For much of the past two years, consumers have kept spending at restaurants despite record-high menu price increases, along with growing demands for things like tips and service charges.
But there are reasons to believe that spending will end, if it hasn’t already. For one thing, millions of Americans are about to start repaying their student loans again, and any time you get a large group that is suddenly hit with a few hundred dollars’ worth of extra bills, they adjust their spending at least in part by dining out less.
Now we have this: Americans are about to deplete their pandemic cash.
The Federal Reserve Bank of San Francisco this week noted that consumers are apparently on pace to deplete the cash they put away during the pandemic.
Americans stopped spending when the pandemic hit and we all went on quarantine in March 2020. In subsequent months, the federal government sent a lot of money to Americans. The result of all this was a massive amount of savings. By June 2020, consumers had $2.1 trillion in excess savings.
And that, as much as anything, has carried them through. It allowed Americans to stop working when the pandemic was raging and enabled them to make more personal choices. And it carried their spending during a run-up of inflation that was as bad as anything we’d seen in 40 years.
That helps explain why they’ve kept dining out as much as they have while restaurant menu prices were increasing 8% or more.
But now, that excess cash is running out. By March, the savings was down to $500 billion. The Fed estimates that it declined to $190 billion by June.
Do some quick math, and that means we’re spending those savings at a rate of about $100 billion per month, which means we’ll be running out of it about … well, now. And if not now, then soon.
And that may well put more pressure on the consumer’s ability to spend. As it is, consumers are spending up on their credit cards—credit card balances increased by 4.6% in the second quarter, hitting $1.03 trillion. If consumers have a lot of debt and less savings, so the reasoning goes, it makes sense to expect a corresponding change in spending habits.
That may well explain at least part of the sales slowdown many restaurant chains saw in the second quarter. Customer traffic was down across the board, with a few key exceptions. Diners traded down from casual dining into quick-service restaurants. But given that most quick-service restaurants saw traffic declines, that also means plenty of consumers traded out of them.
Chains such as Papa Johns are worried about excess pricing by franchisees while Domino’s has long argued that inflation is keeping its customers from ordering as much delivery.
The sales environment, in other words, is not getting any easier. And that long-awaited consumer reaction to high prices may well be coming, if it is not here already.