by Clark Twiddy
In a report from Bloomberg News published last week, the probability of an economic downturn over the next 12 months stands at nearly 50 percent, up sharply from 30 percent odds just one month prior.
This is according to the latest monthly survey of economists and, if anything, other indicators point to an increasing pace of economy contraction.
With increasingly dim economic news beginning to appear like a worrisome storm front along the shores of our still-vibrant visitor economy, it’s worth considering for a moment what any kind of economic slowdown might look like for our business community and subsequent tax revenues.
While the temptation is to always make a prediction, perhaps it’s more useful to consider planning and probabilities for a range of outcomes.
Thinking through any potential slowdowns allows us to plan ahead. As economic news is almost always backward-facing, we might not actually confirm a recession until we’re actually in one and that may be too late to chart an optimal course.
Recent national level economic reporting seems to suggest that the likelihood of a recession appears to be increasing and, as such, the duration and magnitude of that recession each increase exponentially.
Let’s unpack a few basic assumptions.
Nationally, it makes sense that the Federal Reserve continues to raise interest rates in an effort to tackle historic inflation and by doing so deliberately slows down spending. Think less consumption along the Outer Banks.
In turn, it makes sense locally that as that slowdown begins to happen, our visitors begin to adopt a wait-and-see approach in their in their vacation planning decisions. This introduces greater uncertainty to our local businesses.
If we compare that uncertainty to the recent visitor market, we could soon be looking at a return to the 2018 or 2019 models as opposed to the boom years of the last three years.
Based on those assumptions, we then begin to think about how that trend will affect the critical intersection of the property markets and capital markets here on the Outer Banks.
On the property side, we know through historical comparisons that folks will most likely still come on vacation. We also know through past experience, that although they still book a stay, two variables tend to change: 1) when they book and 2) how much they’re willing to pay.
We might also consider what this might mean for how much they are willing to spend while visiting the area.
On the capital side, we know that the costs to borrow money (and make investments) will increase significantly and that means tourism investments get more expensive to buy and operate.
Experience once again teaches that certainty in tourism cash flows is, in many ways, just as important as overall prices and that linkage suggests discounting reminiscent of 2018 and 2019.
That intersection is also important because as things like interest rates increase, it makes sense to think we’ll see a slowdown in the sales (and transfer tax) market, but here’s the critical point in our consumption of data – any slowdown should be compared to a time frame beyond simply last year.
For example, real estate data shows that while the overall market is down this year as compared to last year, we’re still far in advance of 2019.
Better yet, it makes sense to be aware as a destination that our comparisons should include the decade leading up to the pandemic’s travel boom in addition to simply the past two or three years–for example, we know what happened in the market around 2008, or around 9/11 and the subsequent Iraq War. Those proxies may yet prove valuable in our memory.
Lastly, one important aspect in our planning is to question any volatility around the sheer number of visitors we’ll see next year.
Since 2020, the Outer Banks has seen millions of new visitors to the region, and as a destination, we’ve done a good job of converting many “second choicers” to “first choicers.”
How many of those visitors will return next year is a big question. When they’ll make their decision–and what they’re willing to pay–becomes the basis of our probabilities.
If national economic tides continue to move in their current direction, more locally we are likely looking at a reversion to the 2018 or 2019 visitor economy models simply because we’ve had so many new visitors over the past few years that likely will stick with our beaches through the coming economic cycle. Otherwise, I’d say we’d go backwards even more as a destination.
At a local leadership level, no matter the outcome, the proactive among us will have a variety of data at their fingertips. Revenue models for the 2018-19 window, the pandemic boom years, and also the ready models mentioned earlier should we see a greater retrenchment. Experience across market cycles will have never been more valuable.
One thing we know for certain though: it’ll be a bumpy ride and those who adapt rapidly to a range of worrisome probabilities, as many did during our recent pandemic, will be the ones who sail forth with the least turbulence in their operations.
Clark Twiddy is president of Twiddy & Company and serves as president on the board of the North Carolina Vacation Rental Managers Association (NCVRMA).