E2: Economic Update with Nielsen - 08/14/20

EPISODE SUMMARY

Mr. Andrew Duguay, Prevedere Chief Economist, and Ms. Nicole Collida, Nielsen SVP & North American Consumer Intelligence Lead, weigh in on the latest economic update and impact on U.S. consumers. High unemployment, continued state restrictions, and delayed stimulus payments have precipitated the sharpest consumer confidence plunge in over 15 years.

In this latest consumer-focused report, Mr. Duguay and Ms. Collida delve into Q2 economic data, and research findings, shining a light on the pandemic led recession’s complex nature. As lowered stimulus payments impact U.S. households, 38% have shifted their behaviors as money becomes tighter, and job concerns are top of mind.

The updated report leverages Prevedere’s leading indicator economic modeling combined with Nielsen survey and category data to deep-dive into the collective consumer mindset.

Listen to learn how consumers are reacting to current economic challenges across industry segments through 2H-2020, as each leader discusses the latest economic-financial data and Nielsen’s research.

ABOUT SPEAKERS

Nicole Collida, Nielsen SVP & North American Consumer Intelligence Lead Engaging executive leader with expertise in sales, consulting and product activation. Experience leading high-performing teams, setting strategy and managing corporate initiatives, consistently exceeding financial commitments. Passionate challenger, champion of inclusion. Advisor to Fortune 500 companies, partnering to action on investments in data management, analytics and culture to drive profitable growth.

Andrew Duguay is a Chief Economist for Prevedere, a predictive analytics company that helps provides business leaders a real-time insight into their company’s future performance. Prior to his role at Prevedere, Andrew was a Senior Economist at ITR Economics. Andrew’s commentary and expertise have been featured in NPR, Reuters, and other publications. Andrew has an MBA and a degree in Economics. He has received a Certificate in Professional Forecasting from the Institute for Business Forecasting and Certificates in Economic Measurement, Applied Econometrics, and Time-Series Analysis and Forecasting from the National Association for Business Economics.

>> Welcome to the latest Economic Outlook with Consumer Focus Report. This is the third presentation in this series that monitors the US economy and consumer sentiment. This is a joint presentation by Prevedere, market leaders in intelligent forecasting through AI technology that monitors the world’s activity, identifying for future threats and opportunities on business performance.

And Nielsen, global measurement and data analytics company that provides the most complete and trusted view available of consumers and markets worldwide. Joining us again on today’s call is our special guest Nicole Kalita. Nicole is Nielsen’s senior vice president and North American consumer intelligence lead. We are pleased to have Nicole with us today as she is known throughout the industry for her ability to create differentiated value in the marketplace by measuring evolving consumer patterns.

Per usual, please welcome Prevedere’s chief economist, Andrew Duguay, who will provide an overview of the US economy with recession recovery scenarios throughout the rest of the year. Andrew, let’s begin with you to get an overall feel of the economy and what we’re seeing in terms of consumer sentiment.

>> Thanks Nicole, and today we’re gonna be talking about several different threads that are making their way through the US economy and have very large implications for the second half of the year. And then when Nicole goes into more detail about some of the Nielsen analytics and insights that are really making these insights real, I think it’s gonna be a very good presentation that we have here today.

There’s a lot to talk about. And of course, this always starts with how well are we doing at the health crisis. Because the health crisis has, as we’ve said before, necessitated the economic crisis, and the two are intangibly tied. And so while they continue to work on what’s the next stimulus package, how many people are losing their jobs, and we’re gonna be talking about all that and how that’s going to impact the consumer.

This all really backs up and starts with, do people feel healthy and safe. And on that front, it’s been a challenge, a challenging summer, right? We were anticipating seeing a very similar curve to maybe Asia and Europe, where you see a peak in April or May, downturn in cases.

And then start talking about how do we successfully reopen and boost an economy and a consumer that’s been embattled by a wave of virus? Now what we’re faced with is that the second wave is larger than the first. And the number of new cases, while it has been decreasing in recent days, it’s still more elevated than it was during the April May peak when most of the economy was shut down.

Now we have a more balanced approach. So some states have increased their restrictions. But overall, we’re trying to just adjust to economic life in this new world. And I think that is really the theme for the second half of the year and even in 2021, is that where businesses might have initially been planning on how do we temporarily deal with this anomaly.

It’s really shifted to, how do we adapt to a new normal with a consumer that is likely going to be changed permanently, semi-permanently in many different ways. Because the the length and depth of this crisis and how it’s going to be impactful. Now, the health crisis is evolved into what we’re saying as an economic crisis of sorts.

It’s a recession, right, and we’ve had many recessions in the past and we’re gonna talk about, well, what does the recession minded consumer look like going forward. We have a large hole to dig ourselves out of. Jobless claims in the US are still above 1 million new claims every single week, and that is a staggeringly high number.

For some context, the last recession, the Great Recession, never had claims more than 700,000 in a given week. And now we’re going on several months where we’re seeing over 1 million claims every single week. This leaves an economy that is very vulnerable and also very dependent on stimulus measures.

And stimulus measures have expiration dates as we’ve experienced. We’re now in a sort of limbo phase with the temporary extension of some benefits at slightly reduced rates for unemployment payments from the federal government from $600 a week to $400. And Congress still battling out what does permanency look like?

So the good news is that we didn’t go from 600 to 0 all at once. I think the bad news is that if we’re trying to boost consumer confidence and their willingness to spend dollars, leaving everything up to the last minute and uncertain and temporary extensions. Is not the way to get consumers comfortable that the economy or our government is gonna be in a good spot to help us through very tough and challenging times we’re going to face over the next couple quarters as the economy moves through a recession, and a global recession as that, right?

What the US economy is going through, it’s not alone. Cases are rising in India, Brazil, and everywhere even where cases are not rising, we are seeing a global recession. And that’s impacting consumers all around the world and in the United States as well as jobs and industries that creates the incomes that consumers will then spend.

So on a positive side, only two states are currently seeing increasing number of cases. However, the slow pace of decline has really significantly prolonged those timelines for hey, when do we get back to normal? I think it’s really about adjusting to the new normal now rather than getting back to some previous normal when it comes to consumer habits and we’ll be diving into that in more detail.

So with stimulus, does it matter I think is the big question, what happens if we don’t pass another stimulus? And unfortunately, we’re in this situation right now in the US economy where it does matter. It does matter and it matters a lot. And here’s a good example. Just taking a look at the unemployment benefits alone, not talking about the $1,200 stimulus payments or different business bailouts or anything that the Federal Reserve is doing.

But just looking at just unemployment payments alone, how have these impacted people’s spending habits? Well, there’s a recent study done by JPMorgan Chase, showing a control group of people who have lost their jobs since COVID has happened, and have therefore been collecting unemployment payments and their spending habits over time.

Compared to another control group which has had no changes in employment. What we see is that if you had no changes in your employment status since coronavirus happened, on average your spending around 10% less than you were pre-crisis levels. This is natural during a recession, because people move more conservative.

They increase their savings, they might’ve gotten a hit with the stock market volatility. It’s just natural during recessions, people cut back. The control group who actually lost their job and had their incomes replaced by supplemental unemployment payouts actually increase they’re spending by about 10%. So when we think about changing these unemployment benefits, regardless of how you feel about it, whether it’s the right thing to do to have people get paid more or less on unemployment than when they’re working.

The economic reality is that many retailers are actually depending on These unemployment payouts to go to these unemployed people, because they’re the ones turning around and spending it. And this matters a lot for obviously consumer staples, but also other areas of the economy as well. So we’ve seen a lot of shifting and spending, obviously people spending less at restaurants and more in grocery stores.

But we’ve also been seeing shifts in the volumes that people are spending. And sometimes in very unorthodox or unassumed ways such as this phenomena that we’ve been seeing over the last few months. Where the aggressive stimulus that the US government has put out to date has actually turned into increased spending amongst many Americans.

And so when we talk about the economic realities in the second half, we really do need to talk about. Hey, we’re gonna continue to see very tough economic conditions at a job climate. Are we gonna have the backstop of these stimulus payments to keep consumer spending at the rate they are?

Or are we gonna see really a pullback in total consumer spending, if we see a pullback in some government stimulus? So, extending benefits for extenuating circumstances. It’s just really the case that we’re in, is that the government stimulus is propping up a lot of different sectors in many different ways right now.

The other thing that we have to consider when we’re talking about planning or thinking about this second half of the year and out into 2021. Is that you don’t go in out of recessions the way you came in. And one of the areas we’ve been talking about is the fact that geography matters in industry matters.

And we call these micro-recessions and micro-recoveries. And this is gonna be very pronounced in this economic cycle versus some traditional recessions. Now, traditionally in a recession, when the economy moves into recession, most every industry also moves into recession. But what we’ve seen is that, because of the nature of the COVID-19 being a health pandemic changing a lot of consumer habits.

What we’ve seen is that most industries are getting these winners and losers. Either the share of wallet might be going down collectively and that’s the definition of recession rate contraction. But many industries are actually growing because there Increasing their share of wallet. More we’re seeing is also that’s the case in many different geographies as well.

So as there’s a flight from urban centers, or there’s different stratifications from exposure to oil and gas industry or the travel and leisure industry. What we’re seeing is that there’s wide mounts measures in the different geographies that people’s recoveries are. And here’s a good example and this is a restaurant example so it’s to the extreme.

But you see that before COVID, whether you’re looking at Florida or California or anywhere else. Relatively balanced and stable growth in the restaurant sector followed by a complete shutdown of everything. Which means a very narrow range of differences between states. But then when we start to look at May, June and July, it’s really about state policy, it’s about people’s comfort level and going out to eat.

And you’re getting wide ranges of performance across different States. Looking at it a different way, if we want to look at total measures of state performance. We’ve never seen wider gaps in state performance, than at any time in really the last 50 years that we have measurements. So this is an index put out by the Philadelphia Federal Reserve, it’s called a State Coincident Index.

And this is really a reflection of state-level GDPs, so it looks at wages and hours, unemployment. And what we see is that the changes that are happening on a state by state, this are vastly different. So while most are contracting, the rate of contraction is actually varied quite wildly amongst different states.

And this has to do with a number of different factors, right. So one is the number of COVID cases. But I think more importantly than that, it’s how the state is responding to those COVID cases. And whether they’re mandating closures and restrictions. Some states that have less closures and restrictions might have more coronavirus cases but their economies might have been less restricted.

And so they might be lighter shades of red on this, so such as in the mid southwest and the southeast. But also where you are geographically, housing costs and density are also very important things to consider. If you lost your job and your very high cost area the timeline for you is a lot shorter to recovery or crisis.

Than in some of the more rural areas that are more affordable. And then if you look at different states like the reliance on impacted tourism, Hawaii is a good example of this. You have to fly there and people aren’t flying today and Hawaii has a very negative impact.

But also other industries such as oil and gas that have just been crushed. You look at North Dakota, which was typically very isolated or counter cyclic in a lot of recessions. Is seeing some of the worst impacts because of its high exposure to the the oil and shale gas on its economy.

And one of the other things that have to be considered if you’re thinking about targeting different geographies, in your plans for 2021. Is how healthy our state government budgets? That can vary wildly from state to state depending on how conservative they were over the last ten years of economic growth.

Because every state is feeling some sort of financial crisis right now. Most states have to balance their budgets, unlike our federal government. And so money gets really tight when the economy goes down. And we’re seeing these unprecedented levels of crisis are having huge impacts on state government budgets.

And this can reflect, on the local economy and how much that the local governments can actually help boost the economy. Or be a counterweight and actually make the economy worse if they are not in a good financial position to really help the people who are in that state.

So it’s another thing to factor in when considering what states are gonna emerge from this quicker than other states. The various levels of performance on a state by state basis, as I mentioned, have never been wider. And here’s a good example. When we look at all these state economic indexes combined to get a total US index.

What we have charted here is the maximum or the best performing state in the one light blue range and then below that is the worst performing state. And you can see normally during recessions is when you see the biggest divergence between state performance, the good and the bad.

Economic growth tends to make most states very similar to each other and their local economies, but recessions tend to bring out the differences. But if we look at all previous recessions, we’ve never seen divergencies as strong as we have today. So this means that local economics really do matter in this crisis, and that’s really going to impact how consumers act and behave.

And those behaviors can be very different on a state by state or even city by city level. Depending on some of those different factors that we described previously. So with that, a lot of this does depend on consumer health and consumer confidence. And to carry on this conversation we’re gonna turn it over right now to Nicole at Nielsen.

To talk more about the Nielsen consumer and some of the insights that she has seen.

>> Great, thanks so much Andrew. I’m really excited to be here to talk about how consumer behavior is shifting. You hit the nail on the head, recessions really bring out these divergent behaviors.

And it’s quite interesting because for the first several weeks of the pandemic, we were getting so many questions about how recessionary impact Would impact consumer behavior and what we should be expecting to see over the weeks and months to come. And what’s most interesting about that is we really didn’t see that behavior materialize early in the pandemic.

What we saw was that consumers were responding with health restrictions in mind. Their behavior was intricately linked to their health and safety. And Andrew, you talked a little bit about that as you kick things off as well. Now, with the recessionary impacts coming to the forefront, we really expect to see behavior shift yet again.

And we believe that consumers are going to be making decisions with these economic restrictions in mind. More so than health restrictions that they did early in the pandemic. Were really at a tipping point. And as a result of that, we’re starting to see these shifts emerge. So today we’ll delve a little bit more into what we might expect to see over the next several weeks and months.

Let’s start with one of the biggest things we’ve seen in recent months and really, really in history, right? When we think about the consumer confidence index. Over the course of the second quarter of 2020, we saw the sharpest plunge in the last 15 years. We plunged by 14 points in total consumer confidence over the course of Q2 2020.

When you look back to 2008 and 2009, the CCI or Consumer Confidence Index dropped by 20 points, but that was over five quarters. It dropped to a low of 77 and that took seven years for us to recover from. So we saw a slow decline in 2009 take seven years of recovery.

And we’re experiencing an unprecedented drop, the largest single drop in history over the past quarter that we just experienced. So it’s really hard to tell what the potential timeline for recovery this time around will look like. And just how long this sharp decline will take for us to gain back.

All of the Consumer Confidence Index work is underpinned most notably this quarter by job concerns. North America benefited from a higher CCI overall to start, but in this area we dropped by 19 points over the last quarter. The percent of survey respondents who consider the job market favorable was the biggest driver of that.

And in North America that favourability around job prospects drops by 24 points. North America also saw the largest single decline in job prospect favorability more so than anyone else in the globe. So the largest single global decline as well. When we think about health concerns, as I mentioned when I kicked off, early in the pandemic we saw key trans emerge.

And they really were related to health. We saw things like pantry letting on staples, we saw a surge in DIY beauty which was something that was relatively unexpected when the pandemic kicked off. And of course, we saw health items being stockpiled in homes, things like hand sanitizers, things like coughing cold and different at home remedies surged in really unexpected ways.

And we saw an incredible shift in the way consumers shop in terms of location. E-commerce surged early in the pandemic as consumers didn’t want to leave their house. They were either picking up online orders at various retailers, or partnering with other retailers for in home delivery. At the same time though, what’s so interesting to me is that traditional grocery surged in terms of channel preference during the early pandemic.

It’s important to note because over time we’ve really seen a general decline in the way consumers engage with the grocery channel. And as consumers looked to go back to that idea of one stop shopping, we saw traditional grocers benefit. Even something as simple as cosmetics surged in grocery and after years of declining shelf sets, it’s really interesting to see a trend like that pop.

As you think about the impact of these health-related concerns on how consumers are behaving. But over the months to come, we really do expect to see a new shift emerge. An astonishing 24% of American households are telling us that their income has declined in some way as a result of COVID-19.

So consider that number, that’s a huge amount of American households, especially when you think about the stimulus dollars that have infused the market. And the federal unemployment benefits that have been in play to date. After all of that, a quarter of households are still telling us that their income has been reduced.

And so now, we believe that impact is going to be felt even further. A lot of these stimulus acts are coming to an end, or as Andrew mentioned, are really uncertain, and under temporary extensions. And so, we expect that further job losses is really looming, even as you think about something like PPQ ending.

And businesses really having to think about how they staff for their own really sustainability. While almost 24%, almost one-fourth of households were impacted with financial loss, we know that the scale of impact varies. Based on just how significant that loss was to the different households. So we took a look at households and we segmented each household based on financial impact.

And we looked at a scale of households that were impacted in more of an insulated fashion. To those that were really constrained and exposed to financial risk as a result of the pandemic. On the left, you can see those that have less financial impact. You can see that when you think about health minded crowd avoiders, or conscientious store shoppers, that make up together almost half of the households.

That we surveyed, half of representative of half of the US population. You can see that they’re still really operating with health minded concerns at the forefront. They’re changing the way they interact with different stores or the way they select outlets but they’re doing it from a health minded standpoint.

Seeking safer routes to a lot of the same behaviors that they’ve previously had. But those on the right side of this chart and those are really are at risk solution seekers or are stressed strugglers are beginning to emerge as a very prominent group of households in the US.

These are the households that were most impacted by financial struggle or financial loss. And these are the households that also have had to shift their behavior most dramatically. To add to that as recessionary impacts start to make themselves seen, these are the households that we expect to experience continued shifts in behavior as they are already our most at risk households.

These households are behaving very differently. They can’t afford the pantry load for their households. So while health is still a concern, they’re actually often making more trips. But making smaller trips to channels to fulfill their household needs without having to break the budget through pantry loading in one big one stop shop stockpiling, type of trip.

So we’re going to see these changes. So far, it’s been somewhat of a shorter term impact. But as, again, these economic indicators tell us that the recession is here and job loss, further loss, could be looming. We have to pay a lot closer attention. Andrew talked about the fact that stimulus really matters.

And these are the households that those stimulus dollars are gonna matter most to as we think about how their behavior will shift. It is important to talk a little bit about how stimulus did affect spending. 30% of the households that we surveyed did tell us that they at least partially funded a lot of their household goods with these stimulus checks.

And we’ll break down, as we roll through a little bit more detail here, we’ll break down the categories that were most impacted. But this really did create an unexpected behavior change. Spending didn’t fall off at the rate we expected early on. I mentioned early in this presentation that we got so many questions about what to expect as a result of the pandemic on recessionary behaviors.

Those just didn’t materialize early in the pandemic. Now, we’re seeing how much that stimulus matters and with these impacted households beginning to spend less, we have to prepare for, really a continued shift in purchasing. As the pandemic spread throughout the US, consumers cut their spending in a lot of categories.

This chart, I’ll talk you through how we’re thinking about this here because I think it’s quite compelling. Categories like alcohol, cosmetics, produce, other non alcoholic beverages, early in the pandemic spending was cut in those categories and we saw dramatic drops in volume early on. But as stimulus dollars were introduced to the market, these categories rebounded, some more than others.

I think in our last segment, Andrew we spent quite a lot of time talking about the alcohol trends that we were seeing. But in many areas and channels we saw alcohol surging at maybe 30% or more growth, year over year, in some of the weeks as stimulus flooded the market.

So that said, stimulus dollars lead to declines in other areas and those were around staples like prepared foods, dairy, and pasta. As stimulus dollars flooded the market, those categories tended to tail off in terms of volume. So what does this mean for now? Well, as you think about stimulus running dry and job loss looming, the categories that originally benefited from early pandemic behavior are going to have notable tail winds.

So we think those categories, like frozen pizza, will see tail winds as we move from a health minded impact into an economic or recessionary minded impact. And the categories that benefited from stimulus dollars flooding the market are those that are now likely to face a lot of headwinds.

As consumers are making tough choices about how they spend the limited dollars that they have for their households. Channel preference is also really likely to shift as consumers make these difficult decisions. We talked previously about the large increases that we saw early in the pandemic and grocery for one stop shopping and an e-commerce for ease of shopping or regarding health and safety concerns.

But it’s important to think about how we should understand channel shifting in today’s world as consumers prioritize economics rather than just health. The data shows us that we really should expect some shifts. We are predicting continued declines in areas like drug and new declines in areas like the club channel.

This will be driven by just consumers making fewer trips. I think drug will likely still be a result of many health and wellness concerns and fewer small trips. But club will likely be impacted by less stock up trips and less disposable income for many of these households. Whereas value, the value channel was really flat previously, we think an economic shift will bring a lot of share gains to that channel, as consumers really focus on price and look to the value channel to meet most of those needs.

We do think grocery and e-com will continue to maintain their strength. While the basket makeup may change in these channels, we think they’ll remain strengths as consumers have really shifted their habits and that new normal with regard to those channel preferences, is here to stay. Consumers are prepping for a recession.

In July, we surveyed consumers, and asked them about the impact that COVID had had on their lives, on their financial outcomes. But we also asked them about the top five actions they would take if this economic situation continues to worsen. So this starts to shine a flashlight on how consumers are thinking about where they might take their spending or their behavior in the future.

And we saw a lot of behaviors rise that were similar to those behaviors that emerged during the Great Recession in 2008 and 2009 as well. They look really similar, consumers will be cooking at home. Despite less money, consumers are stating that they plan to pantry load and look for bulk buying.

This is one where I think stated sentiment could differ a bit from what we actually see in the market as those financial pressures increase on households. Lower prices will continue to be important for consumers. And that means dealing will be increasingly important as well. In order to drive traffic at retail, in order to help pressured consumers make smart decisions about their brands that they’re purchasing, both retailers and manufacturers are gonna have to think about promotional strategy.

And what that looks like in this new financially constrained but also pandemic constrained environment. So it’s definitely an interesting time to be thinking about strategy for the back half of this year and into 2021, for both our retailer and manufacturer partners. The reality for many consumers around the world really is that they have to stretch their dollars further.

In-home spending is going to be prioritized. We know not only are consumers gonna cut back on out of home discretionary spending because of health and safety concerns. But we also expect that they’ll cut back on those discretionary dollars, simply because there aren’t as many of them to go around as financial pressures continue to emerge.

Interestingly, consumers are going to be more risk averse. They’re going to be looking for those assurances that they’re really making the right decisions. And that they’re able to match their needs to the value they can derive from the money that they spend as they make these difficult choices.

So it’s never really been more important for brands and for retailers to truly understand what’s driving consumer purchase behavior. What are the decisions consumers are making before they even get to their online or physical shelf? And how any product or service that you offer will deliver value, will deliver quality, and will really give consumers peace of mind through efficacy.

Through really delivering on the commitments that you’re making to consumers when they choose to spend their dollars with you. It’s clear that with limited dollars there will be really little space for second chances as brands and retailers engage with consumers. So finally, I would implore everyone to think about the fact that, it is really important to understand consumers and to segment them based on their behavior.

But at the end of the day, a segmentation is only as useful as the activation strategy that you put behind it. So ensuring that the strategy that you set aligns with consumer groups is going to be critical to your long-term success. As we move through these recessionary behaviors, and this shifting consumer spending, to have economics at the forefront rather than just health and safety.

So with that, Nicole and Andrew, thank you so much for inviting me to speak about consumer behaviors. And I’m really excited to come together for the next segment that we’ll have together that will look even deeper into how consumers are actually changing behavior as this recession takes hold.

>> Thank you both for sharing your expertise with us, very interesting. I think we all agree that this conversation is vital across all industries throughout the country. Again, your perspectives are invaluable. Nicole, we sincerely appreciate you taking the time to join us. Andrew, as always, thank you. So this concludes this consumer focused economic update.

Stay tuned for ongoing report series with Nielsen. As Nicole mentioned, we will be continuing to examine the evolving landscape around the consumer and the economy. If you have questions for either Nicole or Andrew, feel free to contact me and I will forward your inquiry on. Thank you.


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