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July 2014
Tec hnomi c
on the... EC O N O MY
S p e c i a l F o o d s e r v i c e E c o n o m i c V i e w p o i n t
July 2014
Tec hnomi c
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EC O N O MY
to develop a rm
reading on foodservice
spending, we must rely on
deeper consumer signals in
the economy.
Economy Sending Mixed Messages for
Foodservice Growth
By Arjun Chakravarti, Ph.D,
Assistant Professor of Management and Marketing, IIT Stuart School of Business
Consulting Economist for Technomic, Inc.
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.
INCOME, WEALTH AND CREDIT
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.
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That said, its 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.
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Similarly, middle class households have also been slow to change jobs due to
underwater mortgages and an increased dependence on local family networks.
2014 Technomic, Inc.
1
Bureau of Labor Statistics
2
Bureau of Labor Statistics

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July 2014
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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 summers 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
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, 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 todays polarized political climate.
As stocks continue to rise, the wealthy spend with cheap credit and aggregate
savings rates have dropped to 3 percent.
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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.
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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.
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
In the face of competition
for share of wallet,
foodservice will need
to focus on high value,
unique experiences that
compel the consumer.
2014 Technomic, Inc.
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July 2014
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EXPENSES
In recent months, nearly half of consumers have reported higher gas and
grocery bills.
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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.
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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.
SUMMARY
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.
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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.
6
Gallup Poll, July 2014.
7
Bureau of Labor Statistics Consumer Price Index Analysis (2012).
8
Cleveland Federal Reserve Bank

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.
Arjun Chakravarti, Ph.D
Assistant Professor of
Management and Marketing,
IIT Stuart School of Business
300 South Riverside Plaza, Suite 1200 Chicago, IL 60606
(
312
)
876
-
0004 technomic.com

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