Recession on the way? Consumers think it’s already here

U.S. consumers have taken a decidedly negative economic outlook, as a majority think the nation already is in recession and worry about high prices on essential goods and services, according to the April Consumer Sentiment Survey by Numerator.

However, the United States doesn’t appear to be in recession, and the grocery retail sector faces a different economic scenario than in the past three recessionary periods, an analysis by Coresight Research indicates.

Of the more than 1,000 consumers in Numerator’s monthly poll, 69% believe the United States is now experiencing an economic recession, and 68% expect it to get worse in the next several months, up four points from March. The market data specialist also found that 61% of consumers are highly concerned about the economy, up four percentage points from March.

Rising prices for essential goods and services like food and housing (74%) and gas/fuel (67%) were the top economic concerns cited by consumers. They also named rising prices on other goods and services (60%), impact on retirement/pension plans (41%), stock market stability (32%), government benefit cutbacks (31%), product/supply shortages (31%), housing market stability (28%), labor shortages (23%) and job security/unemployment (18%) as among their chief economic worries.

Source: Numerator April 2023 Consumer Sentiment Survey

Inflation perceptions and actions

Seventy-five percent of respondents think inflation will rise in the next several months—though the Consumer Price Index has declined in recent months—and 65% reported that elevated gas prices have made it difficult to afford other items, according to Numerator. Unsurprisingly, 41% of those surveyed cited personal finances as their primary concern going forward.

Looking ahead, consumers anticipate taking action on discretionary spending in response to their economic concerns, Numerator’s findings indicate. Forty-one percent aim to cut back spending on restaurants, bars and food delivery services, followed by less spending on electronics (38%), travel (37%), apparel (36%), toys/games/arts and crafts (27%), snacks and candy (25%), alcohol (23%), health and beauty products (20%), home/garden supplies (19%) and household products (17%).

Similarly, shoppers express discomfort spending or allocating their money in a variety of areas. Seventy-one percent of those polled said they’re uncomfortable “splurging” on premium or luxury items, and 58% feel discomfort nowadays in spending money on nonessential items. They’re also not comfortable spending on nonessential travel or a vacation (cited by 56%) and at restaurants and bars or for food delivery (43%). On the financial side, there’s consumer discomfort in withdrawing funds from savings or retirement accounts to spend now (72%), investing in the stock market (58%) and depositing money into savings or retirement accounts for the future (32%).

Source: Numerator April 2023 Consumer Sentiment Survey

Recession picture

In terms of gross domestic product, the U.S. economy isn’t in a recession. GDP rose in the third ( 3.2%) and fourth ( 2.6%) quarters of 2022 following dips of -0.6% in the second and -1.6% in the first quarter, which came after six consecutive quarters of growth, according to the U.S. Bureau of Economic Analysis. The first-quarter 2023 U.S. GDP report comes out on Thursday.

Coresight Research assessed the outlook for a recession by reviewing conditions in the three previous recessions—the DotCom recession (2001), the Great Recession (2008-09) and the COVID-19 recession (2020)—and comparing them to the current situation in its “U.S. Grocery Retail and Recessions: Learnings from the Past and Recommendations for the Future” study, released in March.

“As a fundamentally nondiscretionary/noncyclical sector, grocery retail tends to be a relative outperformer in tough economic times—but that does not mean the sector does not feel the pressure in recessions,” Coresight said in the report. “The U.S. economy grew solidly (circa 3%) in the third and fourth quarters of 2022 (latest), following declines in the prior two quarters. Moreover, with China opening up from COVID-19 restrictions and energy prices easing in Europe, the outlook for the global economy is looking more favorable than it recently did. However, there remains some degree of economic uncertainty.”

During the DotCom recession, grocery retail sales growth climbed to 3.9% in 2001 but then sharply decelerated in 2002, when same-store sales declined as retailers were pushed to cut prices to stay competitive, Coresight explained in the study. From Q4 2000 to Q4 2001, the number of jobless jumped from 2 million to 8 million and the unemployment rate rose from 4% to 5.6%, hovering around 6% monthly during 2002 and peaking at 6.3% in mid-2003. In 2001, the grocery arena saw retailers pursue supermarket acquisition strategies, Coresight noted, and the start of the millennium included some bankruptcies and the emergence of online grocery.

Source: Numerator April 2023 Consumer Sentiment Survey

The Great Recession about a half-decade later was evidenced by a harder-hit consumer and a noticeable turn toward value shopping. According to Coresight, elevated inflation hoisted grocery industry revenue in 2008, yet that trend deflated in 2009. “Like in (or after) the prior recession, the sharp downturn in grocery came not initially but in the second year,” the research firm said in the report. “Shoppers in every income bracket faced budgetary pressures and made different choices relating to food and grocery. The recession affected shoppers’ decisions and challenged retailers to win over price-conscious shoppers.” Citing 2009 shopper trend data from the group formerly known as the Food Marketing Institute (FMI), Coresight noted that consumers embraced hunting for grocery special offers, buying store brands or lower-priced brands, and purchasing only what was on their shopping lists, which impacted grocery volumes.

More recently, in the COVID-19 recession, grocery prospered as other sectors of the economy—notably restaurants/foodservice—were devastated. Grocery sales jumped 9.4% as most shoppers turned toward food-at-home and away from restaurants, Coresight’s report said. The sharp changes in demand and customer behavior led grocers to shell out another $12 billion in payroll and incentive pay and invest $1.5 billion in technology to support sudden spikes in overall demand as well as in online ordering, curbside pickup and home delivery, the study said, citing March 2021 pandemic research from FMI.

What’s ahead?

Strong demand for food-at-home continues to this day, while food-away-from-home spending has bounced back above its pre-pandemic level. But Coresight noted that the current economic situation for the grocery space presents some key contrasts.

“High-quality discount formats are in greater abundance than ever before, representing a marked difference to prior recessions,” Coresight observed in the report. “Also adding greater choice, e-commerce has become a significant channel in grocery retail.”

Coresight’s report described high inflation as “one of the biggest differences between now and prior entry points into recession.” But the March CPI of 5% annual growth marked the ninth-straight month of year-over-year decreases, while the food-at-home index continued its steady decline from yearly growth in 2022 and fell 0.3% on a month-to-month basis in March, the first decline since September 2020. In 2021 and 2022, the food producer price index (PPI) well-outpaced the CPI—reflecting that food retailers absorbed some cost increases, Coresight said—yet recent data shows a relaxation in the PPI.

“The current economic challenges reflect an unusual confluence of a number of forces, whereas prior recessions tended to see one dominant factor,” according to Coresight. “Current economic challenges include disruptions in geopolitical conditions, a tight labor market, supply chain bottlenecks and higher gas/energy prices than before.”

From Coresight Research, “U.S. Grocery Retail and Recessions: Learnings from the Past and Recommendations for the Future,” March 2023

The Coresight study reflects a forecast earlier this year by founder and CEO Deborah Weinswig, who said she doesn’t expect a recession this year and is positive on the outlook for grocery retail. Improvement in key economic indicators—notably inflation—plus strong food-at-home demand and consumers’ return to shopping in stores, among other trends, are playing in grocery retailers’ favor. What’s more, she explained, the nation continues to see historically low unemployment plus real wage growth at lower income levels, uncharacteristic of prior recessionary periods.

“So I think 2023 will turn out to be better than people expect,” Weinswig told WGB in an interview at the FMI Midwinter Executive Conference. “And, going back to retail, there are so many ways that [companies] can monetize. We should see a great performance in the stocks as well.”

Since then, the economy also appears to have weathered a potential banking crisis after the Silicon Valley Bank failure. Coresight noted in its recession report that the economic picture remains uncertain, and grocery retailers can take various strategies. Recommendations include focusing on long-term market share, offering strong options to food-away-from-home, capitalizing on the “lipstick effect” (small treats in place of costlier luxuries), building value perception via pricing, expanding private label, leveraging loyalty programs for competitive advantage, and optimizing profit margins by monetizing retail media and data.

“Retailers should be prudent with passing cost inflation on to their customers, even if that means some erosion of margins in the short term,” Coresight’s study said. “Increasing prices runs the risk of pricing out a portion of their customer base, which may initially trade down to value-focused rivals to dial out inflation but mostly stick with them, even when the economy improves. Holding off pricing actions by absorbing cost increases (and sacrificing margins) will help grocery retailers to preserve market share and build long-term customer loyalty and trust.”