Be Prepared for a Roller Coaster Ride: 5 Key Business Predictions for 2015

December is often a time for reflection on our accomplishments over the past year, which can help us to set our sights, expectations, and strategy for the new year to come. Our forecast for 2014 was largely on point at least directionally, anticipating several key events:

Unemployment edged below 6%.
GDP exceeded 3% in the 3Q 2014 and the United States was a leader in economic growth.
Energy costs and interest rates remained low (very low) through the midterm elections.
Crowdsourcing of capital started to go mainstream.
Home price increases once again made homeowners “paper wealthy,” stimulating consumer spending and thereby spurring economic growth.
“Onshoring” accelerated as U.S. consumer demand for “made in America” goods remained strong.

As we begin 2015, despite low interest rates, low energy costs, and rising but stabilizing housing prices, the U.S. economy might very well begin experiencing a cyclical slowdown. With the Congressional elections behind us, one can expect a series of presidential vetoes as the legislative branch seeks to introduce their agenda for reform. Unresolved debt ceiling and budget conflicts, kicked forward from last year, will continue to create a significant degree of economic, political, regulatory, and capital market volatility in the coming year.

The year 2015 brings a number of “wild cards” to the table, both domestically and worldwide:

The re-engagement of U.S. forces and other countries fighting the ISIL insurgents in Iraq, Syria, and Lebanon will only continue to escalate and expand world terrorism and governance challenges.
Ebola remains a deadly disease that may not be contained just to Africa, requiring other countries to be ready to address the disease both with money and resources as well as address the “fear factor” of their country’s population.
Russia remains the most significant wild card due to declining oil prices, global sanctions, loss of currency value, and political turmoil. Russia has defaulted on debt before and a Russian default or debt downgrade would shake the global economy. (Note: Moody’s recently downgraded Russian debt and the cost to insure Russian debt has doubled in 2014.)
With the election over, U.S. interest rates will rise in 2015 and could significantly slow consumer spending and corporate capital investment.
The United States is not immune to the continued slow recovery in Europe or the economic slowdown in China.

5 Key Business Predictions for 2015

1. Gradual But Consistently Rising Interest Rates

Access to low-cost capital will begin to tighten as interest rates increase over the next year. It is no longer a discussion of when interest rates will rise but rather how much and how fast.

Economic growth accelerated through 2014 due in part to record low interest rates and from homeowners borrowing against the equity in their homes. For the coming year, banks will face increased capital requirements, reducing the availability of debt. Increasing interest rates will slow home refinancings and consequently consumer spending, potentially slowing economic growth. Extremely low energy costs in the short term will partially offset increasing interest rates and temporarily delay the negative effect of rising rates on the U.S. economy.

2. Volatility in Energy Availability and Prices

Last year we predicted that the United States would move closer to being an energy exporter rather than an importer. In mid-summer, the first export of U.S. oil in decades left the country for South Korea. OPEC, fearing increasing U.S. production, met in November and did not cut output, thereby causing a collapse in worldwide oil prices. U.S. drilling permits immediately declined as low prices drove producers to seek to reduce drilling budgets. A boon to gasoline-buying consumers and corporations, low energy prices have a whipsaw effect. Many world economies are dependent upon oil royalty revenues and a decline in oil-based revenues means slow economic growth for many oil-producing countries.

By the middle of 2015, energy prices will partially recover due to decreased U.S. production (producers will bank oil for sale to obtain future higher prices). Opposition to Saudi Arabia’s control of OPEC from cash-strapped OPEC countries such as Iran, Ecuador, Venezuela, and Nigeria as well as from non-OPEC countries such as Mexico and Russia will put pressure on continued high levels of production. Traders will also hedge and purchase oil futures at low prices, forcing prices up.

By midyear, look for significant volatility in oil prices and a significant increase much sooner that many experts predict. (Note: Boone Pickens, an oil industry legend, predicts that prices will be back at 100 dollars a barrel in 12 to 18 months.)

3. Convergence and Consolidation of Social Media and Business

As we exit 2014, the social media landscape is becoming increasingly segmented. Facebook is largely a young consumer media company. LinkedIn is largely a business network, and Twitter a social commentary site. Social media in 2015 will consolidate (how many social media sites can survive?) and become true B2B and B2C business tools through strategic alliances or mergers. Salesforce.com is the preeminent sales and Customer Relationship Management (CRM)platform for business. Microsoft is the leading small and mid-sized business software company. There is theoretically a natural convergence of business service companies with social media companies. Expect significant consolidation and convergence in the Internet, business services, and social media industries in 2015.

4. Rise of Wearable Technology

New technology generally goes through a test phase. Remember the Newton, the long-ago unsuccessful predecessor of the iPad? New technologies are often developed before their highest and best use is found. Wearable technology, currently fashionable as fitness bands and watchband phones, will go through an adoption period until such “highest and best” uses are developed. One possibility for a first killer app: wearable health monitoring devices with galvanic measuring and monitoring of health levels.

Wearable technology may provide meaningful workplace benefits where people inside and outside the workplace do not have easy access to computers and do not have their hands free. For example, emergency room doctors have already begun to use Google Glass to access patient electronic healthcare records. Similarly, in the energy business, field service workers have been using Google Glass to assemble complex tools.

Expect some false starts and stops with product introductions in 2015, but overall wearables such as monitoring and measuring devices will be a successful long-term trend.

5. The Outsourcing of Everything

Google, Amazon, and other companies have already become consumer outsourcing service providers. Meals, groceries, shopping, dry cleaning, and almost every other service one would leave the house for can be outsourced for a fee. To many, this is a trend that is reemerging from the past. Remember Webvan, the grocery delivery company that did a deep dive into bankruptcy almost 15 years ago at the nadir of the dot-com bust? As companies like Google figure how to make personal outsourcing services economical and profitable, outsourcing for consumers will become a huge growth industry in 2015 as people become willing to pay more to preserve their personal time.

For businesses, outsourcing will also become even more mainstream. To achieve better economics, businesses will intensify outsourcing everything that is not strategic to their core business. This will include human resource support functions, accounting, manufacturing, transportation, and even the executive staff of the company. Outsourcing will emerge as a key growth industry of 2015.

In 2014 much of the uncertainty for investors, CEOs and the public centered on the political area leading up to the election that produced a Republican sweep. 2015 will have multiple sources of volatility: any one of many global events may contribute to a potential global downturn. Prepare yourself for a roller coaster ride.

Michael Evans is Managing Director for the Newport Board Group, a partnership of board directors and senior executive leaders with deep knowledge of business strategy, operations, and capital markets. Previous to Newport, Michael L. Evans had been with Ernst & Young since 1977 and served as a partner since 1984. During his 34 years with the firm, he served as a tax, audit and consulting services partner, specializing in real estate companies and publicly traded entities. Michael served as the firm’s Global Director of the Real Estate and Construction Industry from 1988 to 1998, serving many of the largest international real estate organizations in the U.S. and the world. Michael is a frequent writer on business topics and has authored two books. He can be reached at (415) 990-1844 or via email at mievans@msn.com.