Kiplinger Connection
The Economy • Energy • Rival Interests

The Economy: Is superconsumption dead?
Energy: Brazil’s new oil field shifts production race.
Rival Interests: Existing businesses slighted when newcomers arrive.

The Economy
Is the Consumer Age dead? Hardly. Americans won’t suddenly lose their affection for new cars, fashion fads, and techno-gizmos.

But the age of superconsumption may be.
And that spells change for the economy.

Americans are tightening their belts. Consumer spending will gain about 1.7% a year in 2008 and 2009, after growing between 2.8% and 3.6% a year for the past five years.
There’s a whole slew of reasons:
Job worries, with unemployment on the rise.
Stingier lending, as credit card companies tighten their standards, reduce spending limits, and ignore falling interest rates elsewhere in the face of their own rising delinquencies.
Higher gas prices, siphoning about $91 billion from consumers’ discretionary income this year.
And most of all ... declining home prices, effectively ending the use of home equity as a cash machine to support consumer spending.

The result: A big hit to economic growth. From 1999 to 2007, the share of GDP coming from consumer spending barreled from 68% to 72%, far more than that of most other developed economies. In the U.K., consumers account for 66% ... in Germany, 59%. In Canada and Japan ... 57%.
A drop back to 68% in the U.S., as we expect over the next three years, amounts to lopping about half a trillion a year off economic activity.
That’s three times as much as the total stimulus this year. And only about half of that stimulus will actually pump up the economy. A third of the taxpayer rebates will be saved or used to pay off debt. Business breaks won’t spur more spending, they’ll just add to profits.

Some industries will feel it more than others:
Automakers, especially Detroit. Already skidding and now headed onto a more treacherous track, they’ll find it tough to marshal the resources for new models ... key to their turnaround plans. Their market share will deteriorate further and drag small suppliers down with them.
Advertising firms. They’re facing a buzz saw, with many customers ... food, retail, airlines, financial services, etc ... cutting spending.
Retailers, especially specialty apparel stores. Some will be swallowed up ... some, go belly-up.

Energy
Development of a mammoth new offshore oil find in Brazil means that by 2015 or so, Brazil’s production will top those of Kuwait, Nigeria, Venezuela, and the United Arab Emirates. But the jump won’t ease tight global supplies, only help offset declines elsewhere.
Most of the oil will head to the U.S. The long trek via the Suez or Panama canals will make shipping it to Asian buyers too costly.
Meanwhile, don’t fret about threats of a Venezuelan oil embargo. President Hugo Chávez is using a tiff with ExxonMobil to whip up support for his government but knows diverting oil from the U.S. wouldn’t work. Too few buyers are interested in his country’s heavy sulfur-laden crude.

Clean coal? Never mind. That’s the message from the Energy Dept., which recently pulled the plug on its $1.8-billion FutureGen program, aimed at developing coal-fueled, emissions-free electricity plants. DOE says the technology to gasify coal and sequester the carbon dioxide is too iffy. Other efforts on storing CO2 underground are a decade away.
Utilities will have to rely more on natural gas and nuclear power.
That'll bump electricity rates up by about 50% within a decade.

An ethanol flood is nearing. By next year, a slew of new plants will lift annual output to about 13 billion gallons. That’s more than can be used as E85 in flexfuel vehicles on the road and as E10, the 10% ethanol-gasoline blend approved by EPA for conventional engines.
Prices will plunge further, and profits will disappear for makers.
Expect the feds to face pressure to speed up market development ... building infrastructure and helping get ethanol into more of the country and/or letting blends with over 10% ethanol in them be used in all cars.

Rival interests
Teed off at the juicy tax break your town offered a Home Depot?
Take a lesson from Phoenix-area businesses. They felt shafted by local governments’ efforts to lure new employers with sales tax breaks, property tax exemptions and other incentives existing firms didn’t get. When the competition among the area’s towns and counties got too hot and the inducements too sweet, established local businesses blew a fuse.
The Arizona legislature finally stepped in, calling a cease-fire in the bidding wars in the Phoenix area. Now there’s a move afoot to expand the ban on such business tax breaks statewide later this year.
In other states, there’s talk of taking a similar path. Lawmakers in Colo., Ark., Mo., Ga., and N.C. are mulling moratoriums on breaks.

Oops. Bush officials’ plan to help U.S. cruise ships backfires. The administration hoped to hamper competition from foreign-flagged ships by changing customs rules to make them stop for 48 hours at a foreign port when traveling between U.S. ports. That would help two U.S.-flagged ships that cruise around Hawaii but wreak havoc on other lines. Also losers: U.S. cities that are home ports for the 97% of ships under foreign flags.