A case of unemployment
In the last few parts of this series, we saw that food services and drinking places are part of the consumer discretionary sector. This includes the Consumer Discretionary Select Sector SPDR (XLY). Increasing sales would lead to a business expanding and hiring more staff.
During an economic downturn businesses have a hard time maintaining a high level of staff. This leads to many people losing jobs. As a result, the unemployment rate rises.
Labor force participation rate increases
In January, the unemployment rate was 5.7%. It increased month-over-month from 5.6% in December. As the economy gets better, the unemployment rates start declining and business conditions start improving. A falling unemployment rate isn’t enough reason to cheer.
When we look at the labor force participation rate in the above chart, we see that it also increased slightly in January. In January 2015, the labor force participation rate was 62.9%. It increased from 62.7% month-over-month. According to the U.S. Bureau of Labor Statistics, the labor force participation rate is the “share of the population 16 years and older working or seeking work.”
Takeaways for the restaurant industry
Offering to a wide demographic is important for restaurant chains like McDonald’s (MCD), Yum! Brands (YUM), Darden Restaurants (DRI), Brinker International (EAT). It’s also important for XLY. XLY holds about 4% of McDonald’s.
Pricing the menu correctly is important to appeal to the “out of labor force” population. This could explain why casual dining restaurants, that have a higher average check—compared to fast food and fast-casual restaurants—are performing poorly.
To learn more about these concepts read An in-depth overview of the US restaurant industry.
So, what’s happening with the population’s income and hourly wages? We’ll discuss this in the next part of this series.