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12/22/2017

On the Edge of '17 (article)


CBIZ helps with M&A.Each year, CBIZ CMF likes to make predictions on the economy, socio-political issues, and industry trends. Sometimes we get pretty close to the mark, such as when we predicted last year that more households would be cutting the cord on their cable provider, initial public offerings would increase, and the average WTI Crude Oil Price per barrel would be around $49. We have a lot to look forward to in 2018 as well, including the potential of an all-Pennsylvania Super Bowl (Pittsburgh Steelers vs. Philadelphai Eagles), increased number of closed deals ,and a record number of women having seats in Congress. Our complete list of 2018 predictions, along with how we fared with our 2017 predictions, are below.

Economic Predictions for 2018

  • U.S. Unemployment Decreases from 4.38% to 3.90% – Continued economic growth offset by a shortage of available workers result in slight decrease to unemployment rate
  • Labor Participation Rate Increases from 62.9% to 63.30% – Increase in number of openings and pay per hour result in higher participation
    U.S. GDP Growth Increases from 2.5% to 3.0% – Fourth quarter 2017 trend continues
  • WTI Crude Oil Prices Per Barrel Increases from $49.61 to $51.00 – U.S. shale production flexes with demand resulting in no substantive movements in oil price
  • Fed. Funds Rate Increases from 0.97% to 1.50% – Federal Reserve increases rates three times in 2018
  • 10-Year Treasury Note Rate Increases from 2.31% to 2.70% – The yield curve remains relatively flat
  • GBP/USD Exchange Rate Increases from $1.29 to $1.37 – Clarity around Brexit plans result in increasing GBP
  • EUR/USD Exchange Rate Increases from $1.12 to $1.25 – European Central Bank increases interest rates which increases value of Euro
  • USD/CNY Exchange Rate Increases from ¥6.77 to ¥6.90 – The Chinese government manages a slight decline in the value of the Yuan
  • U.S. Savings Rate Decreases from 4.36% to 3.20% – Buoyant economic growth combines with easier lending parameters resulting in lower overall savings rate
  • U.S. Exports Per Month Increases 1% – Driven by oil and natural gas, as well as global economic growth

Socio-Political Predictions

  • Syrian President Bashar al-Assad is removed from power – As part of a larger plan to stabilize the Middle East, driven by Iran being forced into a political corner
  • Republicans increase majority to at least 56 seats in Senate – 33 senators are up for re-election in 2018, including 23 Democrats, two independents who caucus with Democrats, and 8 Republicans
  • Women will enter congressional races at numbers never seen before in the U.S., and will win 40 new seats (from 104 to 144) in the House – The trend of empowered women broadens across a wider swath of congress
  • Brazil’s economy grows by 2.5% – Global economic growth increases demand for farm and oil products and Brazilian government ceases to inflict direct harm on economy
  • An all-Pennsylvania Super Bowl (Pittsburgh Steelers vs. Philadelphia Eagles) – Both teams are strong, and it would be fun

Industry Predictions

  • Amazon picks Austin, TX to build second headquarters – Second headquarters is for Amazon web services and Jeff Bezos is among the largest landholders in Texas
  • Sears is liquidated – Finally succumbs to the inevitable
  • Bitcoin price declines from $8,000 to $4,000 per Bitcoin – Tulip bulbs become more popular
  • The number of closed deals reported by Pitchbook increases by 10% - Trump tax changes will indirectly result in more closed deals
  • Average purchase multiples reported by Pitchbook is 10.5x – Still too much money chasing too few deals
  • 2017 Predictions versus 2017 Actual Results

    Economic Predictions

    Prediction in Nov. '16 for Jan.- Nov '17

    Average Jan.-Nov. '17

    Results (Difference)

    U.S. Unemployment

    ↓ from 4.88% to 4.7%

    4.38%

    -6.77%

    Labor Participation Rate

    ↑ from 62.8% to 63.1%

    62.9%

    -.35%

    U.S. GDP Growth

    ↑ from 1.8% to 3.1%

    2.53%1

    -18.28%

    WTI Crude Oil Prices Per Barrel

    ↑ from $42.01 to $48.00

    $49.612

    3.35%

    Federal Funds Rate

    ↑ from 0.38% to 0.85%

    0.97%

    14.65%

    Ten-Year Treasury Note Rate

    ↑ from $1.78 to $2.75

    2.31%

    -15.90%

    GBP/USD Exchange Rate

    ↓ from $1.37 to $1.23

    $1.29

    4.51%

    EUR/USD

    ↓ from $1.11 to $1.02

    $1.12

    10.07%

    USD/CNY Exchange Rate

    ↑ from ¥6.62 to ¥6.77

    ¥6.67

    -7.22%

    U.S. Savings Rate

    ↓ from 4.9% to 3.8%

    4.36%3

    -16.15%

    U.S. Exports Per Month

    ↑ from 0.2% (from $183,578 to $183,945)

    $193,2204

    5.04%

    1. U.S. GDP growth average is taken from Q1, Q2 & Q3.

    2. Oil average is taken from Jan.-Oct.

    3. Savings Rate is an average of Jan.-Oct.

    4. Exports per month is an average of Jan.-Oct.

    Socio-Political Predictions

    Prediction in November 2016

    Result

    Budget deficit increases to $500B.

    While the deficit increased in fiscal year 2017, the federal budget deficit totaled $666B.

    Evidence of DUIs, criminal conduct and children's use of marijuana results in Colorado reconsidering legalization.

    Although there has been an increase in marijuana-related DUI cases and fatalities, Colorado is not reconsidering marijuana legalization and the increase cannot be definitively linked to legalized marijuana, yet.

    Chinese excessive debt causes meaningful decline in the Yuan; Chinese politburo is worried, which causes a decline in international aggressiveness, including cyber attacks.

    The value of the Yuan has declined, but the Chinese government continues to manage the currency.

    Relations between the Trump Administration and Mexico are just fine.

    NAFTA negotiations and wall deliberations continue to impact relations between Mexico and the U.S.

    Pittsburgh metro area GDP growth rate improves from 78th in 2015 to 25th in 2016 (reported Sept. 2017).

    Declines due to oil, natural gas, and other declines drops Pittsburgh metro area GDP growth rate ranking to 263.

    Industry Predictions

    Prediction in November 2016

    Result

    Middle Market PE M&A deal volume up 10%.

    There were record fundraising levels but deal volume is down 11% Q1-Q3 compared to 2016, likely due to price and quality issues.

    Average multiples on health care businesses decline by more than 20%.

    Health care multiples remain high. Pitchbook's Q3 U.S. PE Breakdown states, "activity reflects that compelling demographic trends still overshadow the uncertainty caused by Washington's on-again/off-again attempts to replaces the Affordable Care Act."

    Drug and medical device companies come under significant government pressure to mediate pricing.

    Drug and medical device companies continue to face pressure from the government to mediate prices.

    Telsa has a breakout year.

    While Telsa is on track to have a breakout year in 2018, it did not reach expected growth rates in 2017.

    Drug and medical device companies come under significant government pressure to mediate pricing.

    Drug and medical device companies continue to face pressure from the government to mediate prices.

    A tipping point is reached where the adoption rate of cord-cutting by household of their cable provider accelerates.

    Approximately 1.2 million people discontinued their cable contracts during July-September 2017.

    Number of IPOs increases 40% YOY.

    Yes, IPOs, as of Sept. 2017, were up by 35% by volume compared to last year.

    Average rig count for oil and gas moves from 489 to 675.

    Although there was an increase in average rig count, as of Nov. 30, 2017, the average rig count for oil and gas was 870.


    Copyright © 2017, CBIZ, Inc. All rights reserved. Contents of this publication may not be reproduced without the express written consent of CBIZ. This publication is distributed with the understanding that CBIZ is not rendering legal, accounting or other professional advice. The reader is advised to contact a tax professional prior to taking any action based upon this information. CBIZ assumes no liability whatsoever in connection with the use of this information and assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect the information contained herein.

    CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

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