Presidential campaigns and food go together like, well, Donald Trump and McDonald’s. The candidates are often photographed eating at local diners, politely declining slices of cheesecake, and shoving corn dogs into their mouths. But candidates (and their rhetoric) are also closely tied to the restaurant industry at large — namely, how well or poorly food sells during an election cycle.
After a slew of disappointing earnings reports from the top chains in the U.S., many investors have been wondering if poor restaurant sales are indicative of a looming recession. According to a new report from Morgan Stanley analysts, restaurant sales are bad (as slow as they’ve been since 2009, in some cases) but that doesn’t necessarily mean the U.S. is heading toward a recession. In fact, it might be politics as usual.
Restaurant sales were really good in 2015. In 2016, just as election season was ramping up, sales dropped.
In 2015, nominal restaurant sales grew as fast as they had in the early 1990s — just around eight percent, according to a recent report by Morgan Stanley analysts. So while 2016 sales are slowing, analysts say they actually aren’t that bad, being that the restaurant industry is "coming off of levels of growth not seen for 30+ years."
On Friday, Bloomberg writer Matthew Boesler tweeted a chart further illustrating just how drastically the difference can be between restaurant sales boom and bust.
Some have said the lack of growth might be indicative of a coming recession. But others, like the CEO of Wendy’s, have blamed slow sales on the Presidential election. In an earnings call with analysts this week, Wendy's Todd Penegor said, "When a consumer is a little uncertain around their future and really trying to figure out what this election cycle really means to them, they're not as apt to spend as freely as they might have even just a couple of quarters ago."
Morgan Stanley analysts have taken a similar outlook, writing in a report published last week that the current slowdown has been largely driven by "consumer reaction to social unrest and political uncertainty."
Political mayhem might not be the only reason for poor sales growth, though.
According to Howard Penney, managing director and restaurant analyst at Hedgeye Risk Management, it’s important not to attribute dwindling restaurant sales to one factor. He admits, however, that the mayhem that comes with a presidential election does play a role. "Certainly the fear mongering — as well as some fear that’s justified — is not good [for restaurant sales]," he says.
But Penney worries that the problems are deeper than politics. Certain economic indicators, he says, have been showing signs of a recession since well before the election cycle began — even as early as 2013. "You can't say it’s just the election [that’s leading to a decline]," he says.
Nearly every facet of the restaurant industry is seeing a slowdown these days — with one major exception. "The high-end, white tablecloth establishments are seeing a decline; upscale casual is down; fast-casual is slowing — the only part of the business that’s doing well is quick service, drive-thrus, fast food," says Penney. "That in and of itself says people could be trading down, and the consumer is feeling stretched."
Morgan Stanley analysts argue that declines in restaurant sales are not always early indicators of broader economic slowdowns. McDonald’s sales, for instance, were "not particularly good predictors of either the 2001 or 2008 recessions." Burger King, meanwhile, actually "went strong through the early days of '08/'09," during one of the worst recessions in U.S. history.
Restaurant prices are also hindering growth. The current gap between food prices at the grocery store and food at restaurants is almost the widest it's ever been — nearly four percent. "It’s really expensive to go out to eat," says Penney. "And there’s no doubt that there’s a trade off between supermarkets and restaurants."
That being said, Penney adds that the earnings at grocery stores like Kroger and Publix are slowing down, too — a further sign that restaurant sales might not be all about politics but a larger sign of things to come.
Recent news — like Ruby Tuesday's announcement that it plans to close 95 stores — is worrisome, says Penney. "It’s fascinating that we’re seeing more bankruptcies and store closures in a booming economy than we did, say, in 2009 during a recession. It’s just another indicator that there’s something else going on."
So, when should we start to worry about a recession?
"We need a few more of the high frequency data points — like consumer confidence — to begin to fall off," says Penney. "Once the banks really slow down lending, that will be a problem. Right now, it feels like a slow bleed."
Recessions don’t happen overnight, of course. Penny says restaurant sales will likely continue to show weak growth through November, to coincide with the election cycle.
"We’re still probably six months away from seeing more visible signs of whether or not a recession is looming," says Penney. "The two biggest things that influence restaurant spending are job growth and income growth. Both of those are fairly strong right now — or, at least, not weak. But we need those to accelerate further for sales to get better." Meanwhile, mid-level independent restaurants in cities like D.C. and San Francisco continue closing apace, demonstrating that at least some Americans are putting their dollars elsewhere.