ITR Economic Forecast: Brian Beaulieu Shares His Projections for 2023
Planning: The Key to the 2023 Economy
ITR Economics CEO Brian Beaulieu is a trusted economic analysis and forecasting source. Because of his expertise and familiarity with MHEDA members, he is always a highly anticipated speaker at MHEDA Conventions and on MHEDA-TV. As we enter 2023, Beaulieu encourages MHEDA members to automate their processes and think ahead. Beaulieu also informs members about what they can expect next.
The MHEDA Journal:
What global economic trends will affect businesses either positively or negatively the most?
On the positive side, what’s going to impact all of us is that inflation will be less and less as we go into 2023. In the Middle East and North America, that is. Europe will still be plagued by the vagaries of the war, and how that disrupts normal economic swings. But the lessening of inflation means that we should be seeing interest rates coming down, particularly here in North America. We’ll still have a problem with interest rates given what the Federal Reserve has been doing here in 2022. But then it’ll be a 2024 problem.
Can you talk more about the disinflation that’s going to be happening and how that might affect MHDA members?
I’m going to put it in reverse order. Disinflation will help MHEDA members if they manage the disinflation process correctly. It’ll help them with their input costs, whether labor or material. Managing that disinflation properly ensures that you see cost reduction. Take a beat, and then decide if you will pass through any cost adjustment to your clients. That will help margins over the course of the year, and we expect demand to stay strong.
There is going to be a strong demand pull for MHEDA members throughout 2023, so they should be able to pull off this delay in any price adjustments and help their margins. This is happening because of things like the gross spending spree that our government was on because of COVID.
We’re now on the opposite side, which tends to bring down inflation. This global supply chain is gradually easing, which helps bring down inflation. The labor shortage isn’t as cute as it was, so that abates some of the labor price inflation.
Now we’re seeing prices like gold, copper, silver and steel coming down. That matters a great deal in terms of seeing the producer price index come down, which will help the consumer price index come down. Sometimes, it’s just mathematics. You can think about how our oil runs at $88 a barrel, right? So, let’s say because of OPEC Plus and their decision, it goes up to $93 per barrel, but that’s a 5% rate of inflation instead of the 60% rate that we saw not that long ago. Unless the prices continue to go crazy, you’ll get some abatement in the year.
The Federal Reserve has been very impatient, more impatient than normal. And I can’t tell you why. I don’t know of any economists who can tell you why they’re so impatient, but it threatens all of our members. But that’s more for 2024. They’ll have to stay tuned to next year’s issue to learn more about it.
What would you say are some best practices to deal with potential economic struggles in 2023 for businesses?
It continues a theme that we’ve talked about in ’21 and ’22. This year remains a very good time to invest in your processes and automate and improve your information systems. Efficiency is one of the best ways to cope with inflation. And while it’s abating, it’s not going to go away. It’s going to be an issue that plagues us for the next 10 years. So the more we can do to regulate those costs, the better. Sometimes – and I’m not recommending this for everybody – we work for outsourced IT companies, and they say, “We’ll manage your servers or your computers. We’ll manage everything for this fixed price and give you a three-year contract.” That’s so you build that into your cost structure without worrying about it for the next three years. Different things like that are helpful; trying to regulate those costs as best as you can.
Also, over the course of 2023, make sure that you have a strategic plan for maintaining your margin even beyond 2023. The way we’re going to have to manage our business from an accounting cost standpoint in ’23 and beyond is similar to how we used to manage our businesses in the early 1980s. So, brush off those playbooks and figure out what will work for you and what won’t work for you.
We think it’s absolutely fundamental for MHDA members – and we’re doing this for all of our clients – to find out how interest- rate sensitive they are. Do the particular markets they serve get impacted by interest rates going up? We have some clients that are very sensitive, and some are not. It’s the function of who they’re selling to. So, we encourage people to find that out. Additionally, are they sensitive to the stock market? Those are the big swings that could occur as we go through 2023. The instances regarding interest rates are more for 2024. But you can do the planning now in order to be ready for it.
Do you think interest rates will impact private equity in 2023?
It won’t have a big bearing in 2023. There’s so much liquidity out there, and it will want to move sooner rather than later. It may dampen the PE activity or overall mergers and acquisitions in ’24 or ’25. Anybody thinking about selling their business is better off doing it sooner rather than later if they have prepared for it. The reason we say that is because rising interest rates shrink multiples.
In three or four years, the multiple on EBITDA that you can get is at six times today and in 2025 and maybe only three and a half or four times. So you have the question: can I improve my EBITDA enough to offset that decrease in multiple, or can I not? You have to have a very good working plan in order to make that happen. That’s critical for boomers thinking about retiring or getting out of the business they own. They have to go through that exercise.
For those who are retiring, passing on their business to someone in the family or leaving it to the next employee who’s coming to take their place, what would you say is the best way for them to prepare to hand that off?
So if you want to keep it in the business, employee-owned companies have become increasingly popular. They either work very, very well or are tremendous busts. You’re better off selling the business on favorable terms to the next generation of leadership or your kids if you have kids in the business. You may hold the paper or want to avoid holding the loan to make it happen. There are a bunch of different ways you can facilitate that transfer. I prefer something other than ESOPs because they’re costly to execute.
Supply chain issues are expected to ease up in 2023, so when can MHEDA members start seeing those effects?
We should be seeing that already. For instance, the semiconductor chip shortage has been an issue, and that’s easing up now. It’s going to continue to get easier as we go through 2023. That doesn’t mean there isn’t any soreness in those joints, but it is getting better. That’s the direction we want to see it go. MHEDA members should also be looking at that near-sourcing or onshoring effort that’s going on as people work to shorten supply chains. There will be some opportunities to help with our inputs from nearsource options and business opportunities to service those manufacturing facilities that are coming onshore and the distribution centers that need to be built around that. So it’s a win-win. You can participate as a customer or as a vendor both ways. That’s a growing market space. It will continue to grow in ’23, ’24 and even beyond.
Why do you think the light vehicle production market is expected to grow more in 2023?
Incomes are rising in the US on average. That could mean an inflation-adjusted income. So, people will have the purchasing power to go out there and buy those new automobiles they haven’t been able to get their hands on for the last two years. Unlike Peloton, where they oversupplied the market, the whole vehicle industry has been undersupplied for the last couple of years and will be playing catch up in that particular space throughout ’23, if not ’23 and ’24.
Is there anything else we haven’t covered that you want to share with MHDA members?
MHEDA should understand that China’s best days are behind it. Politically, they’re heading back into the 1980s. They’re turning their back on capitalism and a lot of different ways, including funneling liquidity into state-owned enterprises where the default rate is tremendously high because they know they don’t have to pay back the banks. In other words, the best bet on the planet is on the United States in terms of future growth, not anyplace else.