Kiplinger Letter – Special 2016 Business Costs Forecast Washington

August 28, 2015

Creating your budget for 2016 will be especially tricky, given the pervasive angst and uncertainty over the global economy.

Figure on a year of steady expansion for the U.S. economy…a 2.8% pace following this year’s 2.5% increase. The economy in coming months will be buoyed by healthier consumer spending plus a recovering and more robust housing market.

Inflation will remain relatively well behaved. Measuring year over year, the Consumer Price Index should climb 2.1%. There will be few new price pressures other than a small rebound in energy prices. Food prices will rise at a normal 2% pace.

Interest rates are finally headed north. Look for the Federal Reserve to raise short-term rates two or three times next year, after one quarter-point hike later this year. The prime rate should end the year at 4% to 4.25%; it’s now at 3.25%. By the end of 2016, 10-year Treasuries will climb to 2.8%; 30-year mortgages…4.6%.

Corporate profits…up about 4% following a weak increase of around 1.5% in 2015. Stronger job and income growth next year will spur consumer spending on a variety of goods and services, boosting sales and drawing down inventories. But the beefier dollar will continue to pinch the profits of U.S. multinationals while slumping oil prices hammer the energy sector.

Business spending will rise modestly…about 6% versus 4% this year… as many businesses keep investment plans on hold in light of the slowdown in China and a European economy that’s barely creeping forward. With oil prices staying low, oil & gas exploration and drilling firms aren’t about to restart projects anytime soon. On the plus side: The revved-up housing industry and continuing expansion by makers of autos and aircraft will generate demand for industrial machinery, etc.

Average pay raises…2.5% versus 2.2% in 2015, as the labor market continues to tighten. Incentive, or merit, pay plans are sure to keep gaining steam. Benefit compensation will show a larger pickup. The cost of paid vacations, 401(k) contributions, etc., will rise 3.2% next year after going up just 1.9% in 2015.  Payroll taxes…minimal change, as the wage base stays at $118,500.

The cost of employer-sponsored health care will rise 4% to 5%, on average, on a par with this year’s increase as employers double down on efforts to control costs ahead of a 40% excise tax on high-cost plans that’s scheduled to take effect in 2018. Among the strategies: Introducing consumer-directed health plans as an option, increasing employee cost sharing and implementing disease management programs.  Prescription drug costs…up as much as 11%, compared with 8% this year. Specialty pharmaceuticals, such as the new immunotherapy cancer drugs, along with expensive popular brand-name medicines, are fueling the increases.

No large-scale recovery for oil prices next year. After tumbling this year, U.S. benchmark crude will remain relatively inexpensive because of strong output that will more than keep pace with global demand. Prices are certain to stay volatile, but look for the average price for 2016 to end up between $45 and $55 per barrel. That’s up only slightly from the roughly $44 per barrel that U.S. crude fetches today, and a far cry from the $100 or so per barrel that oil has traded at in recent years. Cheap oil means motor fuel prices will stay fairly low. For 2016 as a whole, regular unleaded gasoline will average about $2.40 per gallon nationwide. For diesel, figure on a national average of about $2.50 per gallon once 2016 is over and done with. Prices of both will be cheapest early in 2016 before climbing a bit in early spring. Both gas and diesel averaged well over $3 per gallon during the past several years.

Natural gas…an increase of 3% over 2015. Electricity…a 2% rise. Low energy prices spell more-moderate hikes in shipping rates next year.  Trucking…up 1% to 2% as less expensive diesel fuel helps carriers to offset the higher compensation they’ll be shelling out to lure and keep good drivers.  Rail rates…around 2%, in light of waning demand for railcars to carry coal and natural gas. U.S. demand for coal is down, and more gas is routed via pipelines.

Airfares will edge up just 1.5%, thanks to low fuel prices. And fees for checking bags, upgrading seats, changing flights, etc., will stay largely as-is. Budget for another 5% increase in hotel costs. Best bets for getting a deal are with midscale properties such as Marriott Courtyard and Hilton Garden Inn.  Car rental rates…up 2% on average. Restaurant meals…about 3% more.

Modest increases are on tap for office, warehouse and retail space. Up about 2.5% to 3% for offices, on average, though you’ll pay more in tight markets. For retail and warehouse space, figure on an increase of 2% to 2.5% for each.

Insurance rate hikes will be gentle for the most part. Premiums on property and casualty insurance will decline a bit or stay as-is. Directors and officers insurance…down about 3% for public companies, up 2% for private firms and for nonprofits. Policies covering business interruptions should fall between 3% and 5. But with cyberattacks and data breaches on the rise, cyberinsurance premiums will climb 5% or so. Businesses with point-of-sale systems will see increases of more than 10% because of their high exposure to hackers.

Accounting expenses…up 4% to 5%. Legal costs…3% higher on average.

Tech and telecom costs will continue to spiral downward next year. On average, prices of bandwidth will fall 20% or more; mobile data plans, 10%; desktop PCs, 5%; tablets, 5%; printers and copiers, 10%. Smartphones, also lower. But figure on higher delivery and mailing costs. Business mailers should keep the 4.3% emergency increase by the U.S. Postal Service on the books. Package deliveries will go up as much as 4%, similar to this year’s increases.

Advertising expenses…a mixed bag: Ads on mobile devices, up about 1.5%; television ads, 5% to 6% more; radio ads, staying flat. Magazine and newspaper ads, down 2%, though national publications and magazine special editions will cost more.

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