Tyler Cowen asks

Is the downturn all about weak aggregate demand?

Here is one report from yesterday:

Dining out will cost more this year as U.S. restaurants take advantage of the nearly two-year long expansion to boost prices on food and drinks.

Higher-priced menus reflect growing confidence by eateries that consumers can afford to pay more to eat out. Restaurants are emboldened in part by the success of U.S. airlines, which have raised fares almost 10 percent since a year ago, according toDean Maki, chief U.S. economist at Barclays Capital in New York.


Something I don’t have a macro-theoretical explanation for but have divined from experience is that people in general and managers in particular think of the market climate in terms of rates of change.

Business is doing well if business is doing better. Business is doing poorly if business is doing worse. This is irrespective of where they are compared to some baseline.

For example, you hear all up down the supply chain that hospitality is “doing well”

If you look at sales growth you see it right smack at you. Here is food service sales growth – eating out – over the last ten years

FRED Graph

Nice tight ever higher bars. Business is doing better and better, anyone would say so. Good times.

Here is the same data in levels

FRED Graph

Lets add a trend line (human estimated)


That doesn’t look so good. We are well below trend. Yet, that’s not how business feels.

It is, however, how the job market feels because the same data is reflected there.

FRED Graph

If you assume that growth in employment is slightly lower than growth in sales then the two graphs match up. Here are the two growth rates plotted together.

FRED Graph

The moral of all of this is that although the business headline seems to diverge from what people are experiencing on the ground the two actually line up perfectly.

Its not that there is something different between what’s happening in the restaurant industry and what’s happening in restaurant employment. The difference is in how people look at the two.

The restaurant business is “doing well” that means growth rates are good. The economy is “bad” that means employment is below trend. Both are true.