Kiplinger Connection
The Economy • Federal Spending • Tech

The Economy: Expansion to return slowly later this year.
Federal Spending: Funds will flow for energy-source R&D.
Tech: Don’t expect the H-1B visa cap to be raised till 2009.

The Economy
How bad will the economy get? With housing and lending industries hurting, factory production and retail sales falling, jobs shrinking, and household income slowing, we believe the economy is in recession.
Our forecast is for a mild contraction, though clearly some parts of the country will be hit harder than others. Among them: Areas that led the housing boom ... Fla., Ariz., Nev., and Southern Calif. Midwest states, too, particularly Mich. and Ohio, the heart of the beleaguered auto manufacturing industry.
Look for expansion to return in the latter half of 2008. Stimulus from Washington and interest rate cuts by the Federal Reserve, among other moves, will spell 2.5% growth in the third quarter and a similar pace in the fourth quarter.
Growth next year: A tepid 2% or so, which, again, may feel even worse to some.

With election pressures intensifying ... We expect Washington to do more to stanch the economic bleeding.
Odds are rising for a second stimulus package. The legislation would likely extend unemployment benefits, increase food stamps, and funnel more aid to the states to help homeowners and create jobs.
A federal rescue of besieged homeowners is also gaining steam. Democrats plan a big push in April for a bill that would allow Uncle Sam to provide up to $300 billion in guarantees to mortgage companies so homeowners can refinance mortgages they can’t pay. But existing lenders would take a big hit, and most Republicans are strongly opposed to it. Still, the pressure to help homeowners is mounting, especially in light of the lifeline thrown out to troubled investment banker Bear Stearns. Even President Bush now seems willing to work out a compromise.
Another helpful measure: Giving mortgage giants Freddie Mac and Fannie Mae more leeway to bolster the home mortgage market.

Moreover, the Fed will remain bold in a bid to keep credit woes from spilling over from big banks to smaller ones. If needed, the Fed will make more rescues along the lines of the Bear Stearns deal. It’s poised to make further reductions in interest rates, too.
And don’t rule out a drop in gasoline prices. The prices of oil and other commodities are out of whack with supply and demand, and use is all but stagnant. These fundamentals point to a return to earth for oil by year-end. Ditto for metals, crops, and other commodities.

Federal Spending
Look for Congress to jump-start technology R&D in fiscal 2009 by funding new initiatives focusing on renewable power, fuel cells for vehicles, nanotechnology, and intelligent manufacturing.
A new agency called ARPA-E will zero in on renewable energy, teaming with private firms to find ways to cut biofuels production costs. We expect lawmakers to fund the Advanced Research Projects Agency-Energy to the tune of about $5 billion a year for at least the next four years. ARPA-E researchers will also pursue ways to boost the efficiency of wind, solar, tidal, and biomass power systems, among other projects.
NIST will focus on fuel cells, nanotechnology and manufacturing, also in partnership with private firms. Public funds for the initiatives at the National Institute of Standards and Technology will likely top out at less than $100 million in the early stages but may be increased later.
Clinton, Obama, and McCain all strongly favor these programs.

Tech
After years in the doldrums, telecom is back under sail. The outlook for telephone and cable-related companies is solid. Revenues will grow a robust 7.2% per year to $1.3 trillion through 2011.
Broadband is one reason. Internet traffic quadrupled last year, thanks to video and other programs that use huge amounts of capacity. Suddenly, with demand soaring, there’s a shortage of fiber again.
Wireless is another. Consumers are still eager to spend on text messaging, Internet service, music and video downloads, and more.
Businesses are ramping up, too, with private secure networks. Even videoconferencing, which was slow to catch on, is turning a corner.

Congress won’t raise the cap on H-1B visas this year, despite tech firms’ complaints that lack of sufficient high-tech workers is sending more engineering work abroad. An immigration bill next year will offer a better shot to hike the annual cap to 200,000, from 65,000.