Why Unemployment Rate Matters to Restaurants

Before we delve into how an increase in the federal funds rate could impact restaurants, we’ll see if the environment is suitable for a rate hike. The Fed is in charge of ensuring that the economy is healthy with maximum employment and stable prices. This creates a positive environment for businesses including restaurants like Chipotle Mexican Grill (CMG), Panera Bread (PNRA), McDonald’s (MCD), and Brinker International (EAT). You can access some of these stocks through the First Trust Consumer Discretionary Alpha Fund (FXD).

Without going into much detail, in any dynamic and free economy, there’s always going to be some level of unemployment. How much is maximum employment? In its Summary of Economic Projections released on September 15, the FOMC (Federal Open Market Committee) participants put the longer-run unemployment rate between 4.7% and 5.8%.

The latest unemployment rate reading came in at 5%. So, 5% is close to the midpoint of the long-run unemployment rate. This doesn’t mean that the remaining 95% of the population in the US is employed. This unemployment rate is from the pool of the population that’s currently in the labor force.

While the latest unemployment rate indicates that the US economy is healthy, it’s important to remember that the labor force participation fell over time. Currently, the labor force participation stands at 62.5%. This excludes people who are able to work but have stopped looking for a job.

The previous rate hike was in 2004 after the recession in 2001. Back then, the unemployment rate was around 5.5%. However, the labor force participation rate was hovering around 66%. The fall in the current unemployment rate to 5% could encourage a rate hike.

Before consumers can spend, there has to be income. Having a job puts income in consumers’ hands. Consumers can spend their income on necessities as well as discretionary spending. Improved employment conditions naturally turn into a positive outlook for restaurants. Domino’s CEO, Patrick Doyle, stated in the company’s fiscal 1Q15 earnings call that “improvements in job growth and employment” in the US “correlates to more pizza orders.”

Maximum employment is just one part of the Fed’s dual mandate. The second mandate is stable prices. In the next part, let’s see how this impacts restaurants.