Technomic On the Economy: The Final Chapter for 2013


As we enter the fourth quarter of 2013, the Eurozone continues its slow march to growth, which in turn has exposed several structural deficiencies in virtually all of the major emerging economies. By this standard, the consistent 2 to 2.5 percent GDP growth in the United States is impressive, especially in the face of budget sequestration, unrest in Syria, and most significantly, the eventual drawdown of unprecedented Federal Reserve interventions in financial markets.1 Americans are finally seeing positive returns to net worth in stocks and housing and, despite stagnant wages, appear more willing to borrow for consumer durables. Many media analysts have proposed a “pent up demand” story in which consumers feel more comfortable making major outlays, but need to pull back on small purchases (e.g., foodservice) in order to do so. They point to falling numbers in revolving credit and sagging retail sales figures at places like Walmart as evidence of this trend.

But is this an accurate story? The U.S. economy is at its best point since the beginning of the financial crisis but remains weak by most historical measures. Furthermore, economic prospects vary greatly by region, education, and even age. A more likely story is that the people who are cutting back on revolving credit are not the same as those making large outlays. In this article, we delve into these details by describing the current state of the American consumer and discussing the impact of political volatility on their prospects in the coming months.


Labor Markets. At a glance, the top-line unemployment rate has dropped to 7.2 percent in September compared to nearly 13.8 percent who consider themselves “underemployed.”2 Regional differences are high with educated workers in technology hubs (Austin, Boston, Portland, San Francisco) and energy industry workers in the Upper Midwest faring better than those in areas with negative home equity. States with large foreclosure stock such as Illinois, Nevada, and California report unemployment rates above 9 percent. Nationally, labor force participation rates continue to straddle all-time lows. Whereas short-term unemployment spells (e.g., less than 5 weeks) have fallen back to 2007 norms, long-term unemployment in excess of 10 weeks remains at catastrophic levels. Finally, of the jobs gained, the majority are in low-paying service and retails sectors with comparatively low impacts on economic growth. On the positive side, there is hope that surprisingly strong manufacturing numbers of late foreshadow higher wage job growth in the near future.3

The basic impact of the labor market on foodservice is two-fold. The industry heavily and increasingly relies on average to affluent and middle-class consumers who are generally benefiting from lower-than-average unemployment, increasing asset values and cheap credit. Further, relative job stability has returned to middle class households aged 35 or older with wages of middle to older age workers increasing by just 0.9 percent year over year.4

In contrast, young workers have been disproportionately impacted by the sluggish economy: over 35 percent of 18- to 24-year-old Americans are not working, with a full 20 percent reporting income below the poverty level. A historically high 55 percent of young Americans still reside with their parents, as they are more susceptible to spells of wage volatility and underemployment than other workers. Those who have delayed the start to their professional careers can expect up to 20 percent lower relative lifetime earnings than their parents. This is before accounting for high levels of student loan debt for lower-quality jobs. It is no wonder that recent survey evidence shows that younger Americans are as thrifty their grandparents. Absent a major economic turnaround or a large influx of highly-educated immigrants, the industry will need to adjust to a generation of chronically “bargain-oriented” consumers.


The overall story of the U.S. economy is one of slow but sure progress and strength relative to global peers. However, several political risks threaten the pace of growth:

Government Spending and Sequestration. The impact of the federal sequestration has been perceived as minimal by many because of its disproportionate impact to lower income households and to regions with large ties to long-term military and R&D spending. Whereas the short-run drags on foodservice consumption are relatively small, losses to the country’s research apparatus will fundamentally undercut the productive potential of the U.S. in the coming years. In contrast, a prolonged government shutdown would reduce the spending power of 800,000 government workers and a large number of consumers dependent on government spending (e.g., government suppliers and contractors, research grantees, etc.) and in turn shave 0.6 and 0.8 percent from GDP growth.5 Finally, if the U.S. defaults on its debts, the combination of lost credibility and missed payments on high impact economic items would immediately send the economy into recession. Indeed, the mere threat of default in 2011 impacted the economy for months after the event had passed. The current impasse appears to have impacted short-term debt markets and has sent asset markets into a holding pattern. The prolonged uncertainty is likely to slow the pace of hiring as well as potentially encourage consumers to close their pocketbooks in advance of the holiday season.

Housing Markets and Fed Policy. Policy stalemates aside, the relationship between Federal Reserve policy and the housing market is the most important macro-level consideration for foodservice decision-makers. Since 2012, overall consumer debt has declined with negative home equity falling to 53.7 percent of peak losses. Domestic housing growth has almost single-handedly canceled out growth losses due to government stimulus cuts as well as slowing exports to Europe and the emerging markets. Specifically, hard-hit areas with otherwise favorable migration trends (California, Nevada, Florida, Georgia, Massachusetts) have seen significant bounce-backs (36 percent of peak loss) with some areas (Seattle, Colorado, Texas) having almost entirely erased losses. Locales such as the Baltimore to New Jersey corridor as well as Illinois continue to lag behind the national average, due largely to unfavorable migration trends and strict foreclosure laws that negatively impact market prices.7

The decisions of the Federal Reserve will largely determine whether the underlying growth factors are stable. The Fed’s massive investments in mortgage-backed securities have contributed to a cheap money environment that has allowed current homeowners to re-finance and investors to convert existing stock into rental units. Single family home purchases are still rather soft as new buyers appear thwarted by even slight changes in interest rates. In the short-run, regions with growing home ownership and refinancing levels are the most likely locales to produce incremental foodservice growth. In contrast, areas with attractive price-to-rent ratios will experience economic growth, but the returns to foodservice may take longer. Specifically, consumers in these markets may face rent increases as high as 5 and 15 percent as rental stock remains in short supply.8

The underlying dynamics of the housing market put the Fed in a policy bind. Monetary interventions are risky and less “stimulative” over time. Indeed, recent Fed policy meetings suggest that a tapering of the $85 billion bond buying program could still occur by the end of the year. But if Fed policy is still fundamentally the driver of economic growth via the housing market, it is not clear how a drawback can happen. In our view, a drawdown of monetary policy will only occur with better evidence that housing gains have spread to growth in the broader economy.


In sum, holding current trends, the economy is slated to grow at 2.5 percent. If housing growth continues and political theatrics cease quickly, the U.S. economy could potentially grow above 3 percent next year—a direct benefit to foodservice. However, as the government shutdown continues and default risk reverberates through the economy, the industry should prepare at a minimum for a loss in consumer confidence that could undermine manufacturer and retailer preparations for the holiday buying season. A recent Gallup poll indicates that consumer confidence has shown the highest one-week drop since the collapse of Lehman Brothers in 2008. As these policies sort themselves out into 2014, attention will eventually shift to the immediate implications of the Affordable Care Act on employment and levels of coverage.

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

1 Bureau of Economic Analysis
2 Bureau of Labor Statistics
3 We should note, however, that economists are somewhat divided on why manufacturing is currently growing.
4 Bureau of Labor Statistics
5 M. Zandi, Moody’s; Morgan Stanley
6 Home equity losses since the financial crisis reached their peak in 2011. Said differently, as of September, 2013, those values are only 53.7 percent as high as those maximum losses.
7 These figures are derived from regional changes in the Case-Shiller housing index since the beginning of the housing crisis.
8 Various estimates from,, and the Consumer Price Index


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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