Ask Our Experts 1/06/2019
Ask Our Experts: The Federal Reserve and Fears of Recession
By Beau Whitney, Senior Economist, New Frontier Data
Q: The Federal Reserve just increased interest rates to slow the growth of the U.S. economy, but the stock market has recently seen a steep decline, based in part to fears of a global recession. What happens to the U.S. cannabis market if there is a recession either globally or in the U.S?
A: While no industry is completely recession-proof, legal cannabis is an industry that would not be adversely impacted due to a recession. Consumer demand is consistent enough to weather an economic downturn, and with consistent demand comes stability.
Because there has been no U.S. recession since Colorado and Washington (in 2012) became the first two states to legalize adult-use cannabis, there is no historical data to predict how the cannabis industry could be impacted by a recession or economic slowdown. Information collected by New Frontier Data — including individual cannabis spending patterns, which to date have been consistent month over month and year over year — indicates that demand for cannabis might not fluctuate to the degrees seen in other industries.
In the past, relative constancy has been seen across emerging markets, such as demand for mobile devices and craft beer. Despite the downturn during the Great Recession, mobile technologies sustained a ramping stage and were generally insulated from the worst effects of the economy. Likewise, during that recession, the craft beer industry actually saw a massive global expansion.
Demand for cannabis may likewise stay steady despite any economic downturn. Generally, recessions carry more risk for investors than consumers. With the Federal Reserve raising interest rates, capital becomes more expensive, and investors become more discerning and attentive to bottom lines. Investors in the short term may shy away until they feel more confident about the economic climate and the possibility of another rate hike. That said, as noted by New Frontier Data CEO Giadha Aguirre de Carcer, “as other staple stocks may be more heavily negatively impacted in the public market, cannabis stocks may become more attractive as a higher-growth alternative, even if marginally, relatively mitigating any current perceived risk.”
Interestingly, one variable unique to the cannabis industry would be a possibility for federal legislative reform spurred by the new Congress, a Democratic majority in the House of Representatives, and a bipartisan STATES Act bill in the Senate. In such a scenario, any slowing of investments through a recession would likely be offset by historic opportunities for first movers.
In summary: While stock market declines of late show investors fleeing to safety and less speculative stocks, the growth rate of the North American cannabis market leads New Frontier Data to predict that investors will remain willing to invest in an emerging market and that demand will not be significantly diminished through a general economic slowdown.