More jobs, higher prices: restaurants show U.S. economy’s bite

 

Source: Reuters

By Ann Saphir

March 5th

 

What does a nice meal out say about the U.S. economy?

 

Quite a lot, as it turns out, and the Federal Reserve is taking note, especially after a whopping 40,200 food service and drinking establishment jobs were created last month. That represented nearly 17 percent of overall job gains reported by the Labor Department on Friday.

 

Spending at restaurants is also surging and prices are up, reflecting strength in the services sector, which accounts for more than 80 percent of U.S. economic output.

 

If the $16 trillion American economy keeps adding jobs and the recovery from the 2007-2009 financial crisis takes hold more broadly, it will allow the U.S. central bank to make good on its plan to lift interest rates gradually this year.

 

Although waitstaff and line cooks do not generally make big salaries, they are part of a broader story: dollars spent in restaurants are going directly into the pockets of other Americans, and for the Fed, that may point to sustainable economic growth and the beginning of a long-awaited rise in inflation.

 

With a slowing global economy and a strong dollar weighing on U.S. exports and manufacturing, the services sector “is going to be the driver, not only of jobs and growth for the next year or so, but also for inflation,” San Francisco Fed President John Williams said after a speech earlier this week in San Ramon, an affluent city in northern California.

 

Williams knows a thing or two about restaurants: he once managed a well-known San Francisco pizza joint called Blondies.

 

Chef and restaurant owner Rodney Worth sees the driving force of dining out first-hand.

 

“We’re killing it,” he says, of sales at his seven restaurants in the San Francisco area, where he is seeing more guests ordering $11 sloppy joes and $18 brisket as well as desserts, good wines and specialty cocktails.

 

That jump in business has a downside that reflects a tighter job market and lends support to Fed Chair Janet Yellen’s argument that falling unemployment – now at 4.9 percent nationally – and rising wages will push inflation higher.

 

“It’s very hard to find catering managers, servers, cooks, and it’s almost impossible to hire chefs right now,” Worth says, adding that he has had to offer bonuses and higher pay to compete for staff against technology giants like Alphabet Inc’s (GOOGL.O) Google, which have their own on-campus kitchens.

 

He’s had to increase prices, in part because of higher minimum wages, but he also felt comfortable enough to recently open a new restaurant, Worth Ranch, in San Ramon, some 35 miles (56 km) east of San Francisco.

 

‘DO IT BIG’

 

The growth is not confined to California’s booming, tech-driven corner of the U.S. economy. What one Dallas Fed economist refers to as the “dining out” price index gained an annualized 4.4 percent nationally in January, according to government data released last week.

 

Weekly earnings in the leisure and hospitality sector, which includes restaurants, dropped about $2 to $380.80 in February, a smaller dip than for overall wages, according to Friday’s jobs report. The decline was largely driven by a statistical quirk.

 

Cheaper gas, which is putting extra cash in American wallets, is one of the tailwinds driving growth at restaurants and other eateries, says Hudson Riehle, head of research at the National Restaurant Association.

 

Sales within the industry are expected to rise 5 percent to $783 billion this year, with growth in quick-service outlets outpacing fine dining, Riehle says. That would represent a roughly 20 percent jump from 2012.

 

Shares of restaurant companies such as El Pollo Loco (LOCO.O) and Cosi (COSI.O) are slowly rebounding after sharp sell-offs last year.

 

Bakery-cafe chain Panera Bread (PNRA.O), which forecasts as much as 4.5 percent sales growth in 2016 for its company-owned outlets in North America, has seen its shares rise about 13 percent since the start of the year.

 

Restaurant sales reflect stronger job growth in the overall economy and as workers on low incomes tend to spend, “the economic multiplier effect of that on both employment and economic growth overall is substantial,” Riehle said.

 

For Worth, it’s all connected. His catering business all but dried up after the Great Recession, but in the past year he has had to buy an extra van to handle the surge in business from both local firms and households.

 

“They used to ask for pricing on sandwich platters,” Worth said. “Now they are saying ‘show up and do it big – we are not really looking at pricing.'”