Last year was a great time to be an oil company: Crude briefly shot past $55 a barrel, the highest ever. It was good to be a bank, too -- expansionary monetary policy kept banks' cost of money super-low. For retailers, strong consumer spending made 2004 a year to remember.

In 2005, a lot could change -- for better and for worse. Although overall economic growth will be about the same, the ranks of winners and losers are in for a shakeup.

Oil prices may dip a bit, taking some fizz out of the likes of Exxon Mobil Corp. (XOM ) but giving breathing room to energy buyers, from truckers to airlines and petrochemical companies. Banks will have to pay more for deposits as the Federal Reserve continues to tighten short-term interest rates. And the indefatigable American consumer could finally start to feel pinched -- bad news for retailers and car companies.

Other trends established last year will only strengthen in '05. Thriving suppliers of commodities such as steel and chemicals should fare even better if the dollar drops. On the down side, it's shaping up as another tough year for drugmakers, with many blockbuster drugs under suspicion for possible side effects and others losing patent protection.

Underpinning the sector-by-sector outlook is healthy growth for the economy as a whole. BusinessWeek's (MHP ) own forecasters, James C. Cooper and Kathleen Madigan, whose forecasts appear in the charts that follow, expect the economy to grow 3.6% from the end of 2004 to the end of 2005, just a tad below last year's 3.8% pace. The rate of productivity growth is likely to dip this year, forcing companies to hire more people to meet demand and causing the unemployment rate to fall modestly. The productivity dip will also keep a lid on the rate of increase in profits, but earnings should nonetheless be higher than in 2004. Says Standard & Poor's Chief Economist David A. Wyss: "We may have turned into a bit of a plodder, but we do keep on plodding in the right direction."

This annual Industry Outlook susses out major sectors of American business, from semiconductors to insurance to basic industry. Each industry's outlook is determined by its own internal rhythms and by changes in the overall economy. The new year will probably be kind to makers of heavy machinery, bolstered by exports to China. Transporters, energy companies, and utilities should have another good year as well. In contrast, consumer goods makers, the financial sector, construction, and most of tech is looking sluggish. In fact, Merrill Lynch & Co.'s (MER ) equity analysts predict that profits will grow faster in the utility sector than in technology -- an inversion of the pattern of past decades.

A lower dollar stands out as one of the "macro" themes of 2005. While currency rates are notoriously hard to predict, one of the better bets is a continued fall in the dollar. Even China, which has long pegged its currency against the dollar, is expected to allow the yuan to move upward a little. Depreciation of the dollar, assuming it happens, will make U.S. exports more competitive while easing the pressure on domestic producers from cheap imported goods. Lehman Brothers Inc. predicts the dollar will fall to 100 Japanese yen from 103 in the next six months, and the euro will rise to $1.45 from $1.36 over the same stretch.

The dollar's fall to date -- combined with robust world demand -- has U.S. manufacturers and their suppliers in a good frame of mind. "We're forecasting solid industrial pickup," says Michael G. Morris, chairman and CEO of Columbus (Ohio)-based American Electric Power Co. (AEP ), a big utility. "If you talk to the metal melders and the steelmakers, they're already seeing their capacity booked up. The classic part of the U.S. economy, its industrial heart, is cranking again."

On the downside, a falling dollar will contribute to higher inflation and interest rates as foreign investors demand better returns to compensate for exchange-rate losses. Heavy foreign buying of U.S. public and private debt securities -- in spite of the dollar's steady weakening -- kept long-term interest rates remarkably low in 2004, providing a crucial prop for the economy. Rates are likely to rise nearly a full percentage point in the new year. That will be hard on the financial sector and on construction, both commercial and residential. An outright free fall in the dollar, while unlikely, could plunge the U.S. into stagflation, which would sicken every sector.

The fate of oil will also loom large in the 2005 outlook. Today's high oil prices sap consumers' spending power and raise the costs of businesses, especially truckers, petrochemical makers, and hard-pressed airlines. America West Airlines (AWA ) Chairman and CEO W. Douglas Parker says he's planning on oil at $45 a barrel for next year. "We can't run the business assuming things are going to be better than they are," he says.

For American business as a whole, though, the damage from oil seems to be mostly in the past. The smart money is betting on a modest decline in oil prices this year. Just before New Year's, the New York Mercantile Exchange contract for oil to be delivered in December, 2005, was a bit under $41, not far from the $42 price for February, 2005, delivery. Cheaper oil should cause the overall inflation rate to dip this year.


Another broad theme for the new year is the tiring of American consumers, who have kept on spending far longer than most economists predicted. Inflation has been eroding the value of family incomes. Rising interest rates could arrest the rapid rise in home prices that has made ordinary Americans feel wealthy and encouraged them to spend freely. The personal savings rate fell to just 0.2% of aftertax income in October -- down from 5% as recently as 1995. Even a partial retrenchment by consumers is likely to hurt retailers and other sectors that depend on free spenders.

Detroit, for one, may have a tough 2005. It, too, will benefit a bit from the cheaper dollar, but that could be more than offset by the expected weakness in consumer spending, the high cost of materials such as steel, and the big 2004 sales incentives, which caused people to buy vehicles earlier than they'd planned, cannibalizing sales from 2005.

With consumers showing signs of slowing down, the outlook is relatively better for businesses that sell capital goods such as machinery. In the U.S., investment in nonresidential equipment and software is projected to rise 8% in 2005, a healthy number if not quite the 12% growth of each of the past two years. Says Eaton Corp. (ETN ) Chairman and CEO Alexander M. "Sandy" Cutler: "We think the underinvestment in capital stock is really playing into a strong next couple of years."

What's more, makers of capital goods and industrial commodities should see strong gains from exports. Although Europe and Japan are expected to grow less than 2% in the new year, growth elsewhere will pull the worldwide average up to a decent 3%, Inc. projects. Caterpillar Inc. (CAT ) Chairman and CEO James W. Owens calls 2004 "a blow-your-socks-off year," and he's convinced that the good news isn't over. For one thing, he expects China -- a major buyer of Cat's big yellow machines -- to continue growing 7% to 9% a year. Says Owens: "I think we're in the early stages of a long, global, cyclical recovery."

Other sectors will be pushed or pulled by a variety of special factors. Take, for example, efforts to shrink the federal budget deficit. That will hurt aerospace companies like Boeing Co. (BA ) as well as health-care companies. "Medicare payments to doctors, hospitals, and health plans are really going to be scrutinized for rollback opportunities," predicts Aetna Inc. (AET ) Chairman and CEO Jack Rowe. "There will be Medicaid cutbacks, and there will be very little discretional health-care money available." In contrast, professional services such as accounting should grow strongly, helped by spending on compliance with the Sarbanes-Oxley accountability law.

Information technology will march to its own drummer in 2005. The IT sector has long been one of the fastest-growing and most volatile parts of the economy, but lately it has been a little less of each. Software, telecom, chips, and consumer electronics are among the industries that are expected to grow below their long-term trend rate in 2005. Only the hardware sector is expected to grow briskly. On the bright side, volatility is lessening. Consumers are displacing businesses as the main buyers of info tech. This should stabilize sales patterns, as consumer spending is more regular from year to year.

Each year serves up a new list of winners and losers. On the whole, though, the signs indicate a good 2005 for American business.

By Peter Coy in New York, with Michael Arndt in Chicago and bureau reports

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