2015 Economic Forecast: Prosperity in the Age of Decline

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1 2015 Economic Forecast: Prosperity in the Age of Decline Featuring economists Brian Beaulieu and Alan Beaulieu

2 Recently economists and popular Vistage speakers Brian Beaulieu and Alan Beaulieu of ITR Economics walked Vistage members through their specialized, time-tested and highly accurate forecast for the year to come. This special report is a summary of that conversation. The bottom line for 2015 is that it s a good time to be doing business in the U.S. Brian and Alan advised businesses to move forward with investing in people, processes, and equipment, and not to wait until mid-year or to fall behind the competition in doing so. It s also going to be worthwhile to be North American-centric in the next year, with more bang for the buck, easier growth and lower risk than doing business in Europe or Asia. There are several major points to keep in mind when doing business throughout this year: A year of growth, but at a slower rate Brian and Alan s forecasting shows that the US Industrial Production is strong and in a growth cycle for 2015, but the rate of rise will slow slightly over this and the next few years. Look for continued growth at a slower pace. Don t straight-line your expectations from 2014 into 2015, instead plan to adjust to the moderate rate of growth for best results. Housing and auto industries specifically will see slightly slower rates of growth compared to other markets again, remember that growth will continue, just less rapidly than before. A note on oil Brian and Alan discussed the possibility of lower oil prices as a factor for the deceleration of growth in the economy for They caution that businesses tied to commodity prices like oil are likely to experience a slow down and should begin investigating different markets if possible. The energy industry will be taking a hit through third quarter 2015, so keep this in mind! On a positive note, the rest of the business community will find their consumers with more cash to spend due to saving money on oil and gas. U.S. and global economy still life left! Contrary to what media outlets are reporting, Brian and Alan s findings are that the economy continues to stabilize in the U.S. and the World, with their leading indicators all pointing up for They cite Mexico as the next big thing in economic growth, eclipsing Spain and Australia within the next 5 years due to new lower costs for manufacturing. Mexico is now on par for China in manufacturing costs with the U.S., trailing by only 5% more. This is huge for North America in attracting new foreign accounts, and allowing domestic businesses to remain here with much less risk to their capital than in China. Brian and Alan also point to banks in America lending at what 2

3 are considered historic low interest rates, and advise grabbing some of that money to finance your growth while you still can. Interest rates will begin to raise again beyond 2015 as the economy strengthens, which is normal and cyclical, but will be new territory for today s younger professionals. The impending labor predicament Employment is looking up for 2015, with private sector employment up 2.1%, job openings up 13.3% and the Quit Rate rising, meaning that there are more people willing to quit a terrible job or situation because there is confidence at finding a new job quickly. A shortage of skilled labor across a host of industries coupled with new manufacturing jobs entering the market will cause a steady rise in demand for skilled and talented labor. This leads Brian and Alan to what they feel is a key tactical issue facing managers in 2015: dealing with rising labor costs, attracting quality workers and keeping them on board. They encourage companies to solve those internal problems that are scaring people away, and becoming a career destination rather than a stepping-stone. By 2019, ITR shows that this problem will escalate into one of the biggest stumbling blocks for the economy, so it s important to begin thinking about it now. Upcoming recession and depression Brian and Alan warn that although looks favorable, they are seeing the next recession on the horizon beginning in The economy s current strength will continue to press interest rates higher in 2018, pushing over into a recession environment by Their prediction is based on the cyclical nature of the U.S. and global economy, and the period of time that ends up occurring between each upturn and downturn. Additionally, they are fairly confident that the next significant Depression in the economy will arrive in That is why it is so important to begin wealth building and strong long-term investment practices in 2015 s current, strong economy, so that businesses can fall back on accumulated windfalls during the lean times, as well as continue growth on the other side. Brian and Alan specifically direct Generation-Xers as well as Millennials to take note of this forecast and to incorporate it into their long-term plans today! 3

4 Concerns to watch for There are a few areas that may signal a problem in the health of the economy. Brian and Alan don t see any trouble in the foreseeable future, but advise businesses to keep an eye out for: S&P 500 giving way to steeper-than-median-decline: Ups and downs are ok, but sharp drops or lengthy drops could mean trouble. Fears of a European recession: Singular countries may slip (and that s normal), but look for collective recession to signal an issue. Oil prices/instability in the Middle East: This is occurring on a smaller scale, but watch Saudi Arabia, Iran, Nigeria and Venezuela specifically. Healthcare costs sap the consumer: More money devoted to health and insurance, though positive for personal wellness, may mean less cash in pocket. Decelerating corporate profits: Look for rapid or long-term drops in profit. China s debt problems: China s ongoing debt problem is a bit of a mystery to the world, as there is a combination of debt in the shadows as well as out in the open. However, as long as China does not admit to recession and the world does not acknowledge it, they are most likely free to solve the problem on their own, with state-run banks and government-controlled financial systems. A note on healthcare spending There is an overall stabilization in healthcare spending in the U.S., which is a good sign. The trajectory of growth has slowed since 2008, which has saved the economy from disaster. The only problem is that U.S. health spending is consistently much higher than any of its worldly counterparts. Spending will continue to raise as we get closer to the forecasted Depression in 2030, which Brian and Alan attribute partially to this issue. ITR sees healthcare spending rising to a peak by 2036, which is when most baby boomers will pass away, and spending should balance out by then. The relief of lower spending will help pull the U.S. out of the depression, and 2036 is forecasted to be a time of prosperity. 4

5 Industries in growth and decline Brian and Alan show the following industries in a growth cycle for 2015: Non-Residential Construction Consumer Prices Medical Production Financial Wholesale trade Industries in decline for this year: Foreign New Orders Housing Retail Keep in mind that all industries may experience a slight slowing in the rate of growth. The industries in decline will take a soft landing in the deceleration of the economy, not a hard drop. Residential construction With rising labor and material costs, it will be hard to build a house for under $150,000 in 2015 and beyond. Brian and Alan predict an affordability issue, citing young professionals with student loans coupled with rising prices and interest rates, which result in new potential owners getting priced out of the market. However, Fanny Mae and Freddy Mac will also be lessening restrictions for loans in 2015, which, if done correctly, could allow for those families to afford real estate. High-end homes continue to move well, and higher-income families can get easy access to mortgages, which will keep the market steady. A million new units or homes will be built in 2015, which is much healthier than the prior year. New construction professionals will see better and better prices for bids in The remodeling market is a tough place to be for contractors in 2015, as people are showing less interest in home improvement and more interest in the instant gratification of an item such as a new vehicle. Remodeling contractors should be prepared to get beat up on pricing margins for remodels this year. 5

6 Commercial construction Commercial and residential architecture are showing strong numbers for Contractors will continue to bid and find bigger margins, but look out for problems in lumber and labor costs potentially eating into the potential profit. The dollar amount spent on commercial construction will continue to grow, but the rate of growth will slow. There are many sectors where commercial construction prices are rising, such as chemical construction, warehouse construction, private office buildings, and manufacturing building projects, which are in a growth cycle. Stay away from bidding on projects for health care facilities, private medical building construction, private education, or airport passenger terminals, as these areas are in decline. Final thoughts Keep the following in mind for 2015: A year of growth at a slightly slower rate Spend the bulk of time and money in North America Prepare for the labor shortage now Oil prices down until third quarter Take advantage of low interest rates while you can Prosperity ahead from Begin preparation for recession in 2019 and depression in 2030 Where is the economy taking your business? Check out Brian and Alan s Book Prosperity in The Age of Decline: How to Lead Your Business and Preserve Wealth Through the Coming Business Cycles. To find out more about forecasts tailored to your business, contact itr@itreconomics.com. Please use the subject line: Vistage is Awesome! Alan serves as ITR s President, focusing on utilization of cyclical analysis at a practical business level. Brian is ITR s Executive Director and CEO, engaged in long range quantitative forecasting on financial and industrial trends. With an accuracy rate of %, ITR Economics relies on stable methodology and a variety of leading indicators to formulate their yearly forecasts. Since 1957, Vistage has been bringing together successful CEOs, executives and business owners into private advisory groups. Each group is purpose-built to help members help each other improve the performance and outcomes of their businesses. To learn more about Vistage, please visit vistage.com. 6

Economic Outlook, January 2015 January 9, Jeffrey M. Lacker President Federal Reserve Bank of Richmond

Economic Outlook, January 2015 January 9, 2015 Jeffrey M. Lacker President Federal Reserve Bank of Richmond Virginia Bankers Association and Virginia Chamber of Commerce 2015 Financial Forecast Richmond,