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Restaurant Outlook Reflects Strong Economy

The NRA's Restaurant Performance Index, a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry, showed that operators have been ringing up more sales, patron traffic increased, restaurateurs are optimistic about the future, and they're readying capital expenditures.

The Restaurant Performance Index stood at 101.5 in October, up a strong 1.2% from a level of 100.2 in September. In addition, the NRA said, October represented the 30th consecutive month above 100, a level that represents expansion in the Association's composite index of eight key industry indicators.

"The robust October increase in the Restaurant Performance Index was the result of broad-based gains in both the current situation and expectations components," said Hudson Riehle, senior vice president of research and information services. "Each of the eight indicators posted solid improvements in October, propelling the Index to its strongest gain in two years."

National economy bodes well for industry

Commerce Department reported this week that the national economy grew at a 4.3% annual rate in the third quarter. It was deemed the fastest growth since the first quarter of 2004. The economy grew at a 3.3% pace in the second quarter and has now grown faster than 3% for 10 straight quarters. The economy has grown 3.7% in the past four quarters.

The government also reported that the core personal consumption expenditure price index rose at a 1.2% annual rate in the period, compared with an earlier estimate of 1.3%. It's the lowest core inflation in two years. Core inflation rose 1.9% in the past year. All consumer prices, including food and energy, rose at a 3.6% rate, down from 3.7% estimated earlier.

In current-dollar terms, gross domestic product was estimated at an annual rate of $12.6 trillion, up 7.4% from the second quarter. As in earlier estimates, growth was powered by consumer spending and business investments. Residential investments and government spending also contributed to the expansion, while trade and inventories were a drag on growth.

The October increase in the Restaurant Performance Index was driven by strong gains in both the current situation and expectations components of the index, the NRA said. The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 100.4 in October, up 0.9% from September's 24-month low of 99.5.

Growth in the current situation component was fueled by a solid improvement in the sales indicator, with restaurant operators reporting positive same-store sales for the 27th consecutive month. Forty-nine percent of restaurant operators reported a same-store sales gain between October 2004 and this year, up from 44% of operators who registered a sales gain in September. Thirty-two percent of operators reported a same-store sales decline between October 2004 and this year, while 19% of operators reported no change in sales.

Customer traffic also registered an improvement in October, the association said. Thirty-nine percent of restaurant operators reported an increase in customer traffic between the two reporting periods, up from 36% who reported traffic gains in September. Thirty-eight percent of operators reported traffic declines in October, while 23% reported no change in customer traffic.

The Expectations Index, which measures restaurant operators' six-month outlook for four industry indicators (same-store sales, employees, capital expenditures and business conditions), stood at 102.5 in October - up a strong 1.6% from September and its second consecutive monthly gain.

Operations expect sales volume to grow

Driving the growth in the Expectations Index was a solid improvement in operators' outlook for sales growth in the coming months. Fifty-three percent of restaurant operators expect their sales volume in six months to be higher than it was during the same period in the previous year, up from 42% of operators who reported similarly last month. In contrast, just 11% of restaurant operators expect their sales in six months to be lower than it was during the same period in the previous year.

In addition to an improving sales outlook, restaurant operators are also more optimistic about the direction of the overall economy. Thirty-eight percent of operators expect economic conditions to improve in six months, up from just 26% who reported similarly last month. Meanwhile, just 16% of operators said they expect economic conditions to worsen in six months, down sharply from 30% who reported similarly last month.

Another positive development this month was the bolstered outlook for capital expenditure activity in the restaurant industry. Sixty-one percent of restaurant operators plan to make a capital expenditure for equipment, expansion or remodeling in the next six months, the strongest level in six months.

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