Economy Sending Mixed Messages for Foodservice Growth

Moving into the second half of 2014, the economy is sending mixed signals. Revisions of Q1 2014 GDP numbers suggest that the economy contracted almost 2 percent through the winter while job growth has been shockingly robust. Further, because healthcare accounts for nearly 18 percent of Gross Domestic Product (GDP), the significant uncertainties associated with the state-level implementation of the Affordable Care Act will produce biased readings of the overall economy while policies and procedures work themselves out.

As a result, to develop a firm reading on foodservice spending, we must rely on deeper consumer signals in the economy. Specifically, consumer spending on foodservice depends on streams of income, credit, and accumulated wealth net of monthly expenses. Following, we discuss the state of the U.S. consumer on each of these factors and provide an outlook for their spending potential over the next 6 to 18 months.


Job stability and growth. Despite major weather setbacks in the first quarter, job growth and employment stability is increasing. Job growth has exceeded 200,000 for four straight months, outpacing population growth for the first time since the end of the Clinton Administration. The headline unemployment rate is approaching 6 percent and underemployment is falling at a commensurate rate.[1]

That said, it’s important to keep in mind that retail services jobs account for a large proportion of job growth. These jobs average $13.83 per hour with limited benefits and work weeks that average 33 hours. This is problematic given that foodservice spending growth has historically been driven by wage and credit growth.

Wage growth. In addition to job quality, the rate of job openings and quits, while improving, continues to depress wages. For example, workers under age 30 are changing jobs with less frequency and by extension, experiencing historically slow wage growth and social mobility.[2]

Similarly, middle class households have also been slow to change jobs due to underwater mortgages and an increased dependence on local family networks. Further, it appears that less affluent consumers in regions hit by unexpected winter weather have been spending less on nights out as they absorb both lost wages and extremely high energy costs. This effect, however, should begin to dissipate by summer’s end.

Simply stated, wages (and hence, inflation) will begin to increase sustainably when firms anticipate higher demand and find it difficult to source qualified employees. The labor force participation rate[3], which peaked above 67 percent in the early 2000s, has fallen to 62.1 percent, a level not seen since women entered the workforce en masse in the 1970s. More than half of these individuals are new retirees, enrollees to long-term disability, and students who are extending time in school. The remaining individuals are “long-term” unemployed (many under the age of 50) who have not been able to fill open jobs either because of skill mismatch or because they have been “stigmatized” by their job status during the interview process.

Taken together, the data suggests that labor markets should tighten soon and wages should begin to increase in a two-step process. First, using current trends, the underemployed should find it easier to trade up to higher-paying, potentially full-time work by the middle of 2015. Once this pool of workers is absorbed, firms may be more willing to reinstate job training programs and hire more of the long-term unemployed. In the interim, expect wages to stay flat nationally with the exception of high-skilled workers based in growing tech and energy corridors.

Wealth and credit. Affluent consumers continue to benefit both from favorable lending standards and increasing stock portfolios. The historical stock reversions that typically occur in Congressional election years have not materialized, perhaps because “no news is good news” in today’s polarized political climate.

As stocks continue to rise, the wealthy spend with cheap credit and aggregate savings rates have dropped to 3 percent.[4] Poorer households are constrained on each of these dimensions. Middle class homeowners, in contrast, have improved in terms of recovering net worth, but continue to save at historically low levels in the face of tight credit.

Strict lending standards have reduced credit balances as consumers attempt to rebuild their credit worthiness after a period of debt charge-offs. Middle class net worth has recovered as home price growth since 2013 has brought many mortgages back to par with values. However, home sales have slowed significantly in 2014 as housing investors find fewer foreclosure deals and everyday consumers of homes find it difficult to save for down payments and secure mortgages.

High student loan balances have also slowed home sales although their most significant negative impact has been to saddle a rising number of college dropouts with debt.[5] It will be at least 2 to 3 years before creditworthiness, equity recovery, and down payment savings, come together to produce consumer-driven housing growth.


In recent months, nearly half of consumers have reported higher gas and grocery bills.[6] Fortunately, gas supplies are abundant and price pressures should diminish soon. Persistent drought across the U.S. should keep food prices high for the remainder of the year. Renters are facing price increases as high as 15 percent in markets where new supply has failed to keep pace with new household formation. Finally, many consumers face increasing health insurance premiums in the face of new Affordable Care Act measures. Time will tell whether these increases will be offset by better health care outcomes and cost controls on the lower end of the economic spectrum.

Looking to the long-term, there have been several changes to the overall makeup of consumer spending. As of 2012, Americans spend 31.5 percent of income on rent and mortgages, 8.6 percent on groceries, 5.4 percent on utilities, 5.7 percent on cars, and 5.8 percent on food away from home and 3.8 percent on tuition for childcare and education. Items such as apparel, public transport, movies, etc. range between 0.5 and 3 percent of income.[7]

Since 2005, the real cost of durables and non-durables (e.g., televisions, cellphones, kitchen supplies) has fallen dramatically while expenditures on services such as childcare and education have grown in excess of 20 percent. Preferences have also changed as larger proportions of disposable income are being spent on cosmetics, gym memberships and other personal care experiences. In the face of competition for share of wallet, foodservice will need to focus on high value, unique experiences that compel the consumer.


Overall, the remainder of 2014 will be seen as a year of lost potential as the economy attempts to recover from the significant losses in Q1. The rapid housing growth that bolstered the economy in 2013 has slowed. Consumer fundamentals, while improving, suggest a slow and steady pace across the lower and middle class. On the other hand, the rapid growth in job hires and job openings tells a much more optimistic story both for foodservice and the broader economy.

How do we make sense of these divergent signals? The first issue is that nearly one-third of economic growth in 2014 has been due to automobile sales. Unfortunately, the majority of these sales have occurred either by savers spending from retirement or from credit being extended to subprime borrowers.

Another explanation of strong job growth has been that firms’ have expected inflation and borrowing rates to increase faster than the actual pace of inflation for a prolonged period.[8] It is possible that firms have taken recent signals from the Federal Reserve to mean that the economy is on firm footing and that investing in equipment and people should occur now while borrowing is cheap. Ironically, this perception works to improve the actual state of the economy and should hopefully propel a period of wage growth in 2015.

Note: This article was originally published in Technomic on the Economy. View original .PDF file.

[1] Bureau of Labor Statistics
[2] Bureau of Labor Statistics
[3] The labor force participation rate measures the proportion of people aged 16 or over who are currently employed relative to those over 16 who are not.
[4] Bureau of Economic Analysis
[5] Brookings Institution
[6] Gallup Poll, July 2014
[7] Bureau of Labor Statistics Consumer Price Index Analysis (2012)
[8] Cleveland Federal Reserve Bank


Arjun Chakravarti

Arjun Chakravarti, former Research Associate at the University of Chicago Booth School of Business, where he received both his Ph.D and MBA, is currently an Assistant Professor of Management and Marketing at IIT Stuart School of Business, and also a Consulting Economist for Technomic, Inc. His research emphasizes the use of tools from “behavioral” economics to understand trends in consumer behavior and managerial decision-making. He has also conducted research in several areas of public policy including urban and immigration economics, and energy/sustainable development. In addition to these activities, Chakravarti provides market forecasting, research, strategy, and business development services to firms across several industries. Prior to his doctoral studies, he graduated Summa Cum Laude from the University of Colorado and worked as a Consultant to the Colorado Technology Incubator (now C-Tek Ventures) in the business-to-business e-commerce space.

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