Steak Houses Struggle as Big
Spenders Start to Feel the Pinch
Consumer spending is the fuel of the U.S. economy. When consumers spend more, businesses grow and, in return, the economy grows. As we all know, the current U.S. economy lacks consumer spending and thus it lacks growth.
Since the financial crisis of 2008, the U.S. economy has been sailing in rough seas. The financial crisis left the U.S. economy in a dire state and the so-called “recovery” has been the worst post-recession rebound since the Great Depression.
As elementary as it sounds, in a growing U.S. economy, when consumer spending goes up, consumers are more inclined to go to a good restaurant, buy a steak dinner, purchase that better smelling cologne, and buy the better looking car. In the current U.S. economy, this is certainly not happening—mid-market restaurants are facing challenges and luxury good and service providers are getting hit by the economic slowdown except for those at the very high end of the market.
And it’s not only the middle class that has been squeezed; the high income earners are looking at their pockets as well.
The Knapp-Track Index, which has monitored U.S. restaurant sales since 1970, reports that steakhouse operators are seeing weak sales. (Source: Bloomberg, September 19, 2012.) For example, at Capital Grille, a premium brand steakhouse owned by Darden Restaurants, Inc. (NYSE/DRI), sales for the quarter ended May 27, 2012, were at their lowest level since 2010.
The pullback in sales at fine-dining restaurants can be attributed to higher income earners feeling less confident about the economy and thus holding back on their spending. The luxury restaurants are seeing wild swings in their sales and it has been very difficult for them to have consistent growth in 2012. The popular steakhouse Morton’s has started offering lower-priced items on its traditionally high-priced menu.
A healthy stock market rally usually triggers consumer spending in mid-market consumer retail markets, like steakhouses, but there is no evidence of that occurring in this current U.S. economy—even though key stock indices have risen significantly.
Tiffany & Co. (NYSE/TIF), the upscale jewelry retailer, has already warned about its fight within the current economic conditions. Tiffany decreased its outlook for 2012. Consumer spending at luxury goods and service providers is decreasing in the U.S. economy—the opposite of what is supposed to happen during an economic growth period.
While others have been busy waiting for more help from the central banks of the world, I have been stressing the following for months: consumer spending has to increase first before the U.S. economy will start to see any economic growth.
The pockets of the average American in the U.S. economy have been getting emptier each passing day in this post-recession recovery. Add in inflation, uncertainty over the end to the Bush era-tax cuts, worry over the credit crisis in Europe and the slowing global economy, and record government debt, and consumers have every right to be worried. Wouldn’t you be?
An old adage holds: “A penny saved is a penny earned.” Does that really hold true anymore? Well, in Canada, pennies certainly don’t count anymore. Inflation has killed the penny.
The Canadian government will no longer mint pennies. The Royal Canadian Mint made the last Canadian penny on May 4, 2012.
As a tribute to the end of the era of the penny, the Royal Canadian mint is offering silver and gold pennies for people to buy as collectables—a memory of the penny and what inflation can do to money.
Why would the Canadian government do such a thing in getting rid of the penny? Should we eliminate the penny from the U.S. economy as well?
The Canadian government says it’s too expensive to keep making pennies due to inflation. It costs more to make a penny today than its actual value and the coins take up too much space in our pockets and wallets. But let’s just face the facts: inflation has made pennies almost worthless in respect to what they can buy.
The pennies made in the U.S. economy between 1909 and 1982 had 95% copper content, but any penny made after 1982 only has 2.5% copper content. (Source: Coinflation, September 25, 2012.) Just as the Romans did to create more money, the West learned to put less of the real stuff in their coins so they could circulate more.
Those of us senior enough to remember the good old days can recall buying candy from a corner store for one cent…now an impossibility. Chocolate bars used to cost $0.25. That’s not the case either anymore. Prices have increased in the U.S. economy as the value of the dollar has decreased significantly; the after-effects of inflation.
The penny is simply an obstacle in the way of higher inflation. Once the penny gets out of circulation, prices will have to be adjusted higher; to the closest $0.05. Then eventually the nickel becomes the new penny and the vicious cycle continues—inflation with fiat money is inevitable. The more printing of paper money there is, the greater the risk of hyperinflation—making pennies worthless.
Dear reader, my point here is that inflation has really taken a toll on the U.S. economy. The Canadian government stopping the manufacturing of pennies is at least a step in the right direction of a government acknowledging these coins aren’t worth anything if they are not 100% copper as they were initially meant to be.
There is only one form of currency that central banks and governments cannot alter the form of regardless of what inflation does. I’m talking about gold, of course. If you are as concerned as me about what all this “money out of thin air” will do to prices in the future, if you are worried about hyperinflation in the future as I am, you will ensure your investment portfolio has exposure to gold-related investments.
Where the Market Stands; Where it’s Headed:
Looks like the euphoria of the QE3 (a third round of quantitative easing) announcement has worn off. The focus is now back on the slowing Chinese economy, the credit crisis in Europe, the pullback in U.S. corporate earnings, and revenue growth. The reality of the fact that QE3 does very little to help the average American is setting in and the stock market rally is quickly losing its steam.
What He Said:
“Interest rates at a 40-year low: The Fed has made borrowing as easy as possible, resulting in a huge appetite for loans and mortgages. We are nearing a debt crisis.” Michael Lombardi in Profit Confidential, April 8, 2004. Michael first started warning about the negative repercussions of then Fed Governor Greenspan’s low-interest-rate policy when the Fed first dropped interest rates to one percent in 2004.
Spenders Start to Feel the Pinch was last modified: September 28th, 2012 by Michael Lombardi, MBA
About the Author | Browse Michael Lombardi's Articles
Michael Lombardi founded investor research firm Lombardi Publishing Corporation in 1986. Michael is also the founder of the popular daily e-letter, Profit Confidential, where readers get the benefit of Michael’s years of experience with the stock market, real estate, economic forecasting, precious metals, and various businesses. Michael believes in successful stock picking as an important wealth accumulation tool. Michael has authored more than thousands of articles on investment and money management and is the author of several successful investing publications,... Read Full Bio »
Forecasts Aug. 31, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 31, 2015
|Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)||$1014.15|
|Trailing 12-month Price/earnings multiple (Most Recent Quarter)|
|Dow Jones Industrial Average Dividend Yield||2.71%|
|10-year U.S. Treasury Yield||2.14%|