It’s time to batten down the hatches

By Tim Carl

NAPA VALLEY, Calif. — As we navigate uncertain economic tides, a prudent seafarer prepares for the worst. This adage finds resonance in economic forecasts — historically as reliable as predicting the weather or, as the joke among economists goes, they've predicted nine out of the last five recessions. While I'm not an economist, I am a mariner and also deeply interested in the study of the economy — not just as a quasi-science but as a window into global and local social dynamics and as a reflection of our collective human condition. Although no oracle can foresee economic futures with absolute certainty, data can illuminate the likely path ahead.

Tim Carl Render

Today's analysis explores data pointing to potential turbulence ahead for Napa Valley's cornerstone industries of wine and tourism, looming signs of a domestic economic contraction despite the underlying strength of the U.S. economy and cautionary signals for a decelerating global economy.

Drawing from wisdom imparted by my master chief in the Navy as we steered into stormy seas — better to err on the side of caution — it's time we consider battening down the hatches.

Economic dashboards

For a glimpse into the current state of the economy and the potential opportunities and risks on the horizon, I lean on a set of key metrics and indicators. These tools are useful for shedding light on our economic status and forecasting future directions. Below is a selection of these indicators, complete with references to their sources. I encourage you to not just take my analysis at face value but to delve into these resources yourself. Should you arrive at new insights or draw different conclusions, please share them either in the comments or by reaching out directly to NapaValleyFeatures@gmail.com. 

Summary of the findings in this article:

Napa Valley: The Napa Valley real estate sector is starting to see signs of softening, while increased competition in the wine business and changing consumer preferences point to challenges ahead.

United States: Economic indicators such as the Leading Economic Index and the inverted yield curve suggest an increased risk of recession. Surveys suggest pessimism and contraction, and consumers have low savings and high consumer debt, adding complexity to the economic landscape, potentially impacting economic stability.

The globe: The International Monetary Fund has expressed concerns about global economic growth, with GDP flattening in many regions. Unusual gas-price trends, despite supply cuts, may indicate decreasing global demand, reflecting an economic slowdown.

China: China is facing real estate challenges, along with a deficit in capital flows, trade imbalances, rising youth unemployment, declining GDP growth, currency depreciation, deflationary pressures, reduced housing supply, declining foreign direct investment and contracting manufacturing activity. As the world’s second largest economy, these factors collectively point to economic challenges in China and beyond.

The Napa Valley

Real estate market:

This bar graph, incorporating data from Redfin, portrays the year-over-year percentage changes in median home sale prices across various locations in the Napa Valley region. It highlights a YOY 8.3% increase in American Canyon and a modest 2.2% rise in Napa, contrasting sharply with significant decreases in other areas: a 26% drop in Calistoga, a substantial 43.3% decline in Yountville and a 17.2% reduction in St. Helena.

Case Shiller All-Transactions House Price Indices

The All-Transactions House Price Indices chart for Napa and the United States provides a historical perspective on home-price changes. The shaded areas on the chart represent the period of the Great Recession, during which all three indices experienced a significant downturn. Despite Napa's high absolute real estate prices, the percentage growth from the 1980 base level has been less dramatic than that of California as a whole. The chart also highlights the prolonged recovery period following the Great Recession, indicating that it took nearly a decade for housing prices in these markets to regain their pre-recession peak levels. This underscores the vulnerability of the housing market to economic downturns and the potential for lengthy recovery phases. (Data sourced from Federal Reserve Bank of St. Louis.)

Tourism: Occupancy rate and inflation

Visit Napa Valley's 2023 report revealed that the occupancy rate for fiscal year 2023 was 61%, a decline from 71.7% in 2019. Despite the decrease, revenue increased by 19.1% due to higher room rates. However, when factoring in inflation, the real revenue gains diminish significantly. The region's high operational costs further exacerbate this issue, potentially pushing any revenue gains into negative territory. These insights reflect the challenges faced by the tourism industry in Napa Valley. (Data from the 2023 Visit Napa Valley report.)

Unemployment in leisure and hospitality sector

In 2023, the employment in the leisure and hospitality sector in Napa declined by approximately 0.70% from September to October. Additionally, there has been a decrease of about 2.08% from the peak employment level of the year to the latest recorded data in October. These statistics are sourced from the U.S. Bureau of Labor Statistics, highlighting the softening employment trends in this crucial sector of Napa's economy.

Local Consumer Price Index (CPI - inflationary pressure)

This comparative chart visualizes the actual Consumer Price Index YOY increases for the Bay Area alongside the estimated national average for the year 2023. The Bay Area's CPI increase stands out at 14.47%, considerably higher than the estimated national average of 5.5%. This significant contrast underscores the more intense inflationary pressures in the Bay Area compared to the broader national economic landscape. The data sources include actual CPI figures for the Bay Area and an estimated national average CPI YOY increase from the U.S. Bureau of Labor Statistics. The chart reveals that the Bay Area experienced inflationary trends that significantly surpassed the national average, potentially impacting the cost of living and purchasing power for consumers in the region. (Data sourced from U.S. Bureau of Labor Statistics.)

Changes in wine preference

This waterfall chart illustrates the change in the number of wine-preferring adults in the United States between 2018 and 2023. It reveals a significant shift, with 14.3% of wine enthusiasts switching their preference toward beer and spirits during this period. (Data sourced from Gallup and the latest census statistics.)

The salmon-colored floating bar represents the loss of wine-preferring adults, amounting to approximately 7.63 million individuals. This analysis assumes a total U.S. population of 330 million in 2023, with approximately 254.1 million adults over 21 years of age, of which 63% (152.46 million adults) consume alcohol. This loss of wine enthusiasts coincides with a substantial recent increase in the number of wineries and wine brands in Napa Valley. (Data source from Gallup, U.S. Census Bureau, industry reports and Alcoholic Beverage Control of California.)

Wine industry dynamics: licenses, density and growth

Between 2016 and 2023 the number of Type 02 licenses in California saw a significant rise, increasing by 17.36% from 5,691 licenses to 6,724 licenses as of Nov. 30. (Data sourced from Alcoholic Beverage Control of California.)

Napa County's wine production represents only 4% of California's total wine production but holds a substantial 27.5% of the state's Type 02 winery licenses. This disproportion reflects a highly competitive environment for wine brands and producers in the area. (Data sourced from Alcoholic Beverage Control of California.)

The United States has experienced a consistent increase in the number of wineries over the past years, growing from 6,357 in 2009 to 11,691 in 2023. This upward trend signifies a compound annual growth rate of 4.45%, reflecting a flourishing market and increased interest in wine production. (Data sourced from various sources, including Wine Business Monthly, industry reports, Alcohol and Tobacco Tax and Trade Bureau and United States Department of Agriculture.)

California stands out as the dominant force in the U.S. wine industry, both in terms of the number of wineries and the level of wine production. The state hosts an overwhelming majority of wineries compared to other states, with the count far surpassing those found in Washington, New York, Oregon and other wine-producing states. Additionally, the volume of wine production in California is substantially higher than any other state. (Data sourced from various sources, including industry reports, Alcohol and Tobacco Tax and Trade Bureau and United States Department of Agriculture.)

Despite Napa County's reputation for its boutique wineries, the region's wine landscape is substantially shaped by large wine producers, including E. & J. Gallo Winery, The Wine Group, Trinchero Family Estates, Constellation Brands, Treasury Wine Estates and Bronco Wine Co., which together constitute 70% of the wine production in America. (Data sourced from Wine Business Monthly. Alcohol and Tobacco Tax and Trade Bureau, United States Department of Agriculture and industry reports.)

Auction results: Annual proceeds from wine auctions in the Napa Valley

The provided chart details the annual proceeds from wine auctions in Napa Valley from 2012 to 2023, expressed in millions of dollars. The peak year was 2015, with $18.7 million raised. Subsequently there was a downward trend, reaching a low point in 2022 with $1.5 million, indicating a 92% contraction from the peak. By 2023, there was a rebound to $3.4 million, yet this figure remained 82% lower than the 2015 peak. (Data sourced from various sources that include news outlets, industry reports and Napa Valley Vintners website and press releases.)

United States

Conference Board recession risk

The chart tracks the U.S. Leading Economic Index, a composite index that comprises critical economic measures such as the average work week, jobless claims, orders for consumer goods, ISM new orders, orders for capital goods, building permits, stock prices, the Leading Credit Index, interest rate spreads and consumer expectations. This index serves as a reliable indicator of the overall health of the economy. The chart displays the annualized six-month growth rate from 2000 to October 2023. The LEI's trajectory, marked by significant declines prior to recession periods identified by the NBER Business Cycle Dating Committee, points to a potential economic downturn. Notably, after leveling off in September, the LEI resumed its decline in October 2023, suggesting an increased risk of recession.

Inverted yield curve

The chart depicts the difference between the yields on 10-year and three-month U.S. Treasury securities from 1982 to the present. Inversions occur when the yield on shorter-term securities exceeds that of longer-term ones; in this case, when the three-month yield is higher than the 10-year yield, resulting in a negative spread. These inversions are significant because they often precede economic recessions, as reflected in the shaded areas indicating periods of U.S. recessions on the chart. The yield curve has historically been a reliable indicator of economic health, with an inversion suggesting investors have a pessimistic outlook on the economy's near-term prospects. The chart shows several instances where inversions were followed by recessions, evidenced by the correlation between the negative spread and the subsequent shaded areas. (Data and graph sourced from the Federal Reserve Bank of St. Louis.)

Federal funds rate

The chart displays the historical movement of the Federal Funds Effective Rate from 1955 to the present. The Federal Funds Effective Rate is the interest rate at which depository institutions trade federal funds (balances held at Federal Reserve Banks) with each other overnight. This rate is influential as it is used by the Federal Reserve (the central bank of the United States) as a tool to influence economic growth. When the Federal Reserve adjusts this rate, it affects monetary policy, liquidity and overall economic conditions. Typically, the Fed might raise the rate to cool inflation and lower it to stimulate economic growth. The chart indicates that significant increases in the rate often precede economic downturns, marked by the shaded areas that denote U.S. recessions. A notable pattern is that after a period of raising rates, when the Fed begins to reduce the rate, it can be an indicator that a recession is imminent or already underway, as higher interest rates can lead to decreased investment and spending. The chart shows several cycles of rate increases followed by sharp declines aligning with the onset of recessions. (Data and graph sourced from U.S. Federal Reserve Bank of St. Louis.)

Savings rate

The chart displays the United States Personal Savings Rate as reported by the U.S. Bureau of Economic Analysis. It shows a significant fluctuation in the savings rate from 2019 through September 2023. Notably, there was an extraordinary peak in April 2020, which coincides with the onset of the pandemic and the associated economic stimulus, leading to an all-time high savings rate of 32%. By September 2023, the savings rate had decreased to 3.4% from 4% in August of the same year. This decrease represents a shift in consumer behavior and economic conditions. From the peak in 2020 at 32% to the 3.4% in September 2023, there is a decrease of 28.6 percentage points, which represents an approximate 89.4% decline from the peak savings rate. (Data and graph sourced from Federal Reserve Bank of St. Louis.)

Consumer loan level

The chart presents the trend in consumer loans, specifically credit cards and other revolving plans, held by all commercial banks in the United States. The data show a significant growth in these types of consumer loans from just before 2005 up to the present. Notably, around 2008, during the financial crisis, there was a notable dip in consumer revolving credit. After this period, there has been a general increase in consumer credit, with a steep rise post-2020, breaking the $1 trillion mark for the first time in history. (Data and graph sourced from the Federal Reserve Bank of St. Louis.)

PMI

The link illustrates the trajectory of the United States ISM Purchasing Managers Index from 2020 through October 2023. The PMI is an economic indicator that reflects the vitality of the manufacturing sector, with values above 50 suggesting expansion and those below indicating contraction. In October 2023, the PMI recorded a value of 46.7, signaling a contraction and denoting a 39.19% decrease from its peak of 65 a year prior. This downturn represents the 11th consecutive month of contraction for U.S. manufacturing, underscoring the sector's challenges, which include higher borrowing costs and a decrease in new orders. (This information is provided by the Institute for Supply Management, a reputable source for manufacturing data.)

Money supply

The chart represents the United States Money Supply M1 from October 2022 to September 2023, depicting a decline in the money supply. M1 includes funds that are readily accessible for spending, such as cash, checking deposits and other liquid monies. In September 2023, the Money Supply M1 stood at $18,171 billion, a decrease from $18,303 billion in August 2023. This value represents a 12.07% decline from the peak value of $20,665 billion recorded in March 2022. This trend of a decreasing money supply can have various implications for the economy, including the potential for reduced liquidity and changes in interest rates. The source of this data is the Federal Reserve, a trusted authority on monetary matters. (Data and graph sourced from Federal Reserve Bank of St. Louis.)

Gas prices

The graph displays a recent trend in U.S. regular all formulations gas prices. Despite production cuts by major oil-producing entities such as Russia and OPEC, which would typically lead to higher prices due to decreased supply, the graph shows a decline in gas prices. Economic theory suggests that when supply is reduced, prices should increase if demand remains constant. Therefore, the falling gas prices might signal an underlying weakness in demand, potentially due to economic slowdowns, which could precede or coincide with economic recessions, as the shaded areas in the graph traditionally denote. This situation reflects complex dynamics in the global energy market, where the usual price mechanisms are being influenced by broader economic factors. (The data is sourced from the U.S. Energy Information Administration. Data and graph sourced from Federal Reserve Bank of St. Louis.)

Global

Global Manufacturing PMI heatmap

A heatmap representation of the Global Manufacturing PMI over a span from 2009 to 2023 with data up to October 2023 shows heightened risk of recession for most countries. As a reminder, the PMI is an indicator of the economic health of the manufacturing sector, with a score above 50 indicating expansion, below 50 indicating contraction and exactly 50 signifying no change. This heatmap showcases data from various countries, segmented into “Eurozone,” “Developed” and “Emerging” categories. The colors transition from red, representing a PMI below 50, to green, representing a PMI above 50, with yellow signifying a PMI at 50. The data suggest a nuanced picture of manufacturing across these regions, with certain periods of contraction and expansion visible. For instance, in the Eurozone, France and Germany show PMI figures of 43.4 and 39.6 for September 2023, respectively, indicating contraction. In contrast, India shows a PMI of 52.3 for September, reflecting growth. (The source of the data is S&P Global and J.P. Morgan Asset Management, and it includes quarterly averages for a comprehensive analysis.)

Global GDP growth trend

The line chart depicts the trend of annual percent changes in GDP from 1980 to a projected 2028, differentiating between “Emerging market and developing economies,” “Advanced economies” and the “World” average. The lines for each category show fluctuations over the years with periods of growth and contraction. In 2023, the projections indicate that emerging markets and developing economies are expected to grow by 4%, advanced economies by a meager 1.5% and the world economy by 3%. These projections can be crucial indicators for predicting potential recessions as sharp declines or slowdowns in growth rates can signal economic troubles ahead. The exact source of this data is not specified in the image, but such data is typically compiled by international financial institutions like the International Monetary Fund or the World Bank. (Data and graph sourced from the International Monetary Fund.)

China

China is experiencing a deficit in its capital and financial accounts, indicating a higher outflow of capital compared to inflow. This trend can be indicative of decreased confidence in the domestic economy or the pursuit of better investment returns abroad. It highlights challenges in managing capital flows and sustaining investor confidence.

Trade dynamics in China

Despite global production cutbacks, China's imports have slowed since a peak in early 2022 but remain higher than in 2021 when pandemic lockdowns were in effect. In a similar trend, exports have decreased, suggesting weakening external demand for Chinese goods. This trade imbalance underscores the complexity of China's economic situation and points to a global slowdown in demand, with both internal and external factors at play.

Youth unemployment in China

China's youth unemployment rate has surged to a new high, signaling significant challenges in young demographics finding employment amidst the economic slowdown.

GDP growth in China

China's GDP growth has significantly decreased compared to previous years, indicating a slowdown in economic activity and development.

Currency valuation in China

The Chinese yuan has experienced depreciation, which, while potentially enhancing the competitiveness of exports, also raises concerns about the economic outlook. Currency depreciation can impact the cost of imports and foreign debt servicing, further affecting the economic landscape.

Inflation trends in China

Deflationary pressures are evident in China, with flat consumer prices and shrinking factory-gate prices. These trends suggest weakening consumer demand and industrial activity.

Housing market in China

The Chinese real estate sector has seen broad and steady declines. This reduction in housing supply can lead to a slowdown in related economic activities and jobs, exacerbating unemployment issues. The housing market plays a crucial role in China's economy (28% of its GDP), and its dynamics are closely monitored.

Foreign direct investment in China

Official statistics indicate a decline in foreign direct investment into China. This decline suggests potential concerns among foreign investors about the stability and profitability of the Chinese market. FDI is an essential driver of economic growth, and its decline raises questions about China's attractiveness to foreign capital.

Manufacturing and non-manufacturing activity in China

The latest data reveal that China's manufacturing activity contracted in October, falling below the neutral 50-point mark that separates expansion from contraction. This decline in the manufacturing PMI is a significant concern, as manufacturing is a critical driver of the Chinese economy. It indicates challenges in fostering a sustainable economic recovery, with potential implications for unemployment and industrial output.

Rough seas ahead

Economic indicators are signaling a gathering storm for the U.S. economy. A retreat in the Leading Economic Index, coupled with an inverted yield curve and fluctuating consumer financial behaviors, suggests an oncoming squall of economic hardship. This is further complicated by a downturn in manufacturing activity, a constricting money supply and the volatile sway of fuel costs.

Tim Carl Render

China's economy, the second largest behind the United States, faces its own set of turbulent waters. Issues ranging from erratic capital flows and trade imbalances to soaring youth unemployment, GDP growth volatility, currency devaluation and deflationary pressures are certain to impact global trade.

In Napa Valley, the tempest is intensified by unique regional pressures. The anchor of tourism is slipping with declining occupancy rates. The local economy is also navigating through a sea of increasing winery competition and a current of slowing real estate prices. Furthermore, changing consumer tastes are drifting away from wine, signaling a potential change in the prevailing winds of demand.

And we haven’t even discussed Japan and Germany or the historical pattern where a soft landing often precedes hard landings. Nor have we examined that banks are increasingly cautious, focusing on hoarding cash, de-risking and hedging, or how the anticipated conclusion of the Bank Term Funding Program in March 2024 adds to the complexity of the financial landscape. Russia's ceasing of Western companies adds to the strain on the global economy, more developers defaulting on debt, changing commercial real estate market, wide-spread demographic constrictions and the rise of “doom spending.” Geopolitical tensions, ongoing conflicts and persistent supply-chain issues further exert downward pressure, exacerbating these challenges.

The confluence of these factors — both local and global — suggests that each of us may have to buckle up and prepare for rough seas ahead.

Tim Carl is a Napa Valley-based photojournalist.