Nine Key Sectors To Include In Budget Planning
Budgeting for 2008 will be especially tricky, given the economic turmoil that’s forcing some businesses to reconsider their investments in the months ahead. Join us for a look at what the editors of The Kiplinger Letter see happening with the cost of money, pay raises, energy, health care, insurance plus much more.
THE COST OF MONEY
Expect inflation to slow a tad from this year’s increase of 2.7%. Interest rates should steady after the Federal Reserve cuts interest rates this fall, and prime lending rates will end 2008 where they'll be by the end of this year: at 7.5%. 10-year Treasuries will range from 4.5% to 5.25%. The 30-year fixed-rate mortgage, now about 6.5%, is likely to end the year around that level and increase slightly in 2008.
Business spending will rise just 4% next year, on a par with 2007. Profits will go up about 3%, after a 7% jump this year.
ENERGY COSTS:NOT QUITE SO BAD
There’s some relief ahead on energy costs as supplies expand while the sluggish economy dampens demand. Average prices of crude oil, gasoline and diesel fuel will fall nearly 2% from this year’s levels.
Crude will average $62 a barrel. Gasoline at the pump, $2.65 a gallon. Diesel, $2.70 a gallon. But others will rise: Retail heating oil, 2%. Natural gas at the wellhead, 7.4%. And electricity, around 4%.
PAY AND BENEFITS:BIGGER BONUS POOL
Pay raises will average 3.8%, the same as they will this year. And pay in labor contracts will also match this year’s increase of 3.3%. But top performers can expect larger bonuses. The pot for such awards keeps increasing as firms contain base salaries. In 2008, 12% of payroll, on average, will be set aside for bonuses, vs. just 6% in the early 1990s.
Employers face an 8% hike in health care costs, about the same as this year’s gain. Helping to keep costs in line: Cost sharing with employees plus a stronger emphasis on wellness and prevention.
FLYING: DOMESTIC PAIN, INTERNATIONAL GAIN
Hikes of 6% or more are a sure bet for domestic airfares in 2008. And what will you get for the added money? The same crowded planes and service glitches. Not so for many overseas flights, however.
Fares will drop at least 5% on transpacific and transatlantic routes as competition takes off. An Open Skies agreement taking effect in March allows carriers from the U.S. and Europe to offer more service to more destinations.
A ROOM FOR A NIGHT
Hotel rooms will go up 5% on average, tempered by the economy chains. But increases will be much higher at fancier places and in cities where construction of new hotels is constrained by a scarcity of sites. Pricey spots: New York, Miami, Los Angeles, San Francisco and Honolulu. Besides, hotels will continue to drive a hard bargain with customers. Look for convention center space to rise 3%.
Bargains? Indianapolis, Houston, Dallas and Phoenix. A big new facility opening near Washington, D.C., also figures to hold down rates in the nation’s capital next year. Meals, 5%. Rental cars, 3% for corporate clients.
EXPENSING IT
Uncle Sam’s per diem travel rate -- relied on by many in the private sector -- will jump by $10 to $109... even more in high-cost areas. Note that the new per diem allowance takes effect on Oct. 1, 2007. Count on a higher standard mileage allowance by the IRS, possibly to 50¢ or so from this year’s rate of 48.5¢ per mile. Legal fees, up 5%. Increased red tape is the cost driver.
TECHNOLOGY MARCHES ON,PRICES DON'T
Tech and telecom won’t break the bank. Computers, down 8%. Prices will fall further in 2009 after Microsoft’s new operating system, Vista, becomes old hat. Web hookups, up a bit. More people will switch to pricier, albeit faster, fiber-optic service. Cell phone service, no change overall. Prices will stay about as-is for local phone calls and long distance, too. Office copiers and printers, down 5%.
SPENDING ON SENDING
Across-the-board postage rate hikes will kick in by midyear. First-class stamps, to 42¢. Buy "forever" stamps to beat the increase. Overnight letters, 5%. Overnight packages, 7%. Periodicals, 3%.
Shippers are catching a break: Rate increases are slowing for the most part as demand wanes. Truck freight, up 3%. Rail, 2%. Ocean cargo, 4%. Air cargo 3.5%. There’ll be plenty of capacity. Motor fuel surcharges should average about 10%, the same as this year.
GOOD NEWS ON INSURANCE
Insurance costs are poised to behave for the most part next year. Commercial coverage will drop 11% on average, with big firms seeing the biggest cuts. Smalls will fork over about 8% less in premiums. But directors’ and officers’ coverage will see an end to deep discounts as insurers brace for more shareholder lawsuits over performance issues.
Property insurance, up 3%, about half this year’s increase, although insuring coastal properties, particularly in storm-prone areas, is another story --
double digit rate hikes will be common along coasts. Automobile insurance, down 1% because of fewer accidents.
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