Grocery Sales and Consumer Sentiment

Is consumer sentiment a good gauge for how people will spend in the future? The hypothesis is when sentiment is moving up that people will spend more and when it is falling they will spend less. Does this hold for all industries? Are some industries more aligned with consumer sentiment than others?

I specifically wondered if consumer sentiment could be used to help me predict future grocery sales. The first chart below looks at grocery sales YOY and consumer sentiment YOY since 2020. It shows that the two are moving in opposite directions.

The second chart is a scatterplot of both and it shows a strong negative correlation. The Rsq is -0.6 and the correlation coefficient is -0.77, so both are very significant.

So what is going on? Why are people spending more on groceries when they are feeling so bad? Whenever using Covid impacted data, it must taken with a boulder of salt. Covid was an outlier and caused people to behave in ways that are very different than more normal times.

Looking at the top chart, Consumer Sentiment and Grocery Sales patterns moved in opposite directions for several reasons.

1. The first gap was due to Covid which caused consumer sentiment to drop and the only place you could spend money was the grocery store so sales increased

2. The second gap was due to the post Covid inflation. The high inflation pushed consumer sentiment down and the high inflation pushed grocery prices and sales up

3. The third gap was due to inflation falling which made consumers happy but put downward pressure on grocery sales

So the last five years tell us that grocery sales and consumer sentiment have moved in opposite directions due largely to an extraordinary event which will not likely be replicated any time soon. As such, this tells us nothing about consumer sentiment and grocery sales outside of a pandemic.

As such, we need to look at the relationship between consumer sentiment and grocery sales before Covid. This will give us a better idea of how the two will behave in the post-Covid economy.

This chart above is consumer sentiment and grocery sales from 2000 to 2019. They appear to move together at times but also diverge at other times. The chart below shows the scatterplot and helps us assess the strength of the relationship.

The scatterplot shows an insignificant relationship between the two. The Rsq is only 0.04. When consumer sentiment is low or high, it appears to have little impact on grocery sales. If anything there is a slight negative relationship. Could it be that consumer sentiment is a leading indicator and as such we need to lag the data to see the relationship? Consumer sentiment was lagged for 1-9 months but the data did not show anything interesting.

As such, the data does not support the hypothesis that grocery sales and consumer sentiment are positively correlated. This brings us to consider why? There are two things that are likely impacting this relationship. First, grocery sales are an essential item. You have to buy and eat food to survive. As such grocery sales are less impacted by how shoppers feel. In contrast, Durable Goods, like applianced, cars, and technology are discretionary items. We can choose to purchase or not. When people are uncertain and not feeling good about the world, they can pass on durable goods in most cases. Thus, we would expect a positive relationship between these two variables. In the chart below we do see a meaningful relationship between consumer sentiment and durable goods. The Rsq is 0.14 and the corrlation coefficient is 0.38.

The second reason why consumer sentiment is becoming less of a predictor for sales is because it has become more influenced by politics than how one is expected to spend. The chart below shows consumer sentiment by political party affiliation. Prior to 2016, the gaps between political party affiliation were smaller than after 2016 although the gap started to grow in 2009. I wonder what happened in 2016?

In conclusion, there is likely only a minimal relationship at best between consumer sentiment and grocery sales. This is due to groceries being an essential item and consumer sentiment becoming a less reliable gauge of how people will shop. As such, when thinking about grocery sales in the future, there are probably better variables to use than consumer sentiment. In contrast, if gauging durable goods purchases, consumer sentiment may still be a meaningful guide.