Economists Believe a Recession Is Likely, but not in ’17?

Economists tell us the U.S. must face one of two scenarios: Either the next President will face a recession in office, or the U.S. will have the longest economic expansion in its history. Two widely divergent paths. Odds are that the recession is more likely.

Economists in The Wall Street Journal’s latest monthly survey of economists put the odds of the next downturn happening within the next four years at nearly 60%. Word of the next economic slowdown has been growing louder for the past few months. Our analysts have done the research to understand the environment. Here are five reasons it’s unlikely in ’17.

1). Fed is neutralizing policy not trying to slow down economic growth. In other words their monetary policy is still accommodative, keeping the U.S. yield curve positively sloped. Even if (when) rates rise, capital will still be available and at reasonable rates, fueling everything. Available capital means restaurant brands, suppliers can continue to invest.

2). Employment trends continue to be robust. We continue to see demand for labor, indicating growth. Wage growth was at a cyclical high at this most recent jobs report from November 4th, growing at 2.8%. Unemployment trending down below 5.0% headed toward mid 4% area. While this may make recruiting talent a challenge, low unemployment is great for business.

3). The new administration’s stated policy is to increase economic growth through Fiscal Policy. There are fiscal initiatives that should be simulative to growth. Income tax rate reductions, Corporate tax rate reductions, Repatriation incentives through the Homeland Investment Act will likely bring significant capital flows back into the United States for reinvestment domestically.

4). Commodity markets are rebalancing. In other words, the disinflationary forces that transpired from last year’s commodity markets decline created excessively tight financial conditions. Credit spreads widened, the dollar strengthened, asset prices declined, etc. The conditions we are heading into now are the opposite from those (with the exception of recent dollar strength) we faced in the back half of 2015 and first quarter of 2016. Currently, we are seeing Dollar strength for positive reasons such as higher expected U.S. economic growth assumptions.

5). GDP is currently accelerating. Most recent drivers coming from consumer spending as evidenced by improving retail sales trends which are highly correlated to wage growth and the level of savings. S&P 500 earnings are highly correlated to GDP trends. We are about to see the first quarterly EPS growth from S&P 500 earnings in the fourth quarter of this year. The third quarter was trending better as well.

For these reasons, we’re bullish on 2017. Our recent podcast on the coming recession is still relevant, as we believe the downturn will come, eventually. Like most in the restaurant business, we don’t mind if that time takes longer to get here.

Restaurant defense against a bear market and competition

We’ve written and spoken a lot about the change in the market and the potential for a recession. In our recent podcast, we talked a bit about plans restaurants can make now to fend off the bear market. In fact, there are lots of ways brands should be protecting themselves now for tomorrow.

Four main facets will help build relevance, manage costs and separate brands from competitors.

1. Healthy Habits

Better-for-you is on trend. Local ingredients are on trend. Novel menu items and updated options? On trend. Brands that are built on true health of their menu will have an advantage. A brand like MAD Greens that offers robust salads with protein and tons of flavor can outlast the recession. If operators are able to keep prices reasonable. Flexibility to welcome multiple dietary needs or restrictions also helps stop vetoes.

There are lots of restaurants with similar nutritional profiles to MAD Greens. Top healthy brands should strive to get credit for all that is good about ingredients, suppliers and prep. Brands that best communicate or partner with those who can are rewarded with credibility. And store traffic.

Concepts that aren’t quite as healthy as Sweetgreen can still find ways to add items or options to reach health-conscious customers now. Small changes to recipes or suppliers can add up to noticeable changes in nutritional content, especially for those trying to cut out gluten, sugar or sodium.

2. Scale Your Suppliers

Scale usually means handling growth. But smaller brands don’t necessarily need the huge national footprint of larger suppliers. Especially when pulling back on inventory. Focus on partners that can get you what you need, can go small and can grow as needed, too.

In the past 12 months we have seen the let down when suppliers are pushed. Chipotle outgrew its favored sources and some believe that caused the meltdown they are facing now. Smart brands are finding ways to partner with suppliers to better shift when needed.

This might mean developing seasonal menus that adapt to changes in supply chain. Traditionally, brands like QSR have long leads on their menu that makes it hard for suppliers who might fall short or withhold inventory. Look at this fall’s avocado shortage for examples of brands shifting strategy at the last minute and finding ways to accommodate guests.

Changing items to maximize supply can also act as market news. New items or featured ingredients can drive traffic as menu innovations or LTOs.

3. It’s Not a Restaurant, It’s a Base of Operations

Sure the brand is a physical space. The digital space has been pretty good to restaurant brands too. Don’t neglect social media, and mobile technologies that allow you to reach out from the restaurant. Guests have an expectation for communication with the brands they love. Use these platforms to let them be heard.

When thinking about a bear market, it’s time to consider offers. Digital is also a great way to test offers, to follow which items drive the most clicks all the way through traffic and redemption. That is just the beginning. Using mobile to unlock new experiences for frequent guests and people near by can be powerful. Look at what Starbucks has done using their app.

Digital services can also power new revenue through delivery and catering. Use each restaurant as a base for outgoing meals or added dayparts, and promote along with the brand or even separately. Thinking about the brand beyond the place itself leads to big picture opportunities.

4. Value Proposition, Not Just Value

The trend during tough economic times is to slash costs and show consumers lower costs items. Guests understand that value goes beyond cost. By communicating the value proposition of your brand today, you can hedge against tougher times to come.

This value proposition will come from choices you make now to emphasize the items above. Can your brand stand for convenient delivery? Standard menu items that are just a bit better for you? Unique seasonal or local items?

If the bear market comes, it’s true that consumers will be paying attention to price. But they will rationalize that price if brands have done their job and explaining why they’re worth it. This is the time to create those explanations.