Myrtle Beach, SC, Orlando, FL and Washington, D.C. January 7, 2014—Highland Global has released its 2014 economic outlook based on internal analysis, input from the independent think tank, Thinking Outside the Boxe, and consultations with colleagues within the valuation profession and business community. Highlights of Highland Global Business Valuation’s economic outlook follow:
Economic growth showed some signs of modest strength in 2013, and we believe the economy is likely to continue the trend of modest growth in 2014. We expect persistent high unemployment with a rising probability of increased unemployment stemming from corporate cutbacks in response to rising insurance premiums associated with the implementation of Obamacare. We believe the risks are also weighted towards rising inflationary pressures in food and utilities. As a result, consumers’ purchasing power will be negatively impacted as more income is diverted to cover rising food costs, utilities and insurance premiums, thus resulting in soft markets for discretionary consumer expenditures and likely weaker retail sales.
Our assessment and expectations for the economy include the following:
- We anticipate real GDP growth of 2¾%-3¼% for the full year 2014. Should the Congress end the sequester cuts as part of a broader budget deal, economic activity could see a boost as government spending increases. We believe it is more likely than not that government spending will increase and at least part of the sequester will end as part of a budget deal.
- With the rollout of Obamacare, we believe rising insurance premiums will negatively impact both businesses and consumers. Businesses are likely to respond with labor cuts, which may contribute to an increase in unemployment figures. Consumers will be forced to cut back on discretionary spending as premiums rise.
- Inflation is likely to increase in 2014 with the headline CPI excluding food & energy increasing by roughly 1¾%-2¼%. Food prices may experience increases of up to 10% with the most likely increase in the 7%-10% range particularly with respect to grain prices and produce.
- Unemployment may continue to fall slightly in early 2014, though this is likely a result of the expiration of benefits as opposed to any significant increase in job creation. There may be a slight uptick in headline unemployment to the 7% range late in the second quarter or early in the third quarter. Weekly first time unemployment claims are likely to remain at elevated levels, averaging 360,000 per week. Monthly private sector job creation is likely to average 125,000 per month for full year 2014.
- The stock market will continue to be a store for money as long as interest rates remain low. Should there be any extraordinary geopolitical events such as instability in the Middle East, terrorist attacks, oil supply disruptions, or domestic political turmoil linked to a government shutdown or debt default, the broader stock market may fall in response as investors seek the perceived security of cash or precious metals. Ultimately, while it is difficult to predict the markets, we believe the probability of significant market upside is greater than the probability of any significant downside.
- Real estate markets will, in general, remain soft with isolated pockets of strength in areas such as the DC Beltway, Charleston, South Carolina, the Atlanta metro area, Dallas-Ft. Worth, and San Antonio to name a few. Continued distressed property sales are likely to suppress any price appreciation in the coming year in the majority of markets.
- Oil prices are likely to remain in the $80-$100 per barrel range, possibly rising temporarily above the upper end of this range during the summer driving season. We don’t expect any significant, sustained gains in pricing as a result of continued weak demand and increases in domestic production. Oil price declines of up to 20% in the second half of the year are more likely than any sustained upside beyond the low $100s per barrel level assuming there are no supply disruptions from adverse weather events during the hurricane season and the political situation in the Middle East remains unchanged.
- Merger and acquisition activity in the middle market may stall as uncertainty about the consequences and impact of Obamacare prompt some businesses to stop expansion plans in order to keep employee levels low to avoid offering insurance benefits.
- Small business growth is expected to remain robust as displaced workers seek to become entrepreneurs due to lack of other employment opportunities. Franchises are likely to experience increased activity as well as the resale market for main street businesses.
Based on our assessment of the state of the economy in late 2013, the economy, while seeming to improve, is likely to remain largely uninspiring for 2014. The main risks to the economy remain the unknown consequences and impact of the implementation of Obamacare on businesses and consumers and uncertainty regarding the impact of economic weakness in many European countries on other world economies.