructure will cost $202.5 billion over 20 years. Cities will have to make consumers help pay for critical repairs.
Hardest hit: NYC, L.A., Washington, D.C., Miami, and Chicago.
Federal help isn't likely until President Bush leaves office. He says he’ll veto a four-year bill to authorize $14 billion in loans. It easily passed the House but faces tougher sledding in the Senate.