technomic on the economy 7-14

8/12/2019 Technomic on the Economy 7-14

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July 2014 Technomic on the... E C O N O M

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 tJuly 2014

Technomicon the...E C O N O M Y

to develop a firm

reading on foodservice

spending, we must rely on

deeper consumer signals in

the economy.

Economy Sending Mixed Messages forFoodservice GrowthBy 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 signalsRevisions of Q1 2014 GDP numbers suggest that the economy contractedalmost 2 percent through the winter while job growth has been shockinglyrobust. Further, because healthcare accounts for nearly 18 percent of GrossDomestic Product (GDP), the significant uncertainties associated with the state-level implementation of the Affordable Care Act will produce biased readings ofthe overall economy while policies and procedures work themselves out.

As a result, to develop a firm reading on foodservice spending, we must rely ondeeper consumer signals in the economy. Specifically, consumer spending onfoodservice depends on streams of income, credit, and accumulated wealth netof monthly expenses. Following, we discuss the state of the U.S. consumer oneach of these factors and provide an outlook for their spending potential over

the next 6 to 18 months.

INCOME, WEALTH AND CREDITJob stability and growth.Despite major weather setbacks in the first quarterjob growth and employment stability is increasing. Job growth has exceeded200,000 for four straight months, outpacing population growth for the first timesince the end of the Clinton Administration. The headline unemployment rate isapproaching 6 percent and underemployment is falling at a commensurate rate.

That said, its important to keep in mind that retail services jobs account for a largeproportion 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 foodservicespending growth has historically been driven by wage and credit growth.

Wage growth.In addition to job quality, the rate of job openings and quits, whileimproving, continues to depress wages. For example, workers under age 30 arechanging jobs with less frequency and by extension, experiencing historicallyslow wage growth and social mobility.2

Similarly, middle class households have also been slow to change jobs due tounderwater mortgages and an increased dependence on local family networks

2014 Technomic, Inc.

1Bureau of Labor Statistics2Bureau of Labor Statistics


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July 2014 Technomic on the... E C O N O M

EXPENSESIn recent months, nearly half of consumers have reported higher gas andgrocery bills.6 Fortunately, gas supplies are abundant and price pressuresshould diminish soon. Persistent drought across the U.S. should keep food

prices high for the remainder of the year. Renters are facing price increases ashigh as 15 percent in markets where new supply has failed to keep pace withnew household formation. Finally, many consumers face increasing healthinsurance premiums in the face of new Affordable Care Act measures. Timewill tell whether these increases will be offset by better health care outcomesand cost controls on the lower end of the economic spectrum.

Looking to the long-term, there have been several changes to the overallmakeup of consumer spending. As of 2012, Americans spend 31.5 percentof income on rent and mortgages, 8.6 percent on groceries, 5.4 percent onutilities, 5.7 percent on cars, and 5.8 percent on food away from home and 3.8percent on tuition for childcare and education. Items such as apparel, public

transport, movies, etc. range between 0.5 and 3 percent of income.7

Since 2005, the real cost of durables and non-durables (e.g., televisionscellphones, kitchen supplies) has fallen dramatically while expenditures onservices such as childcare and education have grown in excess of 20 percentPreferences have also changed as larger proportions of disposable incomeare being spent on cosmetics, gym memberships and other personal careexperiences. In the face of competition for share of wallet, foodservice willneed to focus on high value, unique experiences that compel the consumer.

SUMMARYOverall, 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 rapidhousing growth that bolstered the economy in 2013 has slowed. Consumerfundamentals, while improving, suggest a slow and steady pace across thelower and middle class. On the other hand, the rapid growth in job hires andjob openings tells a much more optimistic story both for foodservice and thebroader economy.

How do we make sense of these divergent signals? The first issue is thatnearly one-third of economic growth in 2014 has been due to automobilesales. Unfortunately, the majority of these sales have occurred either by saversspending from retirement or from credit being extended to subprime borrowers

Another explanation of strong job growth has been that firms have expectedinflation and borrowing rates to increase faster than the actual pace ofinflation for a prolonged period.8It is possible that firms have taken recentsignals from the Federal Reserve to mean that the economy is on firmfooting and that investing in equipment and people should occur now whileborrowing is cheap. Ironically, this perception works to improve the actualstate of the economy and should hopefully propel a period of wage growthin 2015.

6 Gallup Poll, July 2014.7Bureau 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 tounderstand 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. Priorto 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

technomic on the economy 7-14

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