NVI Technical College Information

Executive Summary

Feasibility Study

New Village Institute Blairsville

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Located at 500 Innovation Drive, Blairsville, Pennsylvania 15717 Indiana County

January 22, 2024

Wert-Berater Feasibility Studies, LLC ● 1968 South Coast Highway, Suite 2382, Laguna Beach CA 92651 ● 1.888.661.4449 ● https://www.wert-berater.com

Important Disclosures

❖ This document has been prepared by Wert-Berater Feasibility Studies, LLC based

❖ The projected financial information contained in the document is based on

on information and opinions provided by third parties named as “Source” and

our internal market research and judgmental estimates and assumptions

the management of BayFirst National Bank and its associates (herein after

made by the management of Company, about circumstances and events that

“Company”) and certain primary and secondary research carried out by

have not yet taken place.

Accordingly, there can be no assurance that the

Wert-Berater, Inc. on behalf of Company. This document does not purport to

projected results will be attained. In particular, but without prejudice to

be all-inclusive or necessarily to contain all the information that a prospective

generality of the foregoing, no representation of warranty whatsoever is

investor or lender may desire investigating the opportunity, and may be subject

given to the relation of reasonableness or achievability of the projections

to updating, revision and amendment.

contained in the document or in relation to the bases and assumptions

underlying such projections not the reasonableness, achievability and accuracy.

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❖ This document is not solely intended to form the sole basis of an investment

decision by any EB-5 Visa applicants, USCIS officials in determining job creation

❖ No representation or warranty, express or implied is given by the

or economic impact of the project or lenders acting as a construction loan or

permanent loan lender, guarantor and/or grant provider. Other interested parties

Promoters, the Company or Wert-Berater Feasibility Studies, LLC its principals,

should carry out their own investigation and analysis of the subject Company

managers, agents or employees, directors, partners, affiliates, or advisors (and

known as BayFirst National Bank concerning any investment, offer, loan or

any warranty expressed or implied by statute is hereby excluded) as the accuracy

guarantee or grant request. The information contained in the document will not

or completeness of the contents of this report or any such document or

constitute or form part of any offer for sale of shares in the subject project or its

information supplied at any time or opinions or projections expressed herein or

Company, its owners or managers of offer of equity, nor will any such

therein, nor is any such party under any obligation to update the document or

information from the basis of any contract in respect thereof. Any investor must

correct any inaccuracies or omissions in it which may exist or become apparent.

rely on the terms and conditions contained in such a contract subject to

In particular, for reasons of commercial sensitivity, information on certain matters

limitations and restriction as may be specified therein. However, this document

may not have been included in this document.

Such information may be

may be used by third parties such as business plan authors and economic impact

available at a later stage.

or job creation economic studies as part of their investigation and analysis.

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Important Disclosures

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Company or for any other costs or expenses incurred by prospective purchasers

principals, partners, officers, affiliates, employees, advisors or agents.

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❖ Wert-Berater Feasibility Studies, LLC is acting as advisor to the Company, its

❖ THIS REPORT AND THE INFORMATION CONTAINED HEREIN DOES

lender and the legal counsel only and to no other person. Neither receipt of the

NOT CONSTITUTE AN APPRAISAL UNDER THE UNIFORM STANDARDS

document nor any information supplied in connection with any proposed

OF PROFESSIONAL APPRAISAL PRACTICE ("USPAP") AND SHOULD NOT BE USED

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investment in the Company by any person is or is to be taken as consulting the

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investment or appraisal services in any state, country or jurisdiction. This report is

Berater Feasibility Studies, LLC in connection with any proposed EB-5 Visa

not warranted by Wert-Berater Feasibility Studies, LLC or any other party for

Application, loan, investment or sale.

accuracy, completeness or any other criteria.

❖ This document should not be considered as a recommendation by Wert-Berater,

❖

General Note on Rounding:

Inc. or any of its subsidiaries or affiliates (including the Company) or their

Microsoft Excel was used in the calculation of the numbers presented in this

respective directors,

managers,

principals,

partners,

officers,

affiliates,

document. Results are presented in whole numbers or rounded to two decimal

employees, advisors or agents to invest in the Company and each potential

places where appropriate, however, the analysis itself uses figures carried to their

investor must make its own independent assessment of the merits or otherwise

ultimate decimal places; therefore, the sums and products generated in the

of acquiring the issued share capital of the Company and should take its own

analysis may not equal the sum or product if the reader replicates the

professional advice.

calculations with the factors shown in the report.

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Table of Contents

Item

Page

Item

Page

Important Disclosures Executive Summary

2 5

Technical Feasibility Conclusion

112

Financial Feasibility

113 114 115 116 117 118 119 120 121 122 123 127 131 132 134 136 138

Definitions

12 14 15 16 18 19 22 23 37 43 49 50 51 53 56 57 60 64 66 70 72 75 78 80 85 86 87 88 99

Assessment of the cost accounting system Breakdown of the Financial Statements

Economic Feasibility

Information Regarding Subject Project Site

Historical Revenue, Expenses, Usage and Financial Ratios Table

Subject Project Site Survey Subject Project | Ariel View

Pro Forma Assumptions Table 1 – Period 2024-2025 Pro Forma Assumptions Table 1 – Period 2025-2026

Subject Project Locator Map | Street View

Pro Forma – Years 1 though 5 Pro Forma – Years 6 though 10 Discounted Cash Flow Analysis

FEMA Flood Map

United States Economic Outlook Pennsylvania Economic Overview

Pro Forma EBITDA Summary Years 1 through 10 Sensitivity Analysis │ 5.0% Revenue Reduction Sensitivity Analysis │ 10.0% Revenue Reduction Breakeven Analysis │ 46% Revenue Reduction

Indiana County, Pennsylvania Overview

Economic Feasibility Conclusion

Market Feasibility

Trade & Technical Schools in the US IBISWorld Industry Report

Financial Feasibility Conclusion

Performance

Management Feasibility Resume of the Analyst

Volatility Outlook

The End

Products and Services Geographic Breakdown

Barriers to Entry

Trade & Technical Schools in the US Industry Data by State Demand for Jobs Related to the Company Offerings

Automotive Body and Glass Repairers Diesel Service Technicians and Mechanics Occupational Employment and Wages, May 2022

National Competitive Vocational & Tech Schools Summary Table

Subject Project Enrollment, Tuition and Fees Tables

Industry Job Growth and Demand

National Competitive Vocational & Tech Schools Locator Map Pennsylvania Competitive Vocational & Tech Schools Summary Pennsylvania Competitive Vocational & Tech Schools Summary Table Information on the Sales Organization and Management

100 102 104 106 107 109 110 111

Technical Contracts Data table Market Feasibility Conclusion

Technical Feasibility

Improvements Description

Regulation and Governmental Action

Subject Project Photographs

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Executive Summary

January 22, 2024

Christopher Hackney CreditBench, BayFirst National Bank 700 Central Avenue St. Petersburg, Florida 33701 (619) 723-3973 E-mail: christopher@creditbench.com

Re: Feasibility Study for the planned continuance of the New Village Institute “NIV” (hereinafter “Company”) Blairsville vocational school hereinafter “subject project” .

Dear Mr. Hackney:

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At your request and authorization, we are pleased to provide this feasibility study concerning the continuance of the vocational school known as

New Village Institute located in Blairsville, Pennsylvania. The school is a fully equipped project that includes single-tenant industrial buildings that comprise a campus of three buildings totaling 282,125 ± square feet of net rentable area (“RBA”) on about 26.419 ± acres. The existing

improvements historically have been used for the same purpose as the proposed school project. The improvements were acquired and have

operated as a vocational school since August 2020 by the management of the Company. The management of the Company indicated there was

about $1.5 million in renovations since its acquision for HVAC, plumbing, roof, all carpet, all paint interior/exterior, signage and exterior lighting

upgrades, etc. Additional $500K coming in Q1 2024 for high efficiency HVAC units and led interior lighting. $250K in additional test equipment,

tooling, shop vehicles, etc.

The improvements include administrative offices, classrooms and work shops which provide for a vocational school setting.

No known

modifications to the buildings are required. There are four detached buildings which are identified as Building 1 at 500 Innovation Drive, which was built in 2004 having 77,007 ± square feet of RBA (Administration/Street Rod); Building II which has 89,400 ± square feet of RBA located at 277

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Executive Summary

Cornell Road, constructed in 2006; Building III (Automotive) located at 406 Cornell Road, built in 2003 having 58,109 ± square feet of RBA and Building IV (Collision, Trim, and Refinishing) at 408 Cornell Road, constructed in 2004 consisting of 57,609 ± square feet of RBA. The land area has

two contiguous parcels. The subject project is a nationally recognized vocational school that has been temporarily closed and to be restarted by

the management of the Company.

The management of the Company acquired the school for $14,800,000 including the real estate for the improvements, equipment and land for the

subject project real estate. Historically, WyoTech schools began in 1966 which operated the subject project facility starting in 2002 as a vocational

school offering Auto/Diesel Vehicle Technology, Automotive Technology with High Performance Power Trains, Automotive Technology with Trim

and Upholstery Technology, Collision/Refinishing and Upholstery Technology and Diesel/Auto Vehicle Technology.

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Historical Background

The WyoTech schools began in 1966 in Laramie Wyoming in automotive repair. The Blairsville site opened in 2002 and added Diesel and large

truck courses as well as specific construction courses such as HVAC repair. Large vocational school conglomerate Corinthian purchased the Laramie

and Blairsville schools in 2002 and opened a Daytona, Florida facility in 2004 as its motorcycle and marine school. After five years of growth and

profits from the vocation schools, Corinthian was forced by the US Government to stop recruiting new students starting in 2012 due to compliance

violations at some of its schools.

At the request of the US Government, ECMC acquired Corinthian ’ s portfolio of schools in 2015 and stabilized the schools but decided to phase out

the 3 WyoTech mechanical tech schools including Daytona and Blairsville since operating mechanical/technical vocational schools was not ECMC ’ s

core business. ECMC completed the government mandated “ teach out ” process through 2017 and 2018 and closed the schools in December of

2018.

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Executive Summary

In 2015 the tenant, Zenith Education Group, Inc., signed a 12-year lease to operate the subject as a technical institute which specializes in

automotive training. The tenant's parent company under the entity of Store Capital Acquisitions LLC acquired the subject, which was included in a

large portfolio sale of trade schools in 2015. After this acquisition, Store Capital Acquisitions LLC elected to phase out three mechanical/vehicle

trade schools that came with the portfolio due to lack of knowledge in operating schools that specialize in automotive training. The subject, being

one of the three trade schools was included in this phase out plan. In 2018 New Village Development 2 LLC engaged in discussions to purchase

the subject properties. While discussions took place, the subject was phased out and became unoccupied in January of 2019. During this time

frame, an agreement was in place that the tenant Zenith Education Group would continue to pay lease payments in the interim until the subject is

sold. Once New Village Development 2 LLC acquires the subject, the initial lease will dissolve and will be replaced by a 20-year lease between

related parties. The subject will operate once again as an automotive technical institute under new ownership New Village Development 2 LLC.

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School Capacity and Recent Developments

The NVI Blairsville campus has the advantage of very large space according to the management of the Company – over 260,000 square feet. This

campus comfortably accommodated over 1,420 students per term. NVD was recently granted ASE Testing Site certification for Automotive Tech

Certification starting 1/1/24. This means NVIB can operate as a public testing center for any technician or student from any business or school

wishing to obtain ASE certifications for themselves or any Employer = Higher visibility and credibility for NVIB technical capabilities, and this is a

revenue generator. It speaks to the technical capability of the NVIB staff as educators and Master Technicians.

NVIB is already a Pennsylvania

DOT certified education center and teaches PennDOT state vehicle inspection courses to the public. All our graduates leave with a Pennsylvania

certification for state mandated vehicle inspections, something other schools do not do.

Loan Request

The Term Sheet provided by BayFirst National Bank indicated $16,900,000 guaranteed by the United States Department of Agriculture (USDA),

Business and Industry Guaranteed Loan Program. 80% loan guarantee required. Wall Street Journal Prime Rate (currently 8.5%) + 1.50%. The rate

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Executive Summary

will be subject to change quarterly from the date of the loan with any increase or decrease in the base of Wall Street Journal Prime Rate a

published daily in the money rates section of the Wall Street Journal. The payment amounts to be adjusted with any change in the interest rate.

The payment amounts to be adjusted with any change in the interest rate. 27 years. Payment of interest only for the first 24 months of the loan

then fully amortized for the remaining term of the loan (25 years).

Strategy

The management of the Company indicated in their business plan summary that the restarting of the subject project as a vocational school is of

low risk because of a long-standing reputation. Their intention is to employ the existing staff that has direct experience in operations of the school

and make minor improvements to the management of the operations as recommended by the staff.

Moreover, the tuition is to be priced at

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$25,000 for six-month course work whereas previous course work was about nine months. The national average tuition cost for the same program

is about $34,000 per certification. Student recruiting will be from onsite high school recruiting, social media, marketing and advertising. Students

are to be drawn to the subject project vocational school also due to the alliance partnerships the management of the Company has developed

whereas employment placement opportunities are abundant.

The alliance partnerships include Harley Davidson, MarineMax, Freightliner, Mac

Truck, Volvo, Ryder, Penske, Yamaha, Mercury Marine, and independent vehicle and marine service outlets. The management of the Company

intends to expand the alliance partners to include job placement programs for the automotive/heavy truck/RV industries and

commercial/residential construction sectors as a job placement service for graduates of their certificates programs. Details concerning back

grounds of the management are presented in the Management Feasibility section of this report.

Report Purpose

This feasibility study is intended to be used by the USDA for review related to a potential loan guarantee through the Business and Industry

program. Therefore, this Feasibility Study is intended to comply with Guide 5 USDA RD Instruction 4279-B.

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Executive Summary

USDA Guide RD Instruction 4279-B is applied for the development of this report. The following Statement of Work is as follows:

1. Executive Summary: Introduction/Project Overview (Brief general overview of project location, size, etc.); Economic feasibility

determination/opinion;

Technical feasibility determination/opinion;

Market feasibility determination/opinion;

Financial feasibility

determination/opinion; Management feasibility determination/opinion; Recommendations for implementation, including an overall conclusion

as to the business ’ chance of success (Revised 10-05-16, PN 489.)

2. Economic Feasibility: Information regarding project site; Availability of trained or trainable labor; Availability of infrastructure, including

utilities, and rail, air and road service to the site.

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3. Market Feasibility: Information on the sales organization and management; Nature and extent of market and market area; Marketing plans

for sale of projected output - principal products and byproducts; Extent of competition including other similar facilities in the market area;

Commitments from customers or brokers - principal products and byproducts. Adequacy of raw materials and supplies. Projected total supply

from members and non-members. Projected competitive demand for raw materials. Procurement plan and projected procurement costs. Form

of commitment of raw materials (marketing agreements, etc.).

4. Technical Feasibility: Suitability of the selected site for the intended use including an environmental impact analysis. Report must be based

upon verifiable data and contain sufficient information and analysis so that a determination may be made on the technical feasibility of

achieving the levels of income or production that are projected in the financial statements. Report must also identify any constraints or

limitations in these financial projections and any other facility or design-related factors which might affect the success of the enterprise.

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Executive Summary

Report must also identify and estimate project operation and development costs and specify the level of accuracy of these estimates and the

assumptions on which these estimates have been based. Project engineer or architect may be considered an independent party provided neither

the principals of the firm nor any individual of the firm who participates in the technical feasibility report has a financial interest in the project and

provided further that no other individual or firm with the expertise necessary to make such a determination is reasonably available to perform the

function. Commercial Replication. Risks Related: Construction, Production Regulation and Governmental Action.

5. Financial Feasibility:

Reliability of the financial projections and assumptions on which the financial statements are based. Two years

(minimum) projected Income Statements and Cash Flow Statements, including Sensitivity Analysis. The income approach of an appraisal is not

an acceptable feasibility study. (Revised 10-05-16, PN 489.). Ability of the business to achieve the projected income and cash flow. Assessment

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of the cost accounting system. Availability of short-term credit for seasonable business. Risks Related to: The offering, Applicant financing plan,

Operational units, and Tax issues.

6. Management Feasibility: Discuss adequacy of management (experience, training, and education of management). Discuss continuity of

management (is there a continuity of management plan and is there depth of management?). Evidence that continuity and adequacy of

management has been evaluated and documented as being satisfactory. Discuss motivation and character of management. Risks Related to:

Applicant as a company (i.e. development-stage) Conflicts of interest or appearances thereof.

7. Qualifications: resume or statement of qualifications of the author of the feasibility study, including prior experience, should be submitted.

The Consultant must be qualified and independent. (Revised 06-12-17, SPECIAL PN.):

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Executive Summary

Recommendations for implementation, including an overall conclusion as to the business ’ chance of success (Revised 10-05-16, PN 489.)

Conclusions are presented at the end of each section of this report.

Please direct questions to:

Donald Safranek, MSc, President

Wert-Berater Feasibility Studies, LLC

Telephone: 1 .888.661.4449 ext. 7

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E-mail: dsafranek@wert-berater.com

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Definitions

where

Discounted Cash Flow Analysis (DCF)

Ct = net cash inflow during the period t

DEFINITION of 'Discounted Cash Flow - DCF'

Co = total initial investment costs

A valuation method used to estimate the attractiveness of an investment opportunity.

r = discount rate, and

Discounted cash flow (DCF) analysis uses future free cash flow projections and

t = number of time periods

discounts them (most often using the weighted average cost of capital) to arrive at a

A positive net present value indicates that the projected earnings generated by a

present value, which is used to evaluate the potential for investment. If the value

project or investment (in present dollars) exceeds the anticipated costs (also in

arrived at through DCF analysis is higher than the current cost of the investment, the

present dollars). Generally, an investment with a positive NPV will be a profitable one

opportunity may be a good one.

and one with a negative NPV will result in a net loss. This concept is the basis for the

Net Present Value Rule, which dictates that the only investments that should be

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made are those with positive NPV values. When the investment in question is an

Calculated as:

acquisition or a merger, one might also use the Discounted Cash Flow (DCF) metric.

Entrepreneurial Profit

The reasoning is based on the economic principle of Entrepreneurial Profit which is

Net Present Value – NPV

an economic theory by Schumpeter, J.A., 1934 (2008), The Theory of Economic

Development: An Inquiry into Profits, Capital, Credit, Interest and the Business Cycle.

Net Present Value (NPV) is the difference between the present value of cash inflows

and the present value of cash outflows. NPV is used in capital budgeting to analyze

The theory indicates that Schumpeter distinguished between two different types of

the profitability of a projected investment or project. The following is the formula for

risk, the first one associated with ‘the technical failure of production’ and ‘the risk of

calculating NPV:

commercial failure’, but he emphasizes that “none of these methods of evening out

economic risks, in principle, creates profit” . Commercial risk is essentially based on

the idea that no entrepreneur would not consider contributing their time to a

business without a minimum profit margin.

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Definitions

Amortization

EBITDA - Earnings Before Interest, Taxes, Depreciation and Amortization

Amortization is the paying off of debt with a fixed repayment schedule in regular

EBITDA stands for earnings before interest, taxes, depreciation and amortization.

installments over a period of time for example with a mortgage or a car loan. It also

EBITDA is one indicator of a company's financial performance and is used as a proxy

refers to the spreading out of capital expenses for intangible assets over a specific

for the earning potential of a business, although doing so has its drawbacks. Further,

period of time (usually over the asset's useful life) for accounting and tax purposes.

EBITDA strips out the cost of debt capital and its tax effects by adding back interest

and taxes to earnings.

Interest

Interest is the charge for the privilege of borrowing money, typically expressed as

Operating Profit

annual percentage rate. Interest can also refer to the amount of ownership a

stockholder has in a company, usually expressed as a percentage.

Operating profit is the profit earned from a firm's normal core business operations.

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This value does not include any profit earned from the firm's investments, such as

Residual Land Value

earnings from firms in which the company has partial interest, and the before the

Land residual technique. in appraisal, a method of estimating the value of land when

deductions of applicable interest and taxes owed. Operating profit is calculated using

given the Net Operating Income (NOI) and value of improvements. Used for

the following formula: Operating Profit = Operating Revenue - COGS - Operating

feasibility analysis and highest and best use. (C. Darlow. Valuation and Development

Expenses - Depreciation and Amortization

Appraisal (London: 1982), pp. 1 – 28. (Residual Method of Valuation).

Depreciation

NAICSCode

Depreciation is an accounting method of allocating the cost of a tangible asset over

NAICS Code 611519 – Other Technical and Trade Schools

its useful life. Businesses depreciate long-term assets for both tax and accounting

Definition of NAICS Code 611519: This U.S. industry comprises establishments

purposes. For tax purposes, businesses can deduct the cost of the tangible assets

primarily engaged in offering job or career vocational or technical courses (except

cosmetology and barber training, aviation and flight training, and apprenticeship

they purchase as business expenses; however, businesses must depreciate these

training).

assets in accordance with IRS rules about how and when the deduction may be taken.

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Market Feasibility Economic Feasibility

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Subject Project Interior View

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Economic Feasibility

Topography

Mostly Level

Information Regarding Subject Project Site

The Subject Project is the vocational school improvements located

Zoning

None designated, Borough of Burrell

at 500 Innovation Drive, 277 Cornell Road, 406 Cornell Road and

4068 Cornell Road, Blairsville, Pennsylvania postal code 15717.

Frontage

1350' Innovation Drive, and 820' Cornell Road

Indiana County. Availability of infrastructure, including utilities, rail,

air, and road service to the site:

Utilities

Municipal sewer, water, and natural gas.

Electricity and telephone.

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Assessor Parcel ID

10-047-101 and 10-047-204

Rail

None directly serving the subject project site

and not a requirement for its intended use.

About 24.4190 ± Acres (1,150,812 ± Square

LandArea

Feet).

Air

Pittsburgh International Airport

Shape

Irregular

Access

Paved two lane road. Four curb cuts, one on the

south, and north side of Cornell Road, two curb

FloodMap

42063C0530F, effective as of 4/3/2012

cuts on the south side of Innovation Drive.

FloodZone

Zone X, Zone X is defined as the area

Environmental

No adverse conditions are known to exist. A

located outside the 100-year and 500-year

Phase I

Environmental

Assessment is

flood plains.

recommended.

Source: Indiana County, Assessor and FEMA

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Economic Feasibility

Subject Project Site Survey

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Source: Management of the Company

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Economic Feasibility

Subject Project Site Survey ׀ Continued

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Source: Management of the Company

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Economic Feasibility

Subject Project | Aerial View

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Source: Google Earth

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Economic Feasibility

Subject Project Locator Map | Street View

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Source: Microsoft Streets

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Economic Feasibility

Subject Project Locator Map | Region View

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Source: Microsoft Streets

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Economic Feasibility

Subject Project Locator Map | Pennsylvania View

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Source: Microsoft Streets

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Economic Feasibility

FEMA Flood Map

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Source: FEMA

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Economic Feasibility

Now, recession fears are falling. The August National Association for

United States Economic Outlook

Business Economics Policy Survey found that two-thirds of the

United States Economic Forecast Q3 2023

panelists are confident of a “ soft landing. ”

The Q3 2023 forecast is optimistic, reflecting increasing signs of a

“ soft landing ” for the US economy. But risks are still anticipated to be

The Wall Street Journal ’ s survey of economic forecasters found a

relatively high; the full impact of the Fed ’ s tightening may not have

drop in forecasters ’ probability of a recession. It certainly looks like

been felt, leaving us to put the chances of recession at around 20%.

an outbreak of surprising optimism from dismal scientists.

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A case of optimism?

A cynic might assume that optimistic economists are a sure signal of

Starting in early 2022, talk of recession was in the air. That summer,

a downturn, but the optimism reflects reality.

internet searches for “ recession ” peaked at a level that was more

than 20% above the level of searches when the pandemic started in

Even if monetary lags are “ long and variable, ” most economists

March 2020.

would have expected a 5-percentage-point rise in the funds rate

over such a short time period to have slowed the economy more

Some well-known economists had argued that inflation would only

than what we have seen so far.

drop if the unemployment rate rose substantially. But inflation has

moderated, yet no recession has occurred. The labor market

And inflation readings during the summer were low enough to

continues to grow, and the unemployment rate remains at

suggest that despite continued issues in some sectors, overall price

extremely low rates.

inflation was under control.

Source: Deloitte

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Economic Feasibility

Of course, many economists have been saying this for about a year,

The economy is indeed slowing. But GDP still appears to be growing

and they have been wrong. That ’ s why we are seeing the current

faster than its long-run potential — the growth rate that can be

bout of optimism.

sustained in the long run. And job growth has slowed, but the

economy continues to add jobs at rates that are much greater than

But what if the economy finally comes to the point when the impact

the underlying growth of the labor force. GDP and employment

of past monetary policy starts to show up? After all, it ’ s been less

growth will have to slow even more sooner or later to reflect longer

than two years since the Fed started raising interest rates.

term trends. In our forecast, we estimate that labor force growth will

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fall to around 500,000 per year in the coming years. The level of job

Second, Fed tightening has already created fragility in financial

growth consistent with full employment would then be just 41,000

markets. The Fed doesn ’ t intend to create a recession by sparking a

per month. Increased immigration and unusually high growth in

financial crisis. The higher it raises interest rates, however, the more

labor force participation could allow faster job growth, but it would

likely such a crisis becomes.

be hard to bet on either of these scenarios.

Despite all those possible reasons for gloom, the US economy is

On the face of it, this would seem to call for even more Federal

coming into fall with continued growth, lower inflation, and the

Reserve (Fed) tightening, as slow labor force growth keeps the job

possibility that all that talk about recession was, in the end, just

market tight. But two problems arise. First, those “ long and variable

that — talk.

lags ” of monetary policy tightening suggest the possibility that a

slowdown is already embedded in economic decision-making.

Source: Deloitte

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Economic Feasibility

Inflation comes back (20%): The decline in inflation due to

Scenarios

decreasing supply chain pressures proves to be temporary.

Baseline (60%): Economic growth slows to the potential rate of

Continued strength in the labor market pushes wages up, leading to

around 1.5% to 1.6%, while inflation moderates to below 3% by

higher costs and prices.

2025. This long-desired “ soft landing ” is accompanied by a stable

labor market, despite slowing job growth. Slow growth in Europe

The Fed, having attempted to slow inflation through shock therapy

and China, higher energy prices, and an expensive dollar have not

in 2022 and 2023, proves reluctant or unable to continue the effort,

proven to be strong enough headwinds to push the US economy

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which presents significant dangers to the financial system.

into recession, or even to slow it below potential.

Inflation settles in at about 4.5%. Although short-term interest rates

Some sectors, however, do experience weakness. High interest rates

remain moderate because of the Fed ’ s reluctance to create more

and market saturation reduce demand for consumer durables and

risk, long-term rates continue to rise as inflation expectations move

housing. Investment in nonresidential structures remains weak, as

up.

the oversupply of office buildings and retail space weighs on the

market.

By 2026, mortgage rates are over 9.0%, with the expected impact on

housing. The combination of high interest rates and uncertainty

Construction of manufacturing structures — encouraged by efforts to

slows growth, and the unemployment rate gradually rises over the

build chip plants in the United States as well as alternative energy

forecast horizon.

production — offsets this weakness.

Source: Deloitte

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Economic Feasibility

Most of that money has been spent, as the savings rate has dropped

The next recession (20%): The Fed ’ s focus on inflation leads it to

from an average of around 9% before the pandemic to around 4.5%

minimize risks to the economy until it is too late. Although the

in the second quarter of 2023. Many households still have more

financial shock is smaller than in 2008, the already weak economy

cash on hand now than they normally would want, but how much of

contracts a substantial 1.9% by the end of 2024. The unemployment

that will they spend as the economy slows?

rate rises to 5.2% in 2025, which alleviates some — but not all — of the

pressure on the job market. The Fed eases monetary policy, and the

One possibility is that many consumers will remain cautious and

economy starts growing in 2026.

A

hold on to those savings even as they are able to go out and spend.

However, the households without savings have been running up

Sectors

their credit card debt — and those card balances have become a lot

Consumer spending

more expensive, with most cards charging over 20% on unpaid

The near-term outlook for consumer spending turns on two big

balances. An additional headwind to spending is the fact that

questions:

households with student loan debt will need to divert funds to serve

1. What will happen when consumers finish running down their

that debt — money that now will not be supporting additional

pandemic savings?

consumption.

In 2020, during the height of the pandemic, we estimated that

The baseline Deloitte forecast assumes that consumer spending will

households saved about US$1.6 trillion more than we forecasted

continue to grow, but slow to about 1.5% per year.

before the pandemic.

Source: Deloitte

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Economic Feasibility

Deloitte ’ s forecast assumes that durable goods spending starts to

2. As consumer services recover, what happens to durable goods?

fall over the next few years as consumer spending “ renormalizes ”

and consumers resume spending on services. While services

The pandemic sparked a remarkable change in consumer spending

spending grows more quickly, total consumer spending slows to a

patterns. Spending on durable consumer goods jumped US$136

level slightly below the rate of household income growth, as the

billion in 2020, while spending on services fell US$473 billion over

excess savings households accumulated during the pandemic period

the same period. Households substituted bicycles, gym equipment,

are exhausted.

and electronics for restaurants, entertainment, and travel. This trend

A

started reversing after mid-2021, and by the end of 2022, real

There is a silver lining for some households in the tight labor

durable goods purchases were down over 4%.

market/high-inflation environment of the past couple of years. Low

wage workers have seen real wages go up, while high-income

However, consumer purchases of durable goods have started

workers have experienced the greatest erosion in the value of their

growing again. With the exception of motor vehicles, this trend

pay. It remains to be seen whether this reduction in inequality will

seems unlikely to continue. If consumers just return to their

continue, but it ’ s certainly welcome news to lower-wage workers.

prepandemic spending patterns, durable consumer goods sellers

will be looking at a 20% fall in spending. And consumers could

Retirement remains a significant concern for many workers: Even

conceivably spend even less, since the durable goods they

before the crisis, fewer than four in 10 nonretired adults described

previously bought aren ’ t going to wear out that quickly.

their retirement as on track,

Source: Deloitte

27

Economic Feasibility

Don ’ t be too worried, however; some research suggests that

with a quarter of nonretired adults saying they had no retirement

homeownership patterns for younger families aren ’ t that different

savings. As the population ages, many people are likely to find it

from those of previous generations.

difficult to afford the retirement they expect.

Our forecast shows the fall in residential construction continuing

Housing

through the end of this year. Housing construction is then forecast

The housing sector outperformed the broader economy in the wake

to bounce back, but only modestly; by 2025, housing starts reach

of the pandemic, as buyers and sellers found ways to navigate the

A

our estimated equilibrium of about 1.5 million units per year.

pandemic ’ s restrictions. Then the tables turned. As the Fed raised

interest rates and inflation appeared, long-term interest rates moved

Demographics suggest that housing is not likely to become a key

up dramatically. The result was a decline in housing starts from 1.7

driver of economic growth in the foreseeable future. Population

million (at an annual rate) in Q1 2022 to less than 1.4 million Q1

growth has slowed to less than 0.5% per year (compared to over 1%

2023. And house prices, which rose sharply starting in the middle of

during the housing boom in the 2000s). The baseline forecast

2021, appear to have stabilized, at least for the time being.

assumes that, after the recovery from the current housing downturn,

housing starts will begin to fall. Faster medium-term growth in

The runup in house prices created a huge housing affordability

housing would require faster population growth, most likely from

problem. Unfortunately, the moderation in house prices over the

immigration. Otherwise, the heightened demand for housing during

past year won ’ t solve the affordability problem because mortgage

the pandemic is likely to be a short-term phenomenon.

rates have moved up substantially.

Source: Deloitte

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Economic Feasibility

Recent legislation — the CHIPS and Science Act and the Inflation

Business investment

Reduction Act — provide significant incentives for increasing

Businesses have ramped up investment since the initial impact of

manufacturing capacity in the United States. And those incentives

the pandemic, but they have been selective about what they are

do seem to be creating demand for investment in manufacturing.

investing in.

Investment in equipment has been slowing. After rising over 10% in

Investment in nonresidental structures fell more than 20% between

2021 and 4.3% in 2022, equipment investment has been flat during

the pandemic and the third quarter of 2022. Prospects in many

A

the first half of 2023. Since the pandemic, equipment investment has

nonresidential building sectors remain grim. The business case for

been dominated by transportation equipment and information

office buildings and retail space has diminished, with online

technology (IT) equipment. Remote work makes IT equipment (and

shopping and the shift toward working at home. Current talk of

software) a substitute for buildings, and so the counterpart to weak

converting office buildings to residential spaces suggests that real

investment in commercial structures is a lot of investment in IT. That

estate experts don ’ t see a lot of room for growth in office demand.

need was particularly strong as companies moved to more virtual

work over the past few years. But now that the initial investments

However, the past few quarters have seen some growth in

have been made, we are seeing a slowdown in investment in

nonresidential construction. Mining structures investment has

information processing equipment. Some of this weakness has been

picked up in response to higher oil prices. The surprise here is that

offset by continued fast growth in investment in transportation

mining didn ’ t grow earlier and faster. But the more surprising

equipment.

contributor to growth is manufacturing structures.

Source: Deloitte

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Economic Feasibility

Financing investment is becoming a bit pricier as long-term interest

Investment in intellectual property (which consists primarily of

rates rise. However, many nonfinancial businesses are sitting on a

software and R&D) remained strong during and after the pandemic.

pile of cash. In our baseline forecast, the AAA corporate bond rate

That ’ s mostly because of investment in software, and it likely reflects

rises to just under 6% and stays there through the end of the

in the investments needed for teleworking. We expect this category

forecast horizon.

to remain strong over the next few years as businesses continue to

require software to accompany their investments in information

Although that may appear high, historically it is not that high. And

processing equipment.

A

continuing innovation in areas like artificial intelligence will help to

raise the demand for capital. On top of that, the need for

Future investment is likely to gradually switch in response to

investments in climate remediation may be quite costly.

incentives to invest in climate change remediation. Such investment

may not appear as profitable as past investment. Current methods

The International Monetary Fund mentions estimates of US$3-US$6

of measuring the economy, and corporate profits, don ’ t correctly

trillion of spending per year required through 2050.11 US business

measure the cost of climate change, or the benefits from reducing

are likely to find plenty of uses for capital, even at interest rates that

greenhouse gas emissions.

remain elevated above the prepandemic level.

US government policy is now pointing companies toward more

Our forecast has nonresidential investment spending growing faster

investment in climate remediation, and an increasing share of

than GDP through the forecast horizon.

business investment spending is likely to be dedicated to this goal.

Source: Deloitte

30

Economic Feasibility

Global exports grew from 13% of global GDP in 1970 to 34% in 2012

Foreign trade

and have stabilized at that level. More recently, the pattern of trade

Recent US trade data has been surprisingly strong considering that

has changed. US imports from China have fallen, and US imports

both China and Europe — two major drivers of the global economy —

from other Asian countries are growing.

are experiencing slower than expected growth. After contributing to

growth for the last four quarters, net exports were slightly negative

This suggests that, while trade patterns may be changing, the United

in Q2 2023. And that ’ s despite a relatively strong dollar coupled with

States remains as fully connected to the rest of the world as it has

high inflation. Petroleum products are part of the story. But exports

A

been in the past.12 In 2022, exports accounted for 8.6% of GDP,

of automobiles and related products, consumer goods, and capital

above the 8.2% average in the five years before the pandemic.

goods have all grown surprisingly fast over the past year.

Government policy

Our forecast shows US exports growing at a good pace over the

Funding the federal government remains a source of significant risk

five-year horizon as the dollar falls (due to a reduction in global risk)

for the economy. Although the budget deal provided an agreed

and growth picks up abroad. Imports, however, will be restrained by

upon blueprint for House and Senate spending bills, it is becoming

the fall in demand for consumer durables.

less likely that both houses can agree on the details for the 12

appropriations bills by October 1. There is a risk — accounted for in

There is a lot of talk about “ deglobalization, ” meaning a reversal of

our recession scenario — that the US government could experience a

the dramatic increase in international trade that occurred in the past

shutdown.

few decades.

Source: Deloitte

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