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Gulp.
So, uh, what do Americans drink during recessions? That’s the timely question addressed in a Bernstein Research note published today. The answer’s mildly tricky.
First of all, write Nadine Sarwat and Trevor Sterling: the economy isn’t a dominant factor in what ends up in your cup:
Over the last 60 years, we find no meaningful correlation between US per cap. alcohol consumption and real GDP growth or unemployment. We also find no correlation between changes in spirits/beer share of throat and the economy. Instead, generational shifts in preferences and changes in public policy (e.g. LDA increased to 21 in 1984) determine the long-term trajectory of alcohol consumption.
(We imagine a fair few readers can align their own life trajectories with those labels — is the “Per Cap Creeps Up” years a product of the excess of generation “Anything Goes”?)
Perhaps part of the reason there isn’t a bigger impact is that alcohol already represents a pretty small part of US household expenditure — 0.9 per cent according to the latest figure (for 2019).
But it’s not quite a nothing-to-see-here situation though, as the analysts note:
At the extremes, the economy does temporarily influence US alcohol consumption, with beer being more resilient than spirits in a recession. In periods of abnormally high unemployment, US per capita alcohol consumption falls ~1%pts. Beer tends to gain 0.2%pts of volume share and spirits tends to lose 0.3%pts of share (with the remainder being felt by wine), likely because beer is more affordable than many spirits. But these are literal temporary kinks in the curve, returning to trend once recovery start.
In an admirable attempt to find Content™, Sarwat and Stirling modelled some economic extremes: finding that the bigger impact on drinking actual comes in periods of economic exuberance: per-capita consumption is boosted during periods of high GDP growth, and even more by the unemployment rate.
There are some practical effects — including speculation that lean economic times may lead drinkers to buy better-value multipacks rather than individuals cans at the “convenience store”. There’s also the potential for consumers to opt for cheaper products (downtrading), although Bernstein reckons this tends to have a short-lived effect.
So what does it all mean for the present moment?
“We aren’t economists and so cannot predict exactly what characteristics a recession this time around would have,” the analysts write (being far, far too generous to economists):
But we can look at current macroeconomic data as a rough guide. Today, US unemployment of 3.6% is at all-time lows. Personal savings remain high, still feeling the benefit of past COVID stimulus payments. These metrics would suggest that the consumer is potentially still relatively resilient.
We previously established alcohol volumes and mix are hit the most in recessions when unemployment is high (>7.5%). But the labor market today remains tight. So unless there is a meaningful increase in unemployment, an upcoming recession would have a mild impact on alcohol. We could expect beer to fare better than spirits, both from a volume and mix perspective.
However, there are two big unknowns here. The first is inflation. With a May-22 inflation of 8.6%, the US economy hasn’t seen inflation this high since the 1970s/early 1980s. So while unemployment might remain relatively low, the squeeze on consumer wallets from inflation could more than offset this, impacting both alcohol volumes and mix. The second is the rate at which the Fed increases interest rates and the impact it has on unemployment. If it raises rates too quickly and unemployment spikes, this could have a deeper impact on alcohol per our above analysis.
Further reading
— How much does a pint of lager cost? An Alphaville investigation
