What's next? A look ahead to 2004

2004 may well be the year in which the United States and Massachusetts regain the spring in their steps after trudging through three years of war, terrorism, recession, and a recovery that felt like a recession. Thanks to a strong finish to 2003 -- including the capture of Saddam Hussein, a Dow above 10,000, and four consecutive months of national job growth -- economists forecast the national recovery taking hold and generating some 2 million new jobs over the year.

The outlook is brightening in Massachusetts, too. Surging demand for computer software and equipment is reviving the critical technology sector. New companies with new products are stepping forward. Old companies are seeing profits rise.

Certainly, the New Year holds risks as well. Fears of terrorism and an intractable Iraqi occupation will continue to haunt the economy. The falling dollar and exploding federal and trade deficits threaten a return to inflation and growth-choking higher interest rates. Global competition -- for both US products and jobs -- will remain fierce.

Still, when considering the last couple of years, there remains an overriding reason for optimism: Could 2004 really be much worse? So, with that in mind, here's a look at the promise, problems, and challenges ahead for the business world in the New Year.

Good news, bad news

The long-suffering technology industry is poised to make a strong comeback in 2004 as consumers and particularly businesses scoop up new computers and wireless networking products. That's good news for the technology-driven Massachusetts economy.

Research firms are boosting their estimates of PC sales and predicting that worldwide demand for wireless networking gear, known as WiFi, will soar. As sales of tech devices improve, so do the prospects of the global chip industry -- which expects a 19.4 percent surge in revenues -- and Bay State companies like chipmaker Analog Devices Inc. and chip equipment maker Varian Semiconductor Equipment Associates Inc.

The only thing that will be missing is a lot of new information technology jobs. The US Commerce Department says the United States lost 4.8 million IT jobs during the recession, many of them permanently to lower-cost nations such as India and China. Don't be surprised if this shifting of jobs overseas becomes a hot presidential campaign issue.

Where it goes, they'll follow

A cluster of Boston-area companies are poised to capitalize on a new technology that is expected to replace the bar codes used to track and price products, and consequently transform the US supply chain, beginning next year. The technology is known as radio frequency identification, or RFID, which, instead of needing a visual scanner, uses a tiny chip or "tag" to beam data to a reader, allowing companies to easily track products from the factory through distribution to the retailer. Driving the change is Wal-Mart Stores Inc., which is requiring its top 100 suppliers to adopt the technology by Jan. 1, 2005. The Pentagon is following, devising its own RFID plan for military suppliers.

The technology, projected to save users billions of dollars, was developed at MIT's Auto-ID Center while local companies, such as ThingMagic of Cambridge and OATSystems Inc. of Watertown, are at the forefront of commercializing it. The challenge is cutting the cost of a tag to a nickel from about $1, and it could still be three to five years before RFID is fully adopted in the US supply chain.

Put up or shut up

After years of promise, the time is now for another key sector of the Massachusetts economy -- biotechnology.

Biogen completed its merger with Idec Pharmaceuticals, forming the nation's third-largest biotech firm, and now the company has to fill a meager pipeline with new drug candidates. Genzyme, having bought back the tracking stocks of two quasi-independent divisions, must show that the transaction will lead to new products, growing revenues, and a stronger company. Millennium Pharmaceuticals must move its successful Velcade through new clinical trials to expand the franchise for the cancer drug.

For the dozens of small-cap and private companies, money is again available from private investors, and for a select few, public offerings. Lack of capital is no longer an excuse for failure to move forward in the lab, the clinic, or the market.

Drugs with buzz

While the drug industry's innovation pipeline looks clogged, the days of the blockbuster are not completely over. The consulting firm Datamonitor ranks 10 drugs with $1 billion in annual sales potential that are lined up for potential Food and Drug Administration approval in 2004.

Leading the pack is Pfizer Inc.'s pregabalin, a compound to treat neuropathic pain, epilepsy, and generalized anxiety disorder. Datamonitor predicts annual sales will hit $1 billion within three years. Among other drugs to watch are Avastin, an anticancer drug developed by Genentech and Roche; Cymbalta, an antidepression drug from Eli Lilly; and the cancer-fighter Erbitux, marketed by Bristol-Myers Squibb and Merck.

No relief, part I

The new year will bring little respite for mutual fund companies. Congress is expected to swiftly try to pass far-reaching overhauls in response to mutual fund trading abuses while the Securities and Exchange Commission will likely adopt new rules, disclosure requirements, and fees intended to head off a repeat of these abuses.

The changes should produce both intense competition among mutual fund companies, and a wave of consolidation within the industry as the costs of complying force smaller companies to seek buyers. Investors, meanwhile, will have more details about the fees they pay mutual funds to manage their money, which should bode well for lower-cost firms, such as Fidelity Investments and Vanguard Group.

No relief, part II

If you've been waiting for housing prices to come back to earth, expect to wait at least another year. Realtors say they see little chance of the already astronomical cost of buying a home in Massachusetts -- the price of a single-family home averaged $376,242 in the first 10 months of 2003 -- coming down in 2004.

The reason: demand continues to outstrip supply.

That means if you're a young family, you have a better chance of finding polite motorists than an affordable starter home within 20 miles of Fenway Park. If you're an employer or political leader, you'd better worry that finding and keeping the talent that makes the Massachusetts economy go could become just as difficult.

No relief, part III

The commercial real estate market should remain soft next year, with property owners not expecting to see much of a decline in vacancies, or much firming -- let alone increases -- in rents until 2005. Just about the only thing landlords have going are historically low interest rates, which, if they stay low, should allow them to service their debt and hold on for another year.

Tenants, on the other hand, will continue to enjoy a buyer's market, signing leases before prices recover. Investors, sitting on record amounts of capital, will be looking for opportunities to buy, most believe, helping to keep sales prices at record levels.

Can your hear me now?

The technology that allows you to make phone calls over the Internet at cheap rates is poised to boom in 2004. AT&T, Time Warner Cable, SBC, and Verizon Communications, as well as start-ups like Vonage and Packet8, all plan big launches of the technology, know as "voice over Internet protocol" or VOIP. Expect monthly rates as low as $35 for unlimited calls. Traditional phone companies fear VOIP could destroy their industry, but federal regulators appear leery of moving too fast to regulate it and choke off innovation.

The telecommunications industry faces another jolt in 2004, thanks to the recent Federal Communications Commission ruling that makes it possible for cellphone users to switch carriers but keep their wireless phone numbers. Consumers have been slow to seize the opportunity, but industry analysts expect as many as 30 million subscribers will exploit the new rules and switch. Changes could trigger long-expected mergers, such as an AT&T-Cingular combination or a Verizon takeover of Sprint PCS.

Would you turn it down?

The digital-music rush is on, with the coming year likely to determine whether song-download services can turn to gold. Companies as varied as Coca-Cola Bottling Co., Wal-Mart Stores Inc., and Microsoft Corp. plan to jump into the Internet music business.

The challenge -- as with so many popular Internet services -- is to make it profitable. Between recording royalties and credit card fees, margins for downloaded music are paper thin. Few companies have the flexibility of industry leader Apple Computer Inc., which is willing to break even on its iTunes Music Store for the chance to sell more portable music players.

Crossroad ahead

Another technology faces a critical year as automakers try to expand hybrid power, which combines a gas engine with an electric motor to get up to 60 miles per gallon.

Toyota and Honda have the only mass-produced hybrids, and sales have been brisk enough that Toyota is boosting the planned 2004 production of its hybrid compact Prius. Toyota also will offer hybrid versions of its Sienna van and Highlander SUV, with other automakers, including Ford, General Motors, and Lexus, following suit with their own hybrid trucks or SUVs. Many in the industry say that spreading hybrid power to larger vehicles would have far greater environmental and fuel savings impact, since many smaller vehicles are already fuel efficient and clean.

It's good to be a customer. . .

When the Bank of America Corp. behemoth swings into town next year, the attention lavished on customers will be unprecedented.

New England's smaller banks are planning advertising blitzes, promotions, and new or improved products with the hope of capitalizing on expected defections by FleetBoston Financial customers after its sale to Bank of America is completed around the second quarter of 2004. The region's second-largest bank, Citizens Financial Group, will continue the "local, local, local" strategy that has helped it gain deposits and market share. Boston's third-tier banks will try to sell their small-bank feel while delivering big-bank services, such as highly competitive mortgage rates.

But Charlotte-based Bank of America is no slouch. The nation's biggest consumer bank is known for good service, a national network of ATM machines, and free checking for customers who deposit paychecks directly into their accounts. Customers "are going to be wooed in a way they haven't been wooed in years," predicted William Ryan, president of Portland, Maine-based Banknorth Group.

. . .unless you're a patient

Many patients face bigger bills as more employers save money on escalating healthcare costs through health plans that charge higher patient copayments. In addition, patients may find doctors and hospitals not only limiting expensive brand-name drugs, but also pricey radiology tests, such as MRIs and PET scans, to help tamp down rapidly rising healthcare costs.

On the plus side, overweight patients who want to drop pounds will pay less as health plans expand coverage for everything from obesity surgery to weight-loss programs.

Blue Cross, for example, next year will begin reimbursing most members $150 of the cost of joining Weight Watchers.

Cool running

Reebok is regaining its cool. With profits rising again, the Canton company is on track for a banner 2004 after setting its sights on the nation's youth -- the lifeblood of the sneaker business. Reenergized by the return of Paul Fireman as CEO, the company has not only enlisted a stable of athlete endorsers to appeal to the young, but also set itself apart with a cast of pop and hip-hop star endorsers such as Shakira, Eve, and 50 Cent.

John Shanley, an analyst with Wells Fargo Securities, predicts Reebok's licensing deals with the National Basketball Association and the National Football League should boost apparel sales. The signing of Chinese NBA player Yao Ming bodes well for its push into the Asian market.

Lots of work

Organized labor faces a tough fight as it takes on the unfriendly policies of the Bush administration and Republican Congress, and tries to reverse the steady slide in union membership -- down to 13 percent of the nation's work force from 20 percent in 1983.

Labor leaders are getting behind a bill, sponsored by Democratic Senator Edward M. Kennedy, that would make it easier for workers to join unions and fine employers who punish workers attempting to join a union. They also are lobbying Congress to overturn the Bush administration's new overtime regulations, which would make professionals earning $65,000 a year or more ineligible for overtime. Professionals who have union contracts guaranteeing overtime payments would be exempt from the federal rules.

Room for improvement

The Massachusetts Convention Center Authority is hoping a leadership shakeup in 2003 will mean more business for the Boston Convention and Exhibition Center in 2004. Not that the new team could do much worse.

So far, the $800 million center in South Boston has only three large conventions booked for 2004, its inaugural year. But the convention center authority hopes the new executives leading its technology, marketing, and finance operations -- as well as possible changes in sales incentives and rental fees -- will boost the number to as many as 10 in 2005, and 43 in 2010.

Material for this report was compiled by the Globe Business staff.