The Kiplinger Letter, Vol. 103, No. 23

FORECASTS FOR EXECUTIVES AND INVESTORS
Reported from Washington, D.C. • kiplinger.com • Vol. 103, No. 23

And what does it mean for the new Fed chair as he takes over responsibility for interest rate policy?

INFLATION

Not as bad as the peak of 9.1% in 2022, but still plenty painful. In some ways, it will hurt more because it comes on top of the post-COVID inflation. Everyone is already dealing with a 24% increase in the cost of living since 2021. Any acceleration in inflation now is likely to hit harder than it would if it arrived after a long stretch of slow price rises.

Energy and commodities are the culprits now as the continued disruption of Middle East exports of oil, gas and other key materials seeps into prices of other things. Consumers tend to focus on gas, but note how other basic goods and services are rising due to the Iran situation: Trucking spot rates, up 40% due to the jump in diesel this spring. Airfares, up 21% due to jet fuel. Package delivery, up 14% and rising. Aluminum, up 48% on tariffs and Persian Gulf losses. Nitrogen fertilizer, up 38%. Phosphate fertilizer…14%. Asphalt prices are up 18%, adding to road work costs. Then there are the ongoing pressures from industrial metals like steel and copper.

There’s no fast way to tame these cost pressures. Even a quick resolution to the Iran standoff (more below in IRAN) would not see prices get back to normal for months as war damage in the Persian Gulf gets repaired and shipping bottlenecks slowly ease.

Federal Reserve Chair Kevin Warsh will find himself in a bind. He has said he thinks the Fed should cut interest rates, but he won’t be able to do so with inflation higher than the central bank wants and climbing. Indeed, markets are starting to show that investors expect at least one Fed rate hike this year to tamp down inflation.

Warsh may be able to avoid raising rates. But doing so could backfire on him. Long-term bond yields actually climbed when the Fed started cutting short-term rates in 2024, likely because investors feared the Fed was easing up on inflation too soon. Now, if prices climb and Warsh stands pat, bond yields could take another leg higher. That would weigh on many credit-sensitive industries, especially housing, since yields on Treasuries serve as the benchmark for rates on mortgages and many other loans. Higher Treasury yields would also raise the Treasury’s borrowing costs when the deficit is near $2 trillion and interest on the debt already costs more than national defense.

The silver lining is that the economy is less vulnerable to energy price rises than it was in the 1970s, when the OPEC oil embargoes caused inflation and recession. Now, the U.S. is the world’s top oil producer, and the economy is more energy-efficient. So while consumers and many businesses still suffer from higher prices, the overall hit to the economy is smaller. We’ll muddle through with higher inflation but no recession.

THE ECONOMY

Bank lending conditions for businesses figure to stay restrictive this year. The Senior Loan Officer Opinion Survey shows tightened lending standards for commercial and industrial loans to firms of all sizes in the first quarter of 2026. The trend is driven by a more uncertain economic outlook, lower tolerance for risk and worsening industry-specific problems. Overall demand for loans is unchanged.

Look for a bit of a mixed bag for household credit. Lending standards for credit cards and auto loans basically remained unchanged in early 2026, while other categories saw some modest tightening. For consumer credit, demand softened, with banks reporting weaker demand for credit cards, auto loans and other consumer loans over the quarter. Residential mortgage standards also stayed mostly stable, and demand for mortgages was unchanged or weaker. With the Federal Reserve holding off on rate cuts because of inflation pressures, borrowing costs will stay high for households, adding strain for many borrowers.

Consumers are relying a bit less on credit cards to pay for things. Federal Reserve data show that credit card debt saw a pullback in the first quarter, though it is still 5.9% higher than a year earlier. Meanwhile, mortgage debt, auto loans and home equity lines of credit were all higher. Consumers are focusing on paying off credit card balances with high APRs. The average APR on credit cards remained at a lofty 21.5% in the first quarter of 2026, and will stay high for a while.

Note that delinquency rates for credit cards and auto loans are still elevated. For most household debt categories, delinquency rates have trended upward over recent years but flattened out in the first quarter of this year. That said, student loan delinquencies bear watching, given the sizable increase to 10.3%.

REAL ESTATE

Single-family home construction is losing momentum. Total housing starts fell 2.8% in April from the previous month. Much of this monthly decline was driven by a 9.0% drop in single-family starts, while multifamily starts rose 10.3%, to a three-year high. Single-family starts account for about 65% of total activity.

Builders remain pessimistic about the market amid subdued buyer demand. Poor affordability and elevated input costs are big factors in the negative outlook, according to the latest NAHB/Wells Fargo Housing Market Index. A slight improvement in current conditions, however, led to builders’ expectations of future sales rising.

In the near term, look for high inventory to hold back housing starts. Total permits, the bellwether for future construction, jumped 5.8% in April, but single-family permits fell 2.6% as builders continue to deal with challenges… high financing costs, uncertainty stemming from the war and tariff-related issues.

Property taxes for homes are rising faster than inflation in most states. The average homeowner paid $4,427 in property taxes last year, up 3% from 2024, vs. inflation’s 2.7% rise in 2025. Some homeowners in very large metro areas have seen property tax payments go up by a lot more than the national average. These include Memphis, Tenn. (up 34%), Baltimore (up 27%), St. Louis (up 11%), and Kansas City, Mo. (up 8%). However, 10 states saw property taxes actually fall.

The amount in escrow accounts to cover taxes and insurance has soared, up about 45% since 2019, says Cotality, a real estate data company. About 65% of accounts are likely to be short this year, which spells higher payments in 2027.

WORK REGS

Federal labor regulators aim to do away with several reporting requirements for employee demographic data. The Equal Employment Opportunity Comm. is particularly focused on the so-called EEO-1 report, which requires private employers with 100 or more workers, and federal contractors with 50 or more workers, to collect and share demographic data with the agency, which then tabulates national totals.

The move ends a burden for employers, but some may still collect the data in question to use for self-assessments related to nondiscrimination and diversity.

POLITICS

Republican lawmakers are nearing a breaking point with President Trump. While GOPers have so far accommodated most of the president’s demands, they fear that recent White House moves could cost them control of Congress, we have found in our ongoing conversations with Republicans on Capitol Hill.

The issue is most acute in the Senate. Concerns intensified after Trump successfully backed a primary challenger against GOP Sen. Bill Cassidy (LA). Their angst then boiled over when the president declined to support John Cornyn, the Republican incumbent in Texas, and instead endorsed challenger Ken Paxton, a candidate many Republicans view as highly vulnerable in a general election.

Frustrations have intensified over some of the president’s pet issues. Trump’s $1 billion request to Congress for his White House ballroom project and a $1.8 billion fund to address perceived political “weaponization” have landed on Capitol Hill like lead balloons, as many GOPers believe the issues are losers.

Republicans are also souring on the Iran war. GOPers in both chambers are increasingly on board with more congressional involvement in the conflict. House Republican leaders recently pulled a war powers resolution from the floor after it became clear that the measure had secured enough GOP votes to pass.

ENERGY

Commercial electricity use will likely surpass residential usage next year for the first time on record, driven in part by growth in data centers. The commercial sector will see electricity sales grow by 2.2% this year, followed by a 5.3% increase in 2027. By contrast, residential demand will be largely flat over the next two years, growing by only 0.5% annually in both 2026 and 2027. While smaller than the other two segments, industrial electricity consumption is also on the rise, expected to increase by 1.0% this year and 4.0% in 2027.

At the same time, expect residential power prices to continue rising, increasing 5% this year (similar to 2025) and another 2% in 2027. The East Coast will suffer the brunt of the price increases, with the Mid-Atlantic leading the way with 7% average annual growth between 2024 and 2027. The Upper Midwest and South Atlantic will also experience above-average electricity price increases.

IN THE STATES

More states are weighing hospital bailouts in response to Medicaid cuts. Around the country, an estimated 446 hospitals serving 6.6 million patients are at a heightened risk of closure because of the cuts…$911 billion over 10 years.

At least three states are considering ways to do so. Calif. is considering whether to double the size of its $300 million distressed hospital loan fund from 2023. Similar, albeit smaller-scale, programs are also in the works in both Pa. and Ill.

More may follow suit as the fallout spreads. 267 of the at-risk hospitals are urban, and 176 are rural. The hit to rural hospitals will be softened a bit by a special $50 billion fund created by Congress. But that money isn’t enough to offset the $137 billion reduction in rural health spending over the next decade.

HEALTH CARE

Look for the current growth in ambulatory surgery centers to continue. Such health care facilities provide same-day surgical care, with procedures like colonoscopies, hysterectomies and more. ASCs allow patients to avoid a trip to the hospital, which comes with both higher costs and a higher risk of infection, and they free up room in hospitals for patients who require longer recovery times.

ASC revenues could reach $57 billion by 2030, up from $45 billion in 2024. Surgeons are increasingly comfortable performing more complex kinds of procedures… including cardiovascular and advanced orthopedic work...in nonhospital settings. Health care officials have helped facilitate the shift, hoping to ease cost pressures faced by programs like Medicare. According to one study, ASCs saved Medicare $5.1 billion in 2024, with savings expected to increase to $12.5 billion by 2034.

WATER SYSTEMS

Note rising worries about the condition of U.S. water and sewer systems. Only 39% of municipal officials rate their systems in “satisfactory” condition, down from 2022’s 82% satisfaction rate, says a new National League of Cities report. 18% of respondents rate their systems “not satisfactory,” up from almost zero in 2022. And in a new American Water Works Assn. survey, respondents’ five-year outlook for the health of U.S. water systems dropped to the lowest rating in eight years.

Upgrades require costly repairs or outright replacements of aging systems, as governments face rising construction costs and difficultly securing financing.

Other challenges for utilities: Higher tariffs, supply chain disruptions, more-frequent natural hazards, cyberthreats, regulatory issues and labor shortages.

AIRLINES

Allegiant Air’s offer to buy Sun Country Airlines has been finalized after regulators and shareholders of each carrier signed off on the deal. The combined airline will operate more than 650 routes serving almost 175 cities. The focus is affordable leisure travel in mostly small markets and secondary airports in big cities. Both carriers will operate as separate carriers for the time being.

Customers can expect little change, for now. But the longer term is unclear as the airlines integrate. Rewards programs are separate in the near term, and points, benefits and status retain their current value. Routes likely won’t get trimmed much.

TECH

Expect expansion by Taiwan Semiconductor Manufacturing Co. and Intel if demand stays strong. TSMC started high-volume Nvidia chip production in Ariz. last fall and has another plant ready to start in 2027. Intel has a facility in Ariz. that is making its most advanced chips and has another ready to start production in 2027. A new leading-edge Samsung Texas plant will see mass production in 2027.

Some projects could be ready earlier than expected. Intel’s delayed plans for a campus in Ohio could be fast-tracked if outside customer demand picks up.

The Iran war and rising costs will put some IT projects on hold this year. Spending on information technology surged in the first half of the year as companies rushed to get ahead of expected inflation, especially for upgrading entire PC fleets. Now, businesses are bracing for IT costs to rise even more in the second half of 2026, causing a drag on segments such as IT consulting, back-office software and devices.

Spending on artificial intelligence and cybersecurity won’t let up, though. Big tech will keep spending on data centers. Business spending on AI will be robust, but with a bigger focus on seeing a clear return on investment in a faster timeline. And geopolitical turmoil spells more cybersecurity spending, as threats keep rising.

IRAN

Along with fresh exchanges of fire between American and Iranian forces. It can be hard to get a read on what’s going on in the fog of this fragile cease-fire.

Expect Washington and Tehran to continue with their war of words… leaks, statements, etc., intended to spin events and increase diplomatic leverage.

Both countries want out, but so far neither has proved willing to budge on issues like reopening the Strait of Hormuz and ending Iran’s nuclear ambitions. The war is now a waiting game, with Washington trying to squeeze Iran’s economy and Tehran betting that the White House will fold before the Nov. midterm elections.

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