Economic Commentary
Bruce Grindy

Bruce Grindy is the National Restaurant Association's senior economist Check out Bruce's past articles.

A Mid-year Review of the Restaurant Industry

July 20, 2006

Despite the challenges of high gas prices and rising interest rates, key restaurant indicators point toward a positive second half of the year.

As we enter the second half of 2006, it's a good time to review the restaurant industry’s performance during the first six months. Overall, although consumers continue to face the challenges of high gas prices and rising interest rates, key restaurant indicators are pointing toward a positive second half of the year.

Here is a look at the performance of restaurant industry indicators during the first half of 2006:

Sales
Although some parts of the restaurant industry experienced a softening in same-store sales in recent months, overall industry sales continue to grow at a healthy pace. After adjusting for seasonal and trading-day factors, total eating-and-drinking-place sales grew at a robust 8.4 percent rate on a year-to-date basis through June 2006, according to the U.S. Census Bureau. During the same period, grocery store sales advanced at a modest 4.1 percent rate, while overall retail sales (excluding foodservice) increased at a 7.4 percent rate.

Jobs The restaurant industry added jobs at a solid pace in the first half of the year, according to the Bureau of Labor Statistics. Eating-and-drinking places -- the primary component of the restaurant industry, which accounts for roughly three-fourths of the total restaurant and foodservice workforce -- added more than 122,000 jobs on a seasonally-adjusted basis during the first six months of 2006, or roughly one of every seven net new jobs added to the national economy.

On a year-to-date basis through June 2006, eating-and-drinking places added jobs at a solid 2.4 percent rate, nearly a full percentage point above the 1.5 percent gain in total U.S. employment. If the current trend continues, 2006 will represent the 15th consecutive year of restaurant-industry employment growth, an impressive streak considering the overall economy lost jobs in two of the last four years.

Food Prices

Although wholesale food prices rose sharply in June, they followed a modest overall downward trend during the first half of 2006. On a year-to-date basis through June 2006, wholesale food prices declined 0.7 percent. In contrast, overall wholesale prices increased at a strong 4.4 percent rate during the same period.

If the current trend continues, it would mark the first wholesale food price decline in four years. Wholesale food prices increased at a 1.8 percent rate in 2005, after posting 5.5 percent and 5.6 percent gains in 2003 and 2004, respectively.

Consumer Prices

Driven by strong growth in gas and energy prices, the inflation rate is on pace to hit a 15-year high in 2006. Through the first six months of 2006, overall consumer prices increased at a 3.8 percent rate. If this trend continues, it would mark the strongest inflation since a 4.2 percent consumer price gain in 1991. In comparison, menu price growth was not as strong during the first half of 2006. On a year-to-date basis through June 2006, menu prices increased at a 3.1 percent rate -- a pace that would match the gain posted in 2005.

Gas Prices

A significant challenge to restaurant-sales growth in the months ahead is higher energy prices. Although restaurant sales weathered the energy crunch during the first half of the year, sustained high gas prices can dampen sales growth.

The nationwide average retail price for a gallon of regular gasoline was $2.99 on July 17, according to the Energy Information Administration. This represented the second highest level on record (unadjusted for inflation), ranking only behind the average pump price of $3.07 on Sept. 5, 2005, in the immediate aftermath of Hurricane Katrina.

Pump prices on July 17 were up 67 cents per gallon from the same period last year, and a whopping $1.06 compared to the same period in 2004. Although the rising gas prices haven’t seemed to significantly impact summer travel, it will likely be a strain on consumers’ confidence and shift their spending patterns.

Looking ahead to the second half of 2006

Although gas prices are expected to retreat somewhat after the summer driving season, they will likely not fall below $2.50 in the near future on an average nationwide basis. While this new reality will force many consumers to make some choices about their household spending patterns, it doesn’t appear that restaurants will be on the chopping block. Even as gas prices crept up to near- record levels, total eating-and-drinking-place sales hit a record high of $35.4 billion in June on a seasonally adjusted basis.

From the operator perspective, the mood remains optimistic. In the Association’s June 2006 Restaurant Industry Tracking Survey, 54 percent of restaurant operators said they expect their sales volume in six months to be higher than it was during the same period in the previous year. In contrast, just 14 percent of restaurant operators expect their sales in six months to be lower than it was during the same period in the previous year.

The Association’s Restaurant Performance Index (RPI), a composite index that tracks the health of the restaurant industry, also suggests that the industry will continue to grow during the second half of the year. While the overall RPI stood at 101.6 in May, the forward-looking Expectations Index of the RPI stood at a healthy 102.2, which points toward broad-based growth in key industry indicators in the months ahead. Index values above 100 indicate that key industry indicators are in a period of expansion, while index values under 100 represent a period of contraction for key industry indicators.

In total, despite the challenges facing consumers in the months ahead, the restaurant industry is expected to continue to fare well overall.

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Bruce Grindy’s Economic Commentary will appear regularly on restaurant.org. For more in-depth analysis of the economic trends that impact the restaurant industry, as well as forecasts of key restaurant-industry indicators, subscribe to Restaurant TrendMapper.

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