Why signs of a weak economy affect restaurants

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Industry classification

The restaurant industry is a part of the consumer discretionary sector as classified by the Global Industry Classification Standard. Consumer discretionary stocks, such as those held by the Consumer Discretionary Select Sector SPDR Fund (XLY), include non-essential goods and services provided by the retail business, the automotive sector, the hotel industry, etcetera.

This sector does well when the economy is expanding and poorly when the economy is contracting. In other words, it’s cyclical. Gross domestic product, or GDP, is the value of goods and services produced in the US. GDP indicates the health of the economy and is a good place to start when trying to understand how macroeconomic trends affect the food services or restaurant industry.

Indi Nov US Gross Domestic Product 2014-11-15

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Better-than-expected GDP

The Bureau of Economic Analysis, reported GDP growth of 3.5% compared to 4.5% over the same period last year. The Wall Street Journal’s economists’ survey estimated GDP to be at 3.2%.

The US economy went into recession between December 2007 and June 2009, which led to a dip in GDP, as you can see in the chart above. During periods of recession, people tend to spend less on non-essential activities such as dining out, and instead prefer cooking meals at home. So, grocery sales for retailers, including Wal-Mart Stores, Inc. (WMT), Costco Wholesale Corporation (COST), The Kroger Co. (KR), and others included in the Consumer Staples Select Sector SPDR ETF (XLP), are not affected to the same extent as restaurants during recession. Sales for companies such as Yum! Brands (YUM), Darden Restaurants (DRI)etcetera, on the other hand, do tend to suffer during downturns.

Retail trade sales

The United States Census Bureau reports retail trade sales data, which include data on food services and drinking places, as well as grocery sales data. Given the strength in the economy, let’s look at these indicators in more detail in the next part of this series.

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