Business forecasts are imperfect at best, suspect at worst. Consumers can be fickle, investors often too confident or not bold enough, and economies subject to circumstances well out of their control, like terrorism or demand in China. So any given year is nearly impossible to predict with a great deal of accuracy.

But that doesn’t stop business leaders from having expectations for or making wishes about the coming year. It’s part of the game, guessing at what’s to come. That’s why The Lane Report surveyed dozens of industry leaders and decision makers around Kentucky about their thoughts on the coming year. We combined their answers with research by our own staff to form an outlook for many of the state’s most important industries in the year ahead.

The common hope for 2005 running through many responses was one of reform, particularly in Frankfort. Nearly everyone expected economic growth to continue and gross state product to increase, as it usually does when the national economy is on the upswing. But many agreed that riding the national tide is not good enough. For Kentucky to excel, they said, a major overhaul of the state tax system, limits on medical malpractice, and further incentives to attract smarter jobs will have to become priorities. Not to mention, the General Assembly will have to pass a state budget.

Time will tell which outlooks are the most accurate. But in the meantime, Kentuckians will be bracing for a tumultuous year in some industries, a lackluster one in others, and record profits in a select few.

— Andy Olsen, managing editor of The Lane Report.

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AGRICULTURE
Radical Change

OUTLOOK: Kentucky farmers are on the verge of the biggest change in agriculture in the state’s history. Foremost is the federal tobacco buyout, which will probably force thousands of small tobacco growers out of the market with the removal of subsidies. “We are going to have a pretty massive exodus of growers,” said Will Snell, an agricultural economist at the University of Kentucky. The trend in the next couple of years will be a consolidation of larger growers in the central parts of the state, according to Snell.

Soaring worldwide demand for poultry, cattle, soy and other grains will continue enlarging the market for those products. But unless 2005 is another record year of rainfall, crop yields will not be as high as they were in 2004.

JOBS OUTLOOK: DOWN Total farm acreage is declining and technological advances are on the upswing. The removal of price controls for tobacco will dramatically cut opportunities for some farm workers.

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REAL ESTATE
Still Strong

OUTLOOK: Though interest rates will rise slightly in 2005, they remain at near-record lows and interest in purchasing new and existing homes remains strong by both first-time and move-up buyers. Consumers are increasingly aware of the equity and tax benefits of home ownership, said Robert Weiss, executive vice president of the Home Builders Association of Kentucky. The largest growth areas in the state will continue to be “rural” counties adjacent to Louisville, Lexington and Northern Kentucky. But recent surges of home building in Bowling Green, London, Elizabethtown and Owensboro will also continue. Another growing sector is “senior housing” for empty nesters who choose to move out of large homes and into smaller ones with many amenities.

JOBS OUTLOOK: UP Demand is torrid in the housing market, but finding skilled labor for construction remains a problem, Weiss said. Expect continued partnerships between homebuilders and the Kentucky Community and Technical College System to recruit and train plumbers, electricians, carpenters and others. “We expect another great year for the housing industry in Kentucky,” Weiss said.

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INSURANCE
Year for Reforms

OUTLOOK: From workers’ compensation to medical malpractice, this will be a year for reforms in Kentucky. Legislators and the Office of Insurance will likely begin pushing to require self-insured group workers’ comp funds like AIK and KEMI to carry higher reserves, said Martin Koetters, executive director of the Kentucky Office of Insurance. The hopes for such a requirement would be to prevent anther multi-million-dollar shortfall like the AIK Comp fund suffered. It could also make it much more difficult for some funds to remain profitable. Expect more debate in Frankfort surrounding tort reform. In auto insurance, savings may come from new anti-fraud regulations passed in 2004 that will officially take effect in 2006.

Small businesses, in particular, will be offering less coverage to their employees as health insurance premiums climb, said Becky Naugle, director of the Kentucky Small Business Center. Workers’ comp costs across the board are likely to continue increasing, as well.

JOBS OUTLOOK: UP Steady but modest growth will continue as insurers hire new claims adjusters and staff to keep up with population growth. Continued growth of insurers like Humana will also provide some jobs.

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EQUINE
Expanding Exports

OUTLOOK: Record-breaking fall horse sales at Keeneland have given Kentucky’s horse industry plenty of momentum heading into 2005. Continued growth in overseas exports of horses and breeding could drive Kentucky’s equine industry to another record year, said Richie Farmer, commissioner of agriculture. Various groups like the Kentucky Thoroughbred Organization are increasingly promoting the state’s horses in regions like Japan and South America. The recent formation of the Kentucky Horse Racing Authority should also boost regional marketing efforts, David Switzer, executive director of the Kentucky Thoroughbred Association, has said. Expect the Kentucky Equine Education Project (KEEP) to begin sparking more discussion in Frankfort about ways to stimulate and protect the industry.

JOBS OUTLOOK: FLAT Though revenues for horse breeders may be up in the short-term, farm acreage and the overall horse population have been slowly declining for years in Kentucky and around the nation.

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LEGAL SERVICES
'Very Average'

OUTLOOK: With the state’s economic growth existent but lackluster, don’t expect a boom in opportunities for start-up and smaller law firms, according to Terry McBrayer, senior partner at McBrayer, McGinnis, Leslie and Kirkland in Lexington.

Med-mal litigation will continue growing at a normal pace. Increasingly large and complex corporate mergers will continue to consume more legal resources near major metropolitan areas, as well as a heightened public sensitivity to wage and hour lawsuits, said Ed Glasscock, managing partner at Frost Brown Todd in Louisville. Mega-mergers of global law firms, the largest of which approach as many as 6,000 lawyers, will continue changing the way regional law firms compete for clients.

JOBS OUTLOOK: FLAT OR SLOW Expect a “very average” year within the legal profession, McBrayer said.

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BANKING
Growing Expenses

OUTLOOK: Consolidation will continue as it has in previous years, but will be slowing among local banks, according to Luther Deaton, chairman and president of Central Bank and Trust Co. Expansion of out-of-state bank franchises will probably be limited to the Golden Triangle region, since the six largest banking institutions in Kentucky are based elsewhere and already control 39 percent of all deposits in the state.

With the Fed continuing to raise short-term interest rates, local bank incomes will probably grow, said Ballard Cassady, president and CEO of the Kentucky Bankers Association. But branch building and increased capital expenses, ever more necessary to compete with larger banks, will likely cut into the overall profitability of local banks. “Banks are investing more in technology and service delivery than ever before,” Deaton said.

JOBS OUTLOOK: UP Expansion and branch building will fuel a slight increase in bank employment.

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HEALTH CARE
Climbing Costs

OUTLOOK: Not surprising, the trend in health care will be rising costs. That means more employers will drop coverage for their workers, and others will ask them to pick up a larger portion of the cost of health coverage, according to Vickie Yates Brown, a medical attorney at Greenebaum Doll & McDonald in Louisville. Though not as hot as they were initially expected to be, health savings accounts will become more attractive and their use will likely increase. Expect debate once again as the General Assembly grapples with tort reform.

With the Bush administration’s reluctance to allow wide-scale importation of prescription drugs from Canada, drug costs will also continue to climb. The state’s Medicaid shortfall hangs at $526 million. Because so many items will compete for time in this relatively short upcoming legislative session, it’s unlikely adequate reforms will pass, Brown said. About 548,000 Kentuckians remain uninsured, and those numbers could grow in coming years with rising costs.

JOBS OUTLOOK: UP In Kentucky’s major cities and elsewhere, the health care industry continues to produce the greatest number of new jobs. The largest job gains will be for practitioners like doctors, dentists and trained technicians, Brown said. They will be followed by nurses and other assistants.

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GOVERNMENT
Tackling Taxes

OUTLOOK: This year’s priorities for the General Assembly will be passing a budget, reforming the state’s antiquated tax code and limiting medical malpractice legislation. “It’s extremely important that we pass tax modernization legislation,” Gov. Ernie Fletcher told the Kentucky Chamber of Commerce at a banquet earlier this month. Look for specific proposals to include a sizeable cigarette tax and lower income tax rates. Because this year’s session is only 30 days long, it’s unlikely all of the Assembly’s priorities will be accomplished. “The political positioning that has already started doesn’t bode well for the success of the efforts” to improve the state tax system, said Becky Naugle, director of the Kentucky Small Business Center. Expect teacher salaries and benefits to continue dominating conversations among educators in Frankfort, said Gene Wilhoit, commissioner of the Kentucky Department of Education.

On the national level, deficit spending will likely continue as homeland security and the wars in Iraq and Afghanistan exert enormous demands on the federal budget. Despite fears about the slipping value of the dollar, don’t expect investors to be wary of the United States in the short term. Markets will be impressed with how Congress has controlled its non-defense spending in recent years, and the Federal Reserve’s continuing interest-rate hikes should be enough to curb inflationary fears, Sen. Mitch McConnell has said.

JOBS OUTLOOK: FLAT With Republicans vowing to cut waste both nationally and in Kentucky, state government employment is not likely to surge.

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TECHNOLOGY
Banking on Broadband

OUTLOOK: Investment in broadband technology around the state, in part because of Gov. Fletcher’s broadband initiative, will likely spur development among Internet and communications companies as providers expand their coverage, according to Commerce Secretary Jim Host. This could be especially true for start-ups and smaller firms in rural areas. Also look for some continued growth among biotechnology and other pharmaceutical research firms, particularly in Louisville.

JOBS OUTLOOK: FLAT Expanding broadband technology could accelerate job growth in some areas, Host said. Historically, however, such widespread communications development projects do not happen overnight – so job growth could be more noticeable in the long run than immediately.

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ADVERTISING AND MEDIA
Pockets of Success

OUTLOOK: Though increases may not be through the roof, expect modest growth in ad revenues in 2005. “If you take the political spending from 2004 out of the mix, overall ad spending in other categories will be up for 2005,” said Becky Simpson, principal and CEO of New West LLC in Louisville. Signs of an improving national economy have increased requests for proposals for annual business at many local media firms from where they have been in the past several years, Simpson said. Declining readership will continue to challenge nearly every newspaper in Kentucky, though that is not necessarily a deterrent to ad sales.

JOBS OUTLOOK: FLAT Even if revenues increase, the industry is ever more competitive and will be a tough market for many small agencies. “There are pockets of success, but overall the market is still very challenging for some,” Simpson said.

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EDUCATION
Stagnant Funding

OUTLOOK: Given the budget impasse in Frankfort at the year’s start, adequate funding for public education will remain on shaky ground across Kentucky, according to Gene Wilhoit, commissioner of the Kentucky Department of Education. The state portion of SEEK (Support Education Excellence in Kentucky) funding has not been sustained for elementary and secondary schools, which will increase pressure on local revenues that may not exist, he said. Look for conversations in Washington, D.C., about school accountability to shift toward high schools.

Even if a new budget is passed, existing pressures from rising health care costs and Medicaid are likely to compete with school funding, said James Ramsey, president of the University of Louisville. Look for university enrollment to continue growing, though not as fast as it did in 2003 and 2004.

JOBS OUTLOOK: FLAT If Kentucky’s economic growth follows the rest of the nation, educational employers will feel more comfortable adding new workers instead of increasing hours for existing employees, Ramsey said. But Wilhoit is not as confident. He noted that stagnant state funding would curb any significant job growth among public educators.

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TOURISM
Vacationing More

OUTLOOK: Both tourism spending and the number of tourists have rebounded in Kentucky since the slump in 2002. Direct expenditures on hotel rooms, in restaurants and at attractions grew two percent between 2002 and 2003, from $5.56 billion to $5.67 billion. A partnership between the Kentucky Department of Tourism and the state parks will strengthen marketing for the parks, as will the state’s branding campaign as it is more widely adopted. If economic growth continues, households will find themselves with more disposable income and an increased willingness to vacation. Expect an increase in funds aimed at attracting local tourists. If the Muhammad Ali Center remains on track to open in November 2005, it could initially draw large crowds to Louisville in the last quarter.

JOBS OUTLOOK: UP The opening of the Muhammad Ali Center, coupled with a number of recently opened restaurants and clubs in places like Newport, is likely to slightly boost demand for employees in tourism services.

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REGIONAL UPDATE: NORTHERN KENTUCKY
Ahead of the Nation

OUTLOOK: Nationwide economic growth will mean good things for three sectors, in particular: banking, transportation and tourism. Greater Cincinnati is heavily dependent on all three, which bodes well for financial services, professional services, and tourist destinations in Northern Kentucky. Gary Toebben, president of the Northern Kentucky Chamber of Commerce, expects economic growth to hover around five percent – slightly slower than 2004, but still above the national average. Delta’s airfare cuts should continue fueling strong passenger traffic at the Northern Kentucky Regional Airport, at least in the short-term.

JOBS OUTLOOK: UP Expect job growth “of about two percent, which is about the same as in 2004,” Toebben said.

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REGIONAL UPDATE: WESTERN KENTUCKY
Merger Talks

OUTLOOK: Cutting-edge companies like CSI, Dippin’ Dots and UDS will continue to push through some job growth in the Paducah region, as well as a renewed focus on bringing new businesses into the city’s downtown. As in much of the state, an outdated tax code is discouraging new investment, according to Elaine Spalding, president of the Paducah Area Chamber of Commerce, Inc. Expect more heated debate as Paducah and McCracken County consider merging governments.

JOBS OUTLOOK: UP Expect modest employment growth with economic growth.

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REGIONAL UPDATE: LOUISVILLE
Led by Healthcare

OUTLOOK: Growth in the largest industries – health care and logistics – will continue to outpace that of other industries in the Louisville metro area, said Steve Higdon, president and CEO of Greater Louisville Inc. Both are strong nationally. But economic growth overall in the region will not quite recover from the national slump a few years ago. A lack of high-paying professional jobs in Louisville is preventing it from keeping pace with its competitor cities in the Midwest and South, Higdon said.

JOBS OUTLOOK: UP Job growth will be driven by service-sector jobs, Higdon said. In addition to health care, UPS’s international air hub will continue generating spin-off activity in logistics. “Warehouse, distribution, truck driving and other positions should continue their steady growth in 2005,” Mayor Jerry Abramson said. “Overall, the unemployment rate is still relatively low and we expect that to remain the case in 2005.”

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REGIONAL UPDATE: LEXINGTON
Recovering Jobs

OUTLOOK: Slight but steady growth should follow national trends, led mainly by the health care industry, according to Bob Quick, president and CEO of Commerce Lexington Inc. The small business and manufacturing sectors should continue providing a few new jobs, assuming the cost of doing business in Central Kentucky remains relatively low. A large portion of at least $250 million in federal tobacco buyout money Kentucky farmers will receive this year could fuel new investment in the region. But like many across Kentucky, area businesses are bracing for the expiration of Lexington’s Enterprise Zone Program at the end of the year. The need for tax modernization and curbing health care costs will continue to deter some new business, Quick said.

JOBS OUTLOOK: UP Pushed by national economic growth, the region will continue to recover from the job slump a few years ago.

editorial@lanereport.com