Restaurant Recession Could Signal Tough Times

Analysts are forecasting a "restaurant recession" in the U.S., which is bad news for America's food and drink establishments and potentially even worse news for the economy at large.

Paul Westra, a senior research analyst at Stifel Financial Corp., said in a research note Tuesday that he'd turned "decidedly bearish" on the restaurant industry, downgrading Stifel's stance on 11 different restaurant stocks, including Chipotle Mexican Grill, Panera Bread and Cheesecake Factory.

He and his colleagues now "confidently believe" that the weak restaurant consumer spending seen in the second quarter of the year "reflects the start of a U.S. restaurant recession."

Restaurants aren't themselves a monumental driver of America's gross domestic product, but they're usually a pretty good indicator of what Americans are doing with their money. When times start getting tough, eating out is typically one of the first things to go.

American restaurants are facing challenges on several fronts. Not only has consumer spending in the industry begun to lag, but there's some concern over profitability related to upcoming changes to U.S. overtime regulations and minimum wage hikes.

"Restaurants operate on thin margins with low profits per employee and little room to absorb added costs," the National Restaurant Association said in a statement earlier this year in response to news that the Labor Department was aiming to expand overtime eligibility among U.S. workers. "More than doubling the current minimum salary threshold for exempt employees, while automatically increasing salary levels, will harm restaurants and the employer community at large."

Westra's research note also pointed out that a substantial portion of the U.S. population lives in states and regions where minimum wage increases are expected over the next few years – namely California, New York, Maryland, the District of Columbia, Massachusetts, Michigan and Connecticut, among others.

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