MONEY Jobs

The Economy is Improving, but May Face a New Speed Limit

empty cubicles
Get ready for Boomers to leave the work force. Getty Images

The recession is gradually ending, but we're about to enter a world where fewer and fewer people work.

While it might not feel like it yet, the economy is getting better. On Thursday, the Bureau of Economic Analysis announced the U.S. economy grew faster than expected in the second quarter of this year.

Here’s the thing, though. Even as employers add jobs, we’re about to enter an era with the lowest percentage of working Americans since 1973. Below is a Congressional Budget Office projection, from a new set of charts they’ve released here, showing the labor force participation rate—the number of people working or looking for a job—through the year 2024. As you can see, despite the economic recovery, it has a distinctly downward trend.

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Source: Congressional Budget Office.

Why doesn’t a better economic climate mean more workers? The boomers, largest generation in American history, is on the cusp of retirement, and will soon begin to drop out of the workforce in even greater numbers. Over time, this will have an dampening effect on the economy—though by how much is disputed. The CBO predicts that GDP growth will average around 2.2% per year, noticeably less than the growth we got used to in the 1980s and 1990s.

Another way to visualize the change is something called the dependency ratio, which measures the proportion of the population that aren’t of working age (below 18 or over over 65). As FiveThirtyEight’s Ben Casselman points out, that number is about to increase from 59% in 2010 to 75% in 2030.

Screen Shot 2014-08-29 at 12.05.20 PM
Source: U.S. Census.

As you’ll notice from the above chart, we’ve been a demographically fortunate nation of late, but we’re about to lose that tailwind. On the other hand, this country has faced big demographic changes before: Look the at the jump in the dependency ratio from the 1950s to the 1960s. Back then, an increasingly prosperous nation spent part of its wealth on kids. Those kids grew up and made the economy even larger, and soon we’ll have to spend part of that prosperity on their retirement.

MONEY Jobs

If Jobs Are Back, Where’s My Raise?

Empty pockets of businessman
Dude, where's my raise? Jeffrey Coolidge—Getty Images

Despite good jobs numbers, wages aren't growing much. The reason why is the biggest debate in economics right now

Today’s strong jobless claims data, which show that applications for unemployment benefits dropped again, is one reason to be cheerful heading into the Labor Day weekend.

Yet despite this, and the fact that the unemployment rate is now down to 6.2%, the economy still has this glaring weak spot: Workers aren’t getting serious raises.

Here’s how two important measures of wage growth have done since the recession. (The Brookings Institution keeps a running tab of these and other key economic indicators in the excellent interactive graphic here.)

fredgraph

Basically, what you are seeing is that pay to workers, whether measured as hourly wages or salaries plus benefits, has been running neck-and-neck with inflation of a bit under 2%. As Fed chair Janet Yellen pointed out in her recent speech at a Fed symposium in Jackson Hole, Wyo., wages are also growing less than workers’ productivity.

Why is this happening? Yellen, for one, likely thinks there’s some remaining “slack” in the economy. Employers are still wary about whether there’s growing demand for their stuff, and so they remain slow to hire. The low unemployment figures leave out a large number of workers who have become discouraged after a long time out of work. But if the slack explanation is right, as companies continue to hire, more of those labor-force dropouts will be drawn back into the employment pool. You won’t see companies under serious pressure to raise wages until that process has played out and companies start competing for a scarcer pool of job-seekers.

Yellen points to (though doesn’t endorse) another possible explanation. Many economists believe wages are downwardly “sticky”—even when companies want to cut costs, they’d rather lay people off than reduce the pay of the people they hang onto. That means that for people who kept working after the recession, wages were higher than they’d otherwise be. And now that the economy is (fitfully) coming back, maybe that means there’s also less room for wages to rise.

Another factor, of course, is that both corporate managers and workers are human, and people can take some time to adjust to new economic signals. Back in July, I sat down with a stock fund manager, who talked about what he was seeing going on at the companies he kept in touch with. More than five years after the financial crisis, he said, the corporate culture among top managers had changed. The people in the C-suite got their positions not by expanding their companies and finding great new hires, but by cutting costs. And they got used to a slack labor market. The manager used the specific example of truckers: You always know you can get a guy to drive a truck from your warehouse to your customer on a moment’s notice. So why worry about hiring more truckers?

As it happens, at the New York Times Upshot blog earlier this month, Neil Irwin wrote that this may be changing. A trucking company called Swift told investors it was having hard time finding enough drivers. The company says the problem is that there aren’t enough skilled people, but Irwin wonders if the problem is really that companies just aren’t paying enough. Trucker pay has fallen, in real terms, over the past decade. Irwin writes:

The most basic of economic theories would suggest that when supply isn’t enough to meet demand, it’s because the price—in this case, truckers’ wages—is too low. Raise wages, and an ample supply of workers should follow…. But corporate America has become so parsimonious about paying workers outside the executive suite that meaningful wage increases may seem an unacceptable affront.

The question now is, how strong does the economy have to get before employers are forced to change their thinking?

Related:
If You’re Looking for Work, the Outlook is Brightening
Why the Fed Won’t Care About Higher Prices Until You Get a Real Raise
What’s the Deal With America’s Declining Workforce?

MONEY The Economy

If You’re Looking for Work, the Outlook is Brightening

open plan office
Mark Bowden—iStock

While the number of Americans in the labor pool is still at worrisome lows, the outlook for those who are employed or are still looking is improving

While there’s great debate about why so many Americans have dropped out of the workforce, there is new hope for those who have stuck it out in the labor pool.

The government reported on Thursday that the number of workers filing first-time claims for unemployment benefits dropped to 298,000 in the week ended Aug. 23, another sign that the job market is stabilizing.

This marked the second straight week of declines in initial claims. More importantly, the four-week average claims figure itself is now just below the 300,000 mark — at 299,750 — putting the job market back where it was before the global financial crisis began in 2007.

US Initial Claims for Unemployment Insurance Chart

US Initial Claims for Unemployment Insurance data by YCharts

To be sure, pessimists (and market bears) will point out that the overall unemployment rate, which stands at 6.2%, still has a ways to go before improving to pre-crisis levels:

US Unemployment Rate Chart

US Unemployment Rate data by YCharts

And as economist Ed Yardeni, head of Yardeni Research, points out, Federal Reserve chair Janet Yellen and other policy makers don’t look at just this one measure of the job market. In fact, she looks at 19.

“Among her favorite labor market indicators is wage inflation,” he said, “which remains too low, in her opinion.” Money‘s Pat Regnier has more about that here.

US Real Average Hourly Earnings Chart

US Real Average Hourly Earnings data by YCharts

But Yardeni points out that wages and salaries on a per-payroll employee basis — in other words, measuring folks who have a job —are nonetheless up 8% over the past 10 years.

So it just goes to reinforce the divide: If you’re employed or in the work force, things are probably looking up. If you’ve dropped out, on the other hand, the picture may not be so bright.

MONEY alternative assets

How to Play Banker to Your Peers

IOU note
Getty Images

Lending Club's IPO filing puts peer-to-peer lending in the spotlight. If you're thinking about opening your wallet, here's what you need to know.

UPDATED—2:01 P.M.

Your bank makes money off borrowers. Now you have the opportunity to do the same. One of today’s hottest investments, peer-to-peer lending, involves making loans to strangers over the Internet and counting on them to pay you back with interest. The concept may be a bit wacky, but the returns reported by sites specializing in this transaction—from 7% to 14%—are nothing to scoff at.

Investors aren’t laughing either. Lending Club, one of the leading peer-to-peer lending companies, filed to go public on Wednesday. The New York Times reports the company is seeking $500 million as a preliminary fundraising target and may choose to increase that figure.

Such lofty ambitions should be no surprise, considering that the two biggest P2P sites are growing like gangbusters. With Wall Street firms and pension funds pouring in money as well, Lending Club issued more than $2 billion of loans in 2013, and nearly tripled its business over the prior year. In July, Prosper originated $153.8 million in loans, representing a year-over-year increase of over 400%. The company recently passed $1 billion in total lending. “A few years ago I would have laughed at the idea that these sites would revolutionize banking,” says Curtis Arnold, co-author of The Complete Idiot’s Guide to Person to Person Lending. “They haven’t yet, but I’m not laughing anymore.”

Here’s what to know before opening your wallet.

How P2P Works

To start investing, you simply transfer money to an account on one of the sites, then pick loans to fund. When Prosper launched in 2006, borrowers were urged to write in personal stories. Nowadays the process is more formal: Lenders mainly use matching tools to select loans—either one by one or in a bundle—based on criteria like credit rating or desired return. (Most borrowers are looking to refi credit-card debt anyway.) Loans are in three- and five-year terms. And the sites both use a default investment of $25, though you can opt to fund more of any given loan. Pricing is based on risk, so loans to borrowers with the worst credit offer the best interest rates.

Once a loan is fully funded, you’ll get monthly payments in your account—principal plus interest, less a 1% fee. Keep in mind that interest is taxable at your income tax rate, though you can opt to direct the money to an IRA to defer taxes.

A few hurdles: First, not every state permits individuals to lend. Lending Club is open to lenders in 26 states; Prosper is in 30 states plus D.C. Even if you are able to participate, you might have trouble finding loans because of the recent influx of institutional investors. “Depending on how much you’re looking to invest and how specific you are about the characteristics, it can take up to a few weeks to deploy money in my experience,” says Marc Prosser, publisher of LearnBonds.com and a Lending Club investor.

What Risks You Face

For the average-risk loan on Lending Club, returns in late 2013 averaged 8% to 9%, with a default rate of 2% to 4% since 2009. By contrast, junk bonds, which have had similar default rates, are yielding 5.7%. But P2P default rates apply only to the past few years, when the economy has been on an upswing; should it falter, the percentage of defaults could rise dramatically. In 2009, for example, Prosper’s default rate hit almost 30% (though its rate is now similar to Lending Club’s). Moreover, adds Colorado Springs financial planner Allan Roth, “a peer loan is unsecured. If it defaults, your money is gone.”

How to Do It Right

Spread your bets. Lending Club and Prosper both urge investors to diversify as much as possible.

Stick to higher quality. Should the economy turn, the lowest-grade loans will likely see the largest spike in defaults, so it’s better to stay in the middle to upper range—lower A to C on the sites’ rating scales. (The highest A loans often don’t pay much more than safer options.)

Stay small. Until P2P lending is more time-tested, says Roth, it’s best to limit your investment to less than 5% of your total portfolio. “Don’t bank the future of your family on this,” he adds.

MONEY Economy

Is Inflation Really Dead?

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Joe Pugliese

We put the question to Pimco Chief Economist Paul McCulley, who explains why you don't have to worry about rising prices—and why Forrest Gump was a great economist.

Paul McCulley, 57, retired from Pimco in 2010 but returned as chief economist in May. Pimco runs almost $2 trillion, including Pimco Total Return, the world’s largest bond mutual fund. McCulley coined the term “shadow banks” in 2007 to explain how Wall Street could trigger a financial panic.

MONEY assistant managing editor Pat Regnier spoke to McCulley in late July; this edited interview appeared in the September 2014 issue of the magazine.

Q: Is inflation really dead?

A: Inflation, which is below 2% per year, may very well move above 2%. In fact, that is very much the Federal Reserve’s objective. So it will move up, but only from below 2% to just above 2%. But in terms of whether we will have an inflationary problem, I don’t think we have much to worry about. Back in my youth, in the days of Paul Volcker at the Fed in the early 1980s, inflation was considered the No. 1 problem. Now I’m not even sure it’s on the top 10 list, but it for darned sure ain’t No. 1.

Q: What’s holding inflation down?

A: First, we’ve had very low inflation for a long time, and there’s inertia to inflation. The best indicator of where inflation will be next year is to start from where it is this year. We won the war against inflation. It’s that simple.

Second, we still have slack in our economy, in both labor markets as well as in product markets. Companies have very little pricing power—as an aside, the Internet is a reinforcing factor because consumers can find the price of everything. And we have too many people unemployed or underemployed for workers to be running around demanding raises.

Finally, the Fed has credibility, so expectations of inflation are low. Unmoored expectations could foster higher inflation, as companies try to anticipate higher costs. Fed credibility is a bulwark against that. Unlike 30 years ago, the Fed has had demonstrable success in keeping prices stable by showing it is willing to raise short-term rates to slow growth and inflation.

Q: What about quantitative easing, in which the Fed buys bonds with money it creates? Doesn’t that create inflationary pressure?

A: I’ve been hearing that song for the last five years. And inflation has yet to show up on the dance floor. People say, “The Fed’s been printing money. It’s got to someday show up in higher inflation.” My answer, borrowing from the famous economist Forrest Gump, is that money is as money does. And it ain’t doin’ much.

Q: You mean money isn’t getting out of banks into the broader economy to drive up prices?

A: Yeah. I mean the Fed has created a lot of money, but it’s done so when the private sector is in deleveraging mode, meaning people are trying to get out of debt. There has been low demand for credit, so the inflationary effect of money creation has been very feeble.

Q: You’ve said that a low-inflation world also means low yields and low fixed-income returns. Why?

A: People my age—I’m 57—remember the days of double-digit interest rates and double-digit inflation. But as the Fed’s fought and won its multidecade war against inflation, interest rates have come down. And it has been a glorious ride for bond investors from a total-return perspective because when interest rates fall, bond prices go up, so you earn more than the stated interest rate.

But now inflation is actually below where the Fed says it should be. So there’s nowhere lower that we want to go on inflation to pull interest rates down further. Now what you see is what you get, which is low stated nominal yields. In fact, rates will drift up in the years ahead, which is actually negative for the prices of bonds.

Q: What does this mean for how I should be positioning myself as a bond investor?

A: First and foremost is to set realistic expectations that low single digits is all you’re going to get from your bond allocation.

New normal

Q: Is there anything I can do to get better yields?

A: For bond investors, what makes sense right now is to be in what Pimco Total Return Fund manager Bill Gross calls “safe spread” investments. These are shorter-duration bonds—meaning they are less sensitive to interest rate changes—that also pay out higher yields than Treasuries do. These could be corporate bonds or mortgage-related debt. They can also be global bonds.

Q: Pimco says investors should also hold some TIPS, or Treasury Inflation-Protected Securities. Why would I own an inflation-protected bond in a low-inflation world?

A: It’s a diversification bet in some respects. But also, the Fed’s objective is 2% inflation, higher than it is now. What’s more likely? That the Fed misses the mark by letting inflation fall to 1%, or by letting inflation hit 3%? I think 3% to 4% is more likely. TIPS protect you against the risk of 3% to 4% inflation. The Fed has made clear that if it’s going to make a mistake, it wants to tilt to the high side, not the low.

Q: Why wouldn’t the Fed just aim for the lowest possible inflation rate?

A: When the next recession hits, do you want a starting point of inflation in the 1% zone? No. A recession pulls down inflation, and then you are in the zero-inflation or deflation zone.

Q: And deflation is bad because … ?

A: Because then people with debt face a higher real burden of paying it off.

Q: How much time does Pimco spend guessing what the Fed will decide? Pimco Total Return lagged in 2013 when the Fed signaled an earlier-than-expected end to quantitative easing.

A: You’ve asked me a difficult question because I wasn’t here. But I was here for the entire first decade of the 2000s, and I know a lot about the firm. I can tell you the firm spends a huge amount of time and, more important, intellectual energy in macroeconomic analysis, including trying to reverse-engineer what the Fed’s game plan is. Fed anticipation is a key to what Pimco does. You don’t always get it right, but not for a lack of effort.

Q: You argued the 2008 crisis was the result of good times making investors complacent. With Fed chair Janet Yellen talking about high prices for things like biotech stocks, is complacency a danger again?

A: I don’t worry too much about irrational exuberance in things like biotech. It doesn’t involve the irrational creation of credit, as the property bubble did. Think of the Internet and tech bubble back in 1999. It created a nasty spell, but it didn’t lead to five years in purgatory for the economy either.

MONEY

No, Warren Buffett Is Not a Tax Hypocrite on Burger King

Warren Buffett
Andrew Harrer—Bloomberg via Getty Images

The investor's Berkshire Hathaway is helping to finance a deal that would turn Burger King into a Canadian company for tax purposes.

Burger King and Tim Horton have made it official: They’re planning to merge, and when all is said and done the new headquarters will be in Canada, not the U.S. By using Ontario as the address for the combined company—the operational HQ for BK restaurant will remain in Miami, the company says—the company may stand to pay a lower tax rate. This has linked BK to the roiling political controversy over “inversions,” in which American companies merge with smaller firms located abroad to become foreign companies for tax purposes.

Part of the financing for the deal comes from Berkshire Hathaway, the company run by famed investor Warren Buffett. He’s long been a a critic of the way our tax code favors, in his view, super-wealthy people like him. Back during the 2012 campaign, President Obama, whom Buffett supported, loved to bring up Buffett’s observation that he actually paid a lower tax rate than his secretary. Obama even proposed a “Buffett rule” that anyone earning more than $1 million should pay at least a 30% effective federal rate.

So a critic of the tax code is taxing advantage of what looks like a loophole in the tax code. This has already prompted some to call Buffett a hypocrite. Neil Cavuto at Fox Business doesn’t go to the H-word but says of Buffett: “It sets him up essentially against himself – and his oft-repeated claim those who have more should pay more in taxes.”

No, not really. First, it’s hardly news that Buffett has always been very shrewd about investing with an eye toward keeping taxes low. A small example: As Bloomberg News pointed out in March, tax savings are one reason Buffett says he prefers to buy companies outright when he can, instead of simply holding stock.

Second, while this is a story that’s very much developing, it is not clear that the Burger King/Tim Horton’s deal is mainly about lowering taxes. As MONEY’s Paul Lim argued yesterday, it may have more to do with diversifying Burger King’s portfolio beyond the slow-growing hamburger business. (BK will still pay U.S. taxes on its U.S. earnings. Though, as Reuters explains, locating in Canada now could eventually become more valuable if the company expands abroad.)

But mainly, suggestions of hypocrisy ring false because Buffett has never, ever held himself out as person who pays more taxes than he has to. The whole point of his story about his tax rate vs. his secretary’s is that he was allowed to pay less than he thought he should. He never said he was writing a check to the Treasury to make up the difference. He just said the law didn’t make any sense, and then he actively he supported a change that would presumably cost him money.

Also, if we had a Buffett rule that captured more of the income of high earners, complex corporate deals that cut taxes would actually be a little less worrying. After all, the ultimate beneficiaries of inversions and the like are the shareholders of companies. And that means it’s wealthy households who get the biggest bang for the tax-saving buck when a U.S. company heads abroad.

MONEY S&P 500

3 Lessons From S&P 2000

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Getty

It has taken 16 years for the S&P 500 to climb to 2000 from 1000. Here are three takeaways for investors about the journey to the 2000 mark.

Updated: 5:45pm

On Tuesday, the index of 500 of the largest U.S. companies dashed across the 2000 level for the first time—16 years after crossing the 1000 milestone and a week after the Dow regained 17,000.

The market’s march from 1000 to 2000 will be remembered as tumultuous chapter in market history. The first S&P crossed the four-digit mark way back in February 1998, according to data from S&P Dow Jones Indices, before the bursting of the Internet bubble and the financial crisis. Between then and now, in fact, the market tumbled back to below 700 in 2009.

Here are three takeaways for investors about the journey to the 2000 mark.

1. It started in a tech rally, and it ended in a tech rally. But overall, technology has been a pretty average investment.

If you’ve been reading market news lately, you’d be forgiven for thinking the bull market is all about Apple, Google and other hot tech stocks. There’s no doubt these have been big winners: Apple APPLE INC. AAPL 0.2445% , which trades for more than $100 today, traded at a split-adjusted price of just 63 cents in February 1998, more than three years before the launch of the first iPod, according to S&P Dow Jones. But picking the next tech winner is no easy feat. On average, tech companies have delivered a total return of 6.1% a year since 1998. That’s actually slightly below the S&P’s 6.2% total return, suggesting plenty of losers and mediocrities offset a few fabulous winners.

2. The real boom was in energy.

If tech stocks are lagging the field, what’s led it? Energy stocks have been easily the best performing sector of the S&P 500, returning nearly 11% a year, on average, over the past 16 years, says S&P Dow Jones. While oil prices are is notoriously volatile, for the past 16 years they’ve made a steady climb, aside from a brief plunge during the late recession. Around $22 in early 1998, a barrel of oil is more than $90 today. Because if there’s one thing that’s arguably bigger than the Internet revolution, it’s been the the rise of developing nations like China, India and Brazil. Their growing number of factories and middle-class automobile owners have continually ratcheted up demand for energy commodities.

3. For buy-and-hold investors, dividends can be powerful over time.

While the S&P 500’s milestone is certainly worth noting, it’s also a reminder that paying too close attention to stock market swings isn’t the best strategy. While it’s taken 16 years for stock price levels to double, investors who simply bought and held stocks in a low-cost index fund could have gotten there sooner. (Somewhere around early 2013.) That’s because stock-market gauges like the S&P 500 don’t account for dividends. But if you hold a mutual fund that automatically reinvests dividends, your portfolio does. Dividends accounted for about a third of the S&P 500s average annual total return over the time it took for the index to rise from 1000 to 2000, according to S&P Dow Jones.

ycharts_chart(3)

Since early 1998, including dividends, the S&P 500 is up 170% as of yesterday (see the chart above), compared to almost 100% for the raw index. We’ll see if the S&P 500 can top 2000 mark today and make that a triple-digit percentage rise.

MONEY wall street

Burger King Wants to Cut its Exposure to Hamburgers, Not Just Taxes

While all the focus is on the tax savings Burger King could enjoy through a Canadian inversion, the real benefit of buying Tim Hortons is boosting breakfast and coffee sales.

The initial media reaction is that Burger King is turning its back on America by reportedly seeking to buy the Canadian coffee-and-doughnut chain Tim Hortons. After all, it can move its headquarters to Ontario to pay less in taxes.

In reality, Burger King BURGER KING WORLDWIDE INC BKW 2.3315% may be more interested in turning its back on the hamburger.

The $11 billion burger chain is in talks to buy Tim Hortons TIM HORTONS INC THI 0.1369% , Canada’s biggest fast-food chain with a market value of around $10 billion. The deal would reportedly involve a so-called inversion, where Florida-based Burger King would for tax purposes be headquartered in Canada, where the top corporate tax rate is 15%, versus 35% in the U.S.

But as The New York Times pointed out, Burger King’s tax rate is actually closer to 27%, and this inversion really wouldn’t cut its taxes that much because the majority of its revenues are generated in the U.S. Even if it moved to Canada, BK would still be on the hook for U.S. taxes on sales made on American soil.

No, there’s something else driving this deal, and it could be that Burger King wants to abdicate its rule over burgers and switch kingdoms.

As Americans’ tastes have changed, burger sales, which have long dominated the fast-food landscape, have started to stall. Last year, for instance, revenues at Burger King restaurants in the U.S. that have been open for at least a year fell 0.9%, while U.S. same-store sales at McDonald’s slumped 0.2%. By comparison, Starbucks STARBUCKS CORP. SBUX 0% reported an 8% rise in comparable store sales in fiscal 2013 while Dunkin’ Brands DUNKIN BRANDS GROUP DNKN -0.0689% , the parent company of Dunkin’ Donuts, enjoyed a 3.4% rise in revenues.

This isn’t just a short-term problem. Analysts at Janney Montgomery Scott recently noted that while three of the five biggest fast-food chains in the U.S. are still hamburger joints (McDonald’s, Wendy’s, and Burger King), by 2020 that number should drop to just one: McDonald’s.

Meanwhile, coffee chains Starbucks and Dunkin’ Donuts are expected to move up the ranks. And McDonald’s is itself doubling down on coffee, pushing more java not just in its restaurants but also on supermarket shelves.

Noticing a common theme here?

In the fast food realm, there are three buzzy trends right now. There’s the rise of the higher-end “fast-casual” restaurants such as Chipotle Mexican GrillCHIPOTLE MEXICAN GRILL INC. CMG 0.1195% . There’s the explosion of cafe coffee shops, which according to the consulting firm Technomic was the fastest-growing part of the fast-food industry last year, with growth of 9%.

Darren Tristano, executive vice president at Technomic, recently noted that “the segment continues to be the high-growth industry leader with Dunkin’ Donuts and Tim Hortons rapidly expanding.”

He added:

[The] coffee-café segment competition will heat up, and new national chain, regional chain and independent units will increase major market penetration. Smaller rural and suburban markets will be getting more attention. Fast-casual brands in the bakery-café segment like Panera Bread, Einstein Bros. Bagels and Corner Bakery will also create new options for consumers as more locations open. Quick-service brands like McDonald’s will provide lower-priced, drive-thru convenience that provide value-seekers with a strong level of quality that is also affordable.

And the third area of growth in fast food is breakfast. According to The NPD Group, while total “quick serve” restaurant traffic fell by 1% at lunch and dinner time in 2013, business at breakfast time rose 3%.

“Breakfast continues to be a bright spot for the restaurant industry as evidenced by the number of chains expanding their breakfast offerings and times,” says Bonnie Riggs, NPD’s restaurant industry analyst.

Now, while Burger King isn’t really positioned to go after the Chipotles of the world, the acquisition of Tim Hortons could quickly make it a bigger player in the coffee and breakfast markets, where it has languished far behind McDonald’s and Dunkin’ Donuts.

Tim Horton’s already controls 75% of the Canadian market for caffeinated beverages sold at fast-food restaurants, according to Morningstar, and more than half the foot traffic at the key morning rush hour.

Morningstar analyst R.J. Hottovy noted recently that same-store sales throughout the chain are expected to rise 3-4% over the next decade, which would be a marked improvement over the same-store declines that Burger King has been witnessing lately.

Even though Burger King is a bigger company by market capitalization, it generates less than half the $3 billion in annual revenues that Tim Hortons does. This means that by buying the Canadian chain, Burger King will be able to buy the type of same-store growth that it could not muster with hamburgers and fries.

So the next time you go to Burger King, don’t be surprised if they ask you “would like some coffee to go with that?”

SLIDESHOW: Burger King’s Worldwide Journey To Canada

 

 

MONEY

Don’t Worry About Inflation Yet, Say Economists

A group of 257 economists say the Federal Reserve is right to keep interest rates low.

A new study shows economists believe the Federal Reserve is doing the right thing by keeping interest rates low.

According to the August Economic Policy Survey, published semiannually by the National Association for Business Economics, 53% of the association’s 257 members said monetary policy was on the right track, while only 39% felt policy was too stimulative.

There has been concern from some quarters that the Fed’s consistently low rates are flooding the market with cheap credit, pushing up the cost of goods. Inflation already appears to have reached the Federal Reserve’s target of 2%, and some, like Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott, think the central bank must act far in advance to prevent prices from rising too quickly.

The Fed has countered that employment and the real estate market must recover further—neither area is back to pre-recession levels—before upping interest rates becomes a viable option. Raising rates while the economy is still weak has the potential to stall GDP growth if businesses once again become reluctant invest money in jobs and capital. MONEY’s Taylor Tepper previously explained how Sweden’s premature interest rate hike has put the brakes on what was once Europe’s most encouraging economic comeback.

For now, at least, economists at the NABE seem to have taken the Federal Reserve’s side.

“Most panelists do not see inflation being a major concern in the coming years,” said Peter Evans, chair of the NABE Policy Survey Committee. “The majority of NABE panelists believe that inflation will be at or near 2% in 5 years.”

However, that support may not be permanent. Evans says the central bank’s approval rating inside NABE has edged downward since last year. All eyes remain on the Fed as it gradually winds down its quantitative easing program and watches the job market for signs of improvement. If inflation picks up, the bank may have to act—or risk a much less favorable approval rating from experts 12 months from now.

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