Are we headed for a recession here in the United States? Or are we already there? What about the future — the second half of 2022 and 2023?
If you follow economic news reports you have encountered all sorts of answers to these questions. And you can be forgiven for being a little confused and maybe quite a lot frustrated that the answers to these important questions are not clearer. Herewith a brief guide for the perplexed with implications for the wine sector.
The Recession Question
The “rule-of-thumb” definition of a recession is when there are two consecutive quarters of falling gross domestic product (GDP). The U.S. economy is in a recession now by this definition because GDP fell in both the first and second quarters of 2022 (second quarter data subject to revision). By this measure, many of the world’s most important economies are either in recession, too, or teetering on the brink.
The two-quarter rule is very useful, but it is not the final world. The National Bureau on Economic Research (NBER) more formally defines a recession in a way that stresses depth, diffusion, and duration: a recession is a significant decline in economic activity that is spread across the economy and lasts more than a few months.
The NBER’s more nuanced definition is better than the two-quarter rule, but it has some downsides. How significant is significant, for example? And how widely spread need the decline be? There is also the problem, unavoidable with lagged economic indicators, that a recession can only be declared well after it has started and will probably be over before the conclusion is called.
So we might be in a recession now — one that started months ago in fact — or we might not. We will only know for sure later on — perhaps when the recession (if there is one) is already over. Argggh!
Up, Down, Twist
If you follow business and finance news you will find evidence to back up any hypothesis you may have about a recession. Prices in some sectors are rising quickly (have you bought a airline ticket recently?) and plunging steeply in other areas.
There are plenty of stories of firms with squeezed profits, declining sales, and employee lay-offs. But there are also stories about rising sales and profits and, of course, the labor market puzzle, where the number of unfilled positions is about twice the number of people who say they are looking for work (but apparently cannot find it).
Last week’s job report was unexpectedly strong — the unemployment rate is only 3.5% and total employment is back to the pre-pandemic level — suggesting that the U.S. is not currently in recession, despite what the GDP figures say. Ironically, some analysts speculate that this good jobs news actually increases the odds of bad news in the near future. The reasoning is that the Federal Reserve will be forced to raise interest rates even higher now in order to slow control demand-driven inflationary pressures.
What’s the story? Is the economy up or down? The correct answer (which applies to wine, too) is … yes. If you are looking for a generalized answer to the recession question you won’t find it. Maybe it is best to say that the economy is twisting. The devil is in the details here and the answer you get depends upon where you look and how.
The Price is Right?
There are several reasons for this complicated picture. One of them is that the economy — like the wine market — is never all one way or another. Like the climate, it is always running hotter in some areas and colder elsewhere.
But another, particular to this moment, is the fact of rapid inflation because an inflationary economy works by different rules. In an economic system with stable prices, consumers cut back purchases when employment falls or when there is fear of unemployment. In an inflationary economy, the pressure to cut back spending affects a much broader set of consumers who find their budget squeezed by rising prices of necessities. Higher energy and housing prices (although moderating somewhat in recent weeks) have put the squeeze on millions of households regardless of job market status.
And so that’s what we are seeing now. So maybe the recession question isn’t the right one to be asking.
The Squeeze: A Tale of Two Worlds?
The conventional wisdom is that wine is recession-proof. Maybe. But an inflationary squeeze and the twist it creates is different and I don’t see how wine sales can escape unscathed.
Under these circumstances it is more important than ever to know your customers and the product chain that connects them with your business. Based on recent quarterly reports, for example, it looks like selling wine into mass market Walmart World’s part of the retail spectrum, where both the retailer and its clients seem to be really feeling the squeeze — is much different from selling wine into high income Costco World, where the squeeze is still on but the impact seems more moderate. So far.
Excellent article Mike. Thank you.
Really enjoyed this article,