Concerns of a “restaurant recession” are largely misplaced, and industry growth will likely continue in the months ahead, according to the NRA’s Chief Economist Bruce Grindy. His Economist’s Notebook commentary and analysis appears regularly on Restaurant.org and Restaurant TrendMapper.
Recent concerns of a “restaurant recession” are largely misplaced. Just as economists wouldn’t say the overall economy was in a recession if just a few sectors were struggling, the same shouldn’t be said about the restaurant industry based on the results of a handful of companies.
While same-store sales and customer traffic trends were certainly a mixed bag in recent months, that doesn’t paint a complete picture on the health of the overall restaurant industry. A better performance metric is total restaurant industry sales, which includes both existing restaurant sales as well as sales at new restaurants that enter the market. By this measure, the restaurant industry remains on a positive trajectory.
According to data from the U.S. Census Bureau, total eating and drinking place sales were up 6.0 percent on year-to-date basis through July 2016. Adjusting for menu-price inflation, sales were up about 3.3 percent during the first seven months of the year. This real growth rate is right in line with the average annual gains registered during the last five years, which suggests the restaurant industry expansion is maintaining its post-recession track.
That’s not to say that consumers aren’t somewhat unsettled, and a chunk of that uncertainly could likely be traced to the vitriol coming from the U.S. presidential campaign. In fact, 31 percent of adults say they have become less confident about their personal spending as a result of the presidential campaign during the last few months, according to a new national survey conducted August 18-21 by ORC International for the National Restaurant Association. Fourteen percent say they are more confident, while 55 percent say it hasn’t impacted their personal spending.
However, thanks to the resilient American consumer, the overall restaurant industry is growing. Here are five reasons why the expansion will continue in the months ahead:
1. Labor Market Remains Healthy
The number-one driver of restaurant sales is a healthy labor market. When people are employed, they have both the income to support spending as well as the daily need for the convenient food and beverage options that the restaurant industry provides.
While the current economic expansion has generally lacked explosiveness, it has been remarkably consistent, with gains of at least 2.1 million jobs each year since the end of the Great Recession. Job growth is on a similar pace in 2016, including the addition of more than a half-million jobs during the last two months alone.
The restaurant industry has never contracted without a corresponding decline in the labor market, and there are currently no indications that job losses are on the horizon.
2. Wage Growth is Picking Up
Although wage growth has been noticeably stagnant during the current expansion, there are signs that it is finally starting to pick up. According to the Bureau of Labor Statistics (BLS), the average hourly earnings for all private sector employees rose 2.6 percent between July 2015 and July 2016. This matched the strongest 12-month wage growth during the economic recovery, though it was still below the mid-three-percent gains posted before the recession.
Other factors should lead to stronger wage growth in the months ahead. As the economy moves toward full employment and the jobless rate drops, businesses typically have to compete harder for talent in a shrinking labor pool.
A healthy labor market also gives workers the confidence and ability to leave one job for a higher paying job somewhere else. According to BLS data, an average of 2.3 percent of private sector workers quit their jobs each month during the first half of 2016. This represented the highest half-year quit rate since 2007.
If wages continue to rise and inflation remains modest as expected, consumers will have more disposable income to support additional discretionary spending.
3. Households Have Some Breathing Room
Household debt is rising steadily. Total revolving credit balances are approaching $1 trillion for the first time since 2008, according to data from the Federal Reserve. However, a key difference between now and eight years ago is the fact that households are much more equipped to handle this level of debt.
The Federal Reserve’s Financial Obligations Ratio, which is the ratio of total required household debt payments (plus rent on primary residences, auto lease payments, insurance and property tax payments) to total disposable income, is nearly three points below 2008 levels and hovering near an all-time record low.
Households are also building up a financial cushion, with savings rates in recent months roughly double what they were just prior to the Great Recession. Consumers also continue to benefit from relatively low gas prices, as well as grocery store prices that are on pace to decline for the first time since 1967. These all put additional disposable income in the pockets of consumers.
Many consumers are also benefiting from rising wealth, which has a positive impact on spending. House prices are trending higher, and all three major U.S. stock indices have closed at record highs during August.
4. Pent-up Demand Remains Elevated
Although overall sales are trending higher, consumers have yet to get their fill of restaurants. According to a national survey conducted in April 2016 by ORC International for the National Restaurant Association, 45 percent of adults say they are not eating on the premises of restaurants as frequently as they would like. Similarly, 46 percent of consumers say they are not purchasing take-out or delivery as often as they would like.
Not surprisingly, pent-up demand is higher among lower-income households, as six in 10 consumers in households with income below $35,000 say they would like to be using restaurants more frequently. However, fully one in four adults living in households with income above $100,000 also say they are not patronizing restaurants as often as they would like.
As households with income above $100,000 are responsible for four in 10 dollars spent in restaurants, any degree of unfulfilled demand is an encouraging sign for the industry in the months ahead.
While there is always some degree of unfulfilled demand for restaurants, the current levels are well above historical norms. In the mid-2000s, only about one in four adults said they weren’t eating at restaurants as often as they would like – or just over half of the level that exists today.
5. Consumers Crave Experiences
In the aftermath of the Great Recession, consumers became very selective in their spending habits, which resulted in some sectors doing much better than others. One of the reasons why the restaurant industry held up relatively well during a challenging economic environment has been a shift in consumers’ spending habits toward experiences.
When given the choice of how they would spend an additional $100 if they had it, more than four in 10 adults say they would spend it on an experience such as a restaurant or other activity. Fifty-eight percent say they would be more likely to purchase an item from a store.
Among consumers in households with income above $75,000, one-half say they would be more likely to spend their extra $100 on an experience.
Founded in 1919, the National Restaurant Association is the leading business association for the restaurant industry, which comprises more than 1 million restaurant and foodservice outlets and a workforce of 14.4 million employees. We represent the industry in Washington, D.C., and advocate on its behalf. We operate the industry’s largest trade show (NRA Show May 21-24, 2016, in Chicago); leading food safety training and certification program (ServSafe); unique career-building high school program (the NRAEF’s ProStart); as well as the Kids LiveWell program promoting healthful kids’ menu options. For more information, visit Restaurant.org and find us on Twitter @WeRRestaurants, Facebook and YouTube.