Kiplinger Connection
The Economy • Energy • Health Care

The Economy: Recession’s at the door; Fed will cut interest rates.
Energy: Some interesting large-scale alternatives are coming.
Health Care: Some options to help smalls offer coverage.

The Economy
Recession is now very likely. In fact, the economy may already be in one. GDP growth in the quarter just finished will be negligible...zero to 0.5% ... with massive job losses and plunging asset values. In the fourth quarter of this year, we expect the economy to shrink. Unless there’s a rebound in consumer spending early next year ... very long odds ... it will continue to shrink in the first quarter of ’09. By anyone’s gauge, that’s a recession. And the National Bureau of Economic Research, which considers not just GDP growth but a variety of other yardsticks to determine if and when the economy is in recession, may date this one as starting in summer ’08.
The economy won’t begin to pick up until the middle of next year, at best.

Look for the Federal Reserve to cut interest rates before Election Day in a bid to help the staggering economy. The biggest drop in jobs in five years last month … a net loss of 159,000 … is partly due to employers hunkering down in light of the virtual lending freeze gripping the economy and squeezing firms.

The federal credit rescue plan will help slow the descent in home prices as bargain hunting investors, awash in cash, start to buy up distressed real estate as well as stocks, bonds, and other assets. Figure prices have about 10% more to drop on a national average basis, with wide variations between geographic regions.
Sales of existing homes are bottoming out. They’ll inch up 100,000 in 2009, to 5.1 million, aided by 30-year fixed mortgage rates hovering in the 6%-6.25% range.
But there’s a long, slow slog ahead. New-home sales won’t pick up until 2010, and housing starts will head lower again next year, slipping to 900,000.

For very small banks, there’s a silver lining in the current financial crisis:
An opportunity to win new customers up for grabs following the failure or absorption of hundreds of large community and regional banks in coming months.
They’ll face cutthroat competition from the megabanks: Bank of America, Citigroup, and JPMorgan Chase now hold almost a third of U.S. bank deposits and can entice customers with a wide array of services, from 401(k)s to mutual funds.
But they’ve got an edge to exploit: Personal service and the ability to act fast. Bankers who needn’t worry about shareholders and stock prices are more likely to renegotiate loans with struggling borrowers and cut good customers some slack.

Energy
Large scale geothermal generators are about to go mainstream. Located in Nevada, an Ormat Technologies plant will provide 50 megawatts of electricity, about the same as some natural gas-fired plants. It’s part of a boomlet at work on more than 100 geothermal plants with a combined output of 4000 MW, enough for 4 million homes. Other trailblazers: AltaRock Energy and Geothermix.
Likely to give the industry a giant boost: Coming carbon emissions caps and other government initiatives to curb global climate change. In about five years, look for geothermal plants to give coal- and gas-fired generators a run for their money.
Homeowners and businesses can tap the technology now, cutting heating and cooling bills up to 50% by using the ground’s steady temps. Systems are costly ... up to four times conventional AC and heating units ... but they can pay off quickly.

On a more distant horizon: Super solar power systems orbiting Earth. Wafer-thin mirrors on satellites will collect energy from the sun, converting it to microwaves that are beamed to Earth and made into electricity. Projected costs and output for each satellite: About the same as for a large nuclear power plant.

An air-powered car? It’s no pipe dream. Years-old, off-the-shelf technology to use compressed air to drive car engine pistons is attracting new interest because of high gas prices. Zero Pollution Motors will franchise assembly plants ... turnkey operations ... that will make up to 8,000 cars a year, likely starting in 2011. Air cars can travel at 35 mph for 60 miles a day on air alone ... good for city commuters. Or an integral motor can use a bit of fuel to compress more air, letting the car run at highway speeds for 800 miles. Indian carmaker Tata has already bought the rights to make the car for the huge Indian market. Expected cost of the car: Under $20,000.

Health Care
Only 62% of small firms still offer health insurance, down from 68% in 2000.
Two states’ premium subsidy programs are helping them buck the trend. Okla. picks up 60% of the tab for firms with 50 or fewer low-wage workers. In Ariz., employers of up to 25 workers get discount certificates to purchase private insurance.

Other options that can help a firm hang on to coverage for its employees:
Self-insure, maintaining a stop-loss policy to protect against catastrophes ... but only if your company has at least 50 employees. For smalls with fewer workers, it’s just too risky. Self-insuring may not cost much less than buying a group policy, but it offers some benefits: Employers aren’t subject to state mandates on coverage, which range from chiropractic services to routine cancer screenings. And policies can be tailored to the particular needs of a firm’s workforce ... skipping maternity care and adding checks for high blood pressure if workers are mostly older, for example.
Switch to a high-deductible plan combined with health savings accounts or health reimbursement arrangements. Employer pay-ins to either are deductible.
Check into plans offered by associations or trade groups ... rotary clubs, medical associations, chambers of commerce, etc. But be sure to check out any plan with the National Assn. of Insurance Commissioners.