Business Costs in 2015

Every year The Kiplinger Letter takes a wide-ranging look at business costs for the year ahead and how they’ll affect the bottom line. Next year, a hardier economy will bode well for businesses. We see economic growth rising 3% vs. 2.1% this year, led by consumer demand for cars, electronics and other goods plus a pickup in home sales. Corporate profits will be up a solid 7%, off a weak performance this year attributable to the bitter winter weather that ushered in 2014, hitting businesses hard enough to bring full-year profits down around 2%.

A moderately higher cost of money is on tap, with the Federal Reserve poised to begin bumping up short-term rates again in the second half of 2015. For planning purposes, figure on a modest quarter-percentage-point increase. Ten-year Treasuries will climb to 3.5% next year from 2.8% at the end of 2014.

Look for business spending to increase by more than 7%, vs. 5% in 2014, though that’s still well shy of annual 10%-plus hikes in years before the recession. Much of the spending will go to upgrade long-neglected machinery and other gear.

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Pay raises will rise 2.5% on average, a tad above 2014, as the labor market tightens a smidge, with job openings and hiring both on the upswing. Information technology, professional and business services will be among the industry sectors giving the biggest raises. But raises will lag in health care, education, manufacturing and government. Merit bonuses for top performers will continue to play a prominent role at most businesses.

Payroll taxes will also rise as the wage base goes from $117,000 to $119,100. For firms that pay pension premiums to Uncle Sam, a hefty 2015 increase: 16% for plans paying flat rates, going to $57 from $49 per plan participant in 2014. And there’ll be a steep jump in variable rate premiums for underfunded plans, rising from $14 to $24 per $1,000 of unfunded vested benefits (subject to a $412-per-participant cap).

The cost of employer-sponsored health care will rise 3% on average for both large and small employers. They’ll keep the expense from going higher by offering smaller networks of providers and by boosting copays and deductibles. But prescription drug costs could go up as much as 11% next year compared with an 8% jump this year. Though generics now make up 86% of all drugs taken in the U.S., the cost of complex specialized medicines alone will increase by 18% next year.

Figure on budgeting a bit more, too, to insure your property and data. Premium payments on property and casualty insurance will go up about 3%—slightly less than this year’s increase. Policies covering business interruptions and cybersecurity, which are becoming more and more popular with businesses, are going to rise between 3% and 5%. The large volume of such policies allows insurers to reap profits on them while keeping price hikes fairly modest. Directors and officers insurance will also rise, albeit at a slower pace than this year. Next year, premiums, especially for private firms, will grow 5% or just a bit more than that, compared with a jump of more than 7% this year. For accounting and legal expenses, little change for most services.

Crude oil prices will remain calm next year, even pulling back some, to an average of $90 to $95 per barrel from this year’s likely average of $95 to $100, barring any major supply disruptions. Strong U.S. output is keeping a lid on prices. That means paying a bit less at the pump. For gasoline, about a dime less than this year’s expected national average of $3.40 per gallon for regular unleaded. For diesel, a smaller drop: around 5¢ per gallon from this year’s average of $3.85. But natural gas and electricity rates will creep up. The price of natural gas will be about 4% to 5% more than in 2014. Electricity rates are in for about a 4% increase.

Despite lower fuel prices, figure on higher trucking and rail freight rates. With the economy revving up, there’ll be more cargo moving on highways and rails, spurring demand for trucks and train cars and bumping shipping rates higher. Trucking—up about 6% to 7%, largely because trucking firms will hike pay to hire the drivers they’ll need to handle the expected increase in shipments. Rail rates—around 5% higher, given the added strains on already-tight capacity. Ocean shipping rates, however, won’t see much in the way of increases because of a glut of large cargo ships. But ports are likely to see more congestion. Airfares will go up about 3%, on average. But fliers on nonstop routes and on ones with more-convenient connections will find themselves paying top dollar.

With hotel capacity still tight in the face of increased demand for rooms, you’d better budget about 5% more, on average, for hotel costs next year. And watch out for fees added to bills. Some hotels will even charge for maid service. Car rental rates—up approximately 3%. Restaurant meals—2.5% more. If you’re in the market for office, warehouse or retail space next year, note that vacancy rates in many places are dropping, boosting rents. Figure on paying up to 3% more for prime office digs and 2% or so, on average, for warehouses. Rents for retail space will rise as much as 2.5% nationwide.

On the tech and telecom front, flat or lower prices are the story. Desktop computers—falling 9%. Also down: tablets, 2%, and smartphones, 5%. Even prices for high-end laptops and ultraslim PCs will be flat or up just a tad. Printers and copiers will be down as much as 10%, with high-end models dropping most because of lower hardware costs. Costs per printed page will be lower, too. Prices for Internet connectivity and bandwidth will keep inching down because of keen competition among providers, though rates vary by location. Mobile data costs will go down, too, also because carriers are duking it out.

Advertising costs will stay roughly as-is, with ads running on mobile devices up just 1% to 2%, radio ads flat and television advertising around 2% higher. Rates on print ads in magazines and newspapers will continue to tail downward. Note that next year will see a whopping 50% ramp-up in spending by marketers on advertising designed solely for smartphones, tablets and other mobile devices. Slightly higher delivery and mailing costs lie ahead: Overnight delivery will be up 3% to 4%. Mail delivery fees will go up about 2% for periodicals, catalogs and promotional materials on top of the existing 4.3% emergency increase, which won’t expire next year as planned.