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Loss of business at restaurants - a sign of impeding recession?

Posted August 14

As restaurants have experienced a recent business downturn, an analyst has warned that this could be signaling another U.S. recession. Even if not, what could be causing this decline? (Deseret Photo)

Want to steer the economy from recession in 2017? Start eating out. That's the logical conclusion from the findings of one financial analyst who has predicted a widespread recession for 2017, based on a drop in restaurant sales.

It was just over a year ago, April 2015 to be exact, that people were actually spending more money on restaurant bills than groceries. Bloomberg described it as a “retail highlight” as other businesses, such as department stores, still suffered in the recovery from recession.

But now analyst Paul Westra of Stifel Financial Corp. has noted recent surveys show a drop in the restaurant business, prompting a downgrade in the stock of 11 companies, according to Bloomberg.

And Westra warned the downturn in the restaurant business isn’t just bad for eateries, but a possible sign of a greater nationwide recession in 2017, as "restaurants have historically led the market lower during the three- to six-month periods prior to the start of the prior three U.S. recessions," Bloomberg stated.

“Restaurant industry sales tend to be the ‘canary that lays the recessionary egg,’” Westra is quoted as writing in his research report, according to CNN.com. Westra also cautioned, it continued, that this recession could be the “worst ever” for restaurants as it would coincide with rising labor costs.

CNN.com also reported that Westra’s “gloom-and-doom” prediction stands in “stark contrast” with Wall Street economists who see little chance of an encroaching nationwide recession.

The Federal Reserve and the retail industry are not convinced of an awaiting recession, adage.com reported.

"Near-term risks to the economic outlook have diminished," the Fed said in a statement Wednesday, according to adage.com. Meanwhile, the National Retail Federation bumped up its forecast for 2016 sales growth to 3.4 percent from 3.1 percent this week.

Dave Schick, retail analyst and research director for Consumer Edge Research, said restaurants may instead be suffering from “smaller, newer, more differentiated players” that are adept using social and digital media, adage.com stated.

CNN.com noted other possible factors for the restaurant slowdown, such as:

• Rising restaurant prices as workers are paid more

• Newer brands that are spreading customer bases thin

• Slowed job growth in June means more cautious spending by consumers

• Security concerns about public places after terrorist attacks

• And the 2016 election

With a recent spree of terrorism has shredded consumer confidence, industry experts told New York Post.

“When people feel pressured, they start cutting things out that they’d like to do,” Britt Beemer, chairman of consumer-trends tracker America’s Research Group, told New York Post.

But as some industry experts told New York Post, "it’s too early to read the tea leaves,” on what's going to happen. And as restaurant earnings are reported in the coming weeks, analysts will get a better idea of recent sales, according to Bloomberg.

Email: smanderson@deseretnews.com, Twitter: @Sarahsonofander.

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