‘Steak House Index’ Update – July 27, 2016

How is Your Pension Fund Performing?
July 26, 2016
Today’s GDP Results: It’s Really Not That Bad
July 29, 2016

Today is a very special day!

Not only do we update the SHI today, but today the FED and FOMC conclude their 5th of 8 meetings this year…and will issue a press release.   Very exciting indeed!

And, as always, if you need a quick refresher, take a look at the original blog: https://terryliebman.wordpress.com/2016/03/02/move-over-big-mac-index-here-comes-the-steak-house-index/


Why you should care: The US Department of Commerce ‘Bureau of Economic Analysis’ publishes the most recent GDP figures the instant they’re available.

And, as we’ve discussed previously, the vast majority of GDP growth – or declines – are related to consumer spending.  Remember:  The latest GDP figure released on May 27th was $18.2 trillion.   Consumer spending, known as the ‘PCE’ was about $12.5 trillion – or almost 69% of the entire US GDP.   Clearly consumer spending is a REALLY important piece of the US economy!

But here’s the problem: GDP numbers are not proactive … we seem them months after economic events have occurred. Which means we can’t make financial/investment choices – personal or business – before the economy turns sour … only after.

Not good. We want advance notice of an economic decline. The SHI may help give you that. Our objective with the SHI is to be predictive, to anticipate when the economy is going to ‘turn’ and give you the ability to take action early – not when changes are too late.


Taking action: Just keep up with the weekly column. If the index changes appreciably – either showing massive improvement or significant declines – indicating expanding economic strength or a potential recession, we’ll discuss possible actions at that time. Trending is very important…and we’ll watch the trend.


THE BLOG:   It’s interesting.  Recently, a friend suggested to me it’s about time for the next recession.  He suggested the current expansion has run out of time.

Not true.   Economic expansions don’t die of old age.   Bob Hall, a Stanford University economist, opines recessions “… are killed by unpredictable shocks.  The next recession will come out of the blue, just like all of its predecessors.”

But it is interesting to look at the duration of past US business cycle expansions and contractions, the source of my friend’s comment and concern.

The National Bureau of Economic Research has compiled the chart below showing every business cycle since 1854:

Recessions

The last recession – The Great Recession – ended in June of 2009.    Thus, this month, we’re officially 84 months into our current business expansion.   Only 3 previous expansions have lasted longer.   Interesting.  Uncorrelated, but interesting.

But I digress.  Today we’re focused on restaurants and the SHI.

But wait!  Earlier this week author Maggie McGrath posted an article in Forbes Magazine entitled, “Is the Restaurant Industry Headed for a Recession?”  Well, this is very interesting indeed!  And right on point!

In the article, she comments “…according to two new pieces of research out Tuesday, a bevy of trends — including historical restaurant cycles, a glut of supply and increased competition from independent operators — are pointing to significantly choppier times ahead.”   Hmmm……

restaurants

The image above shows the source of her concern.  Full-service restaurant sales ‘growth’ has been declining since the middle of 2015.   Earlier this week, two stock analysts – both closely follow the restaurant industry – downgraded a number of restaurant stocks.

Analyst Paul Westra downgraded 11 – including two that we follow, Ruth’s Chris and Darden.    But he didn’t stop there.  He even suggested that a restaurant recession could be a harbinger for a U.S. recession in 2017.   Hmmm…

From our restaurant-industry only perspective, industry category comps decelerate simultaneously typically the year-before and year-of a U.S. recession,” he writes.

Clearly he too is a believer in the power of the Steak House Index!  Of course, I don’t agree with his conclusion; the prior sales deceleration (see the image above) did not impact the current expansion.  Nor have many prior restaurant sales decline cycles.  In general, there seems to be a great degree of variability and volatility in the industry as a whole.  Of course, overall trend is somewhat indicative.  For both the restaurant industry as a whole and our SHI.

How is the SHI doing today?   Let’s take a look:

shi

While still negative, the reading has improved slightly from last week.   Mastro’s – once again – is fully booked thru 9 pm.   And our ‘dog’ (sorry, Capital Grille) remains fully available.    Let’s take a look at the overall trend:

shi trend

It looks like this week’s reading – a negative (-4) – is about at the center of our historic results.   This is now our 20th reading and we’re developing a nice database.  But, in my opinion, the data doesn’t give us any reason to suspect a deceleration in demand for these pricey eateries.   The public’s appetite remains hearty!  Once again, steady as she goes.

As I mentioned at the beginning of this update, the FED met today.  And they have issued their press release.   For 5  consecutive 2016 meetings, once again they’ve decided to leave short term rates unchanged.  Their comments:

Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further.  Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.

What does the FED mean when they say “medium term?”   Well, they seem to define dates after 2018 as “longer term”, so we can conclude medium term means thru the end of 2018.

Right or wrong, and we’ll only know in the years ahead, it seems pretty clear the FED is anticipating a very, very slow and gradual increase in both short-term rates and the rate of inflation.  I agree.

  • Terry Liebman

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