A- CBO Economic Projections
The most up-to-date economic prediction, spanning 2023–2025, was issued by the Congressional Budget Office (CBO). This blog article summarizes the CBO's forecasts in great detail, highlighting its predictions for growth, unemployment, inflation, and interest rates, among other important metrics.
1. Potential Deceleration in Growth Soon
The Congressional Budget Office projects weaker economic growth in the United States in 2024 compared to 2023. Fiscal stimulus is receding, interest rates are increasing, and supply chain disruptions are still running strong, all of which contribute to this moderation. The CBO, however, predicts a GDP bounce in 2025 when these obstacles start to fade.
2. Jobless Rates to Rise Slightly
In 2024, the CBO projects that the unemployment rate will somewhat rise, although it will still be quite low compared to historical norms. Economic growth is anticipated to slow down, which is the main reason for the increase in the unemployment rate. Nonetheless, the CBO emphasizes that, generally speaking, the labor market will likely be tight, and that several industries will likely continue to create jobs.
3. Prices to Decline Over Time
The Congressional Budget Office projects that inflation will decline in 2024 and 2025, getting closer to the Federal Reserve's 2% target rate. Fewer obstacles in the supply chain, cheaper energy, and stricter monetary policy have all contributed to this drop in inflation.
4. Interest Rates to Reach Their Maximum and Parity
In 2024, the CBO predicts that interest rates will reach their highest point as the Federal Reserve fights inflation. But after inflation is reined in, the CBO predicts interest rates will begin to fall in 2025.
5. What Is the Implication for You?
You can learn a lot about the possible future of the American economy from the CBO's economic predictions. Although there will likely be a slowdown in growth, the general picture is still bright. In 2024, the economy may be a little tighter, with interest rates going up and maybe slower employment growth, so companies and consumers should be ready. On the other hand, the CBO predicts that interest rates will level off and inflation will decline in 2025, so the economy should be ready to bounce back then.
B- Impact on Business Valuation
There are many ways in which the CBO's economic predictions for the years 2023–2025 could affect the value of a company:
1- Growth and Profitability:
Slower Growth: The Congressional Budget Office predicts that economic growth will decelerate in 2024, which can cause companies to see a drop in sales and profits. Companies in industries like technology and consumer discretionary, which are highly dependent on economic development, may see their values fall as a result of this.
Interest rate hikes: The CBO has also projected interest rate hikes, which may make borrowing money more expensive for businesses and cut into their future cash flow. Investors may find these companies less appealing, which might result in reduced values.
Sectoral impact: The effect on different industries would be different. Some industries may be less hit than others; they include healthcare and consumer staples. On the other hand, if commodity prices were to rise, the value of sectors such as energy and materials might rise as well.
2. Valuation Methods:
Discounted Cash Flow (DCF): Values will fall because the discount rate used to calculate discounted cash flows (DCFs) will rise in the face of weaker growth and rising interest rates.
Public Market Multiples: If the market value of publicly listed firms operating in the same industry falls as a result of the downturn, it is probable that private enterprises operating in the same industry will also witness a fall in their values.
3. Overall Uncertainty:
Increased volatility: A more unpredictable economic consequence may occur, given the CBO's predictions rely on a variety of assumptions. Because of this unpredictability, stock market volatility might rise, and company valuations can become increasingly inaccurate.
Investor risk aversion: A slowing economy may make investors wary of taking chances, which might drive up the profits they seek from private enterprises. This might also have an impact on valuations.
Keep in mind that these are only forecasted effects; many other factors will determine the real impact on company values, such as:
The specific company and its industry: The economic downturn may have less of an impact on a firm with solid foundations and a competitive edge than on one with weaker foundations.
The state of the company's finances: In the event of an economic slump, a company's ability to weather the storm depends on its balance sheet strength and the amount of debt it carries.
Feelings among investors: Some investors could be ready to put money into businesses with good growth potential even if the economy is doing poorly.
When assessing how the CBO's forecasts may affect the value of a particular company, it is crucial to take all of these considerations into account.
Achille Ekeu, MBA, CVA
The Washington Valuation Group
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