The Macro Economy of Vermont Restaurants

Hi folks! How was your week? As per previous years the AoF family de-camped for Presidents’ Week to Vermont to get in some serious skiing. However, whilst the skiing conditions were mixed, the restaurants provided a uniformly bad experience! Let me tell you why this matters to you and your portfolio.

Macro Economy

Were you expecting the next in the Inflation Risk series? I handed the baton to my blogging buddy ERN at and he raised the bar with Episode 2. I need to knuckle down and get on with Episode 3; so make sure you return soon. Given ERN declared February as “Macroeconomic Month” I will be declaring March as “March Macro Madness Month”!

But let’s now get back to my recent vacation…

Food Budget

Normally we have a pretty strict monthly food budget that captures groceries, restaurants, coffee shops etc, and we have seen some real success in bringing this family spending down. You can see below from the trailing 12 month average that the AoF family food spending peaked in the summer last year and after some sustained effort has been brought under control.

AoF Family Food Spending

The key area we have cut out is restaurants, and we’ve honestly not missed it at all, but on this particular trip my mom came, and she likes to sample the local restaurants.

Restaurant Hijinks

I’ll keep this brief to spare you all the details, but we experienced three nights of restaurant pain.

On the first night we were kept at our table for over an hour before even being allowed to order since we were told the kitchen could not cope with the flow. The restaurant certainly was not full, and my son perspicaciously commented that a chef had probably just walked out. My calm complaint about the wait and lack of communication was met by a red-faced manager perspiring from having to wait tables all evening to pull in the slack.

On the second night we visited four restaurants before finding one that could seat us immediately. For some reason Vermont doesn’t believe in advance booking so trudging from place to place is the only way to go.

On the third night we waited disconsolately by the greeting station for around 5 minutes while staff rushed back and forth failing to greet us. After a period the manager came to seat us and conspiratorially whispered that it was impossible to retain and recruit staff.

These experiences made me think of the macroeconomic ramifications…


There are two key macroeconomic conclusions I took away from this experience:

  1. Restaurants are busy with no shortage of customers. People seem to have money to fill ski resorts and their neighboring restaurants. My conclusion here is that the economy is doing well and people feel confident about their jobs, and are willing to engage in discretionary spending.
  2. For relatively transient work, like waiting tables and kitchen staff, there seems to be difficulty in filling these positions and retaining enough staff to cope with the restaurant demand. This can only happen if there are many available jobs in the economy and not enough people to fill them. The fancy economist-speak for this situation is “full employment”.

You might know that the economy goes in boom/bust cycles, and in all the commentary I read from people smarter than me, the current position in the market cycle is described as “late cycle expansion”. From my observations above, I have to agree, and this is significant since this phase presages a bust, or recession. The following chart neatly shows the cycle of unemployment, and you can see the current very low level of unemployment.

Unemployment rate

Pedal that Macro Cycle!

Let me provide a little more color on economic cycles.

We’ve just undergone a period of extraordinarily low interest rates that has permitted companies to invest in their businesses. They have expanded their output, and as a result hired more people to provide their goods and services to the market. In return, more people are employed and earning a wage, and this has created more demand in the economy, thus fueling growth. It’s the classic expansionary part of the cycle.

However all good things end…

The labor force is an economic good like any other, and as demand for labor increases the price of labor increases. Errrr what? The “price” of labor is just a fancy way of economists to refer to wages. We started to see some small upward movements in wages and the market began to freak.

You might be asking why, since surely higher wages are good – I know I like higher wages!

As people have more money in their pocket they tend to spend more, creating demand for skiing, restaurants and all that stuff in Target that is impossible not to buy. This creates inflation (see part 1 and part 2). A little inflation is desirable, but not if it gets out of control, and this is where the Federal Reserve steps in. They will generally increase interest rates to try and dampen down all the fun.

They have a very tricky job as they don’t want to over or under react. If they raise rates too fast then the market has a meltdown, but not raising fast enough means that Vermont Restaurants end up having to pay their staff crazy rates and passing on those costs in exorbitant burger prices. This then dampens demand and will eventually result in the very same restaurants having to lay off staff as customers fall.

Have you signed up for email updates to make sure you get the next Inflation Risk instalment? You should also sign up for earlyretirementnow’s  list to get those episodes too! You might have thought I could figure out how to get the email signup box here, but I don’t have time to sort that out. Also follow me on Twitter @actuaryonfire. I’m almost at 1,000 followers.

Where on the Cycle?

The key question is – where exactly are we in the current cycle?

GDP since the last peak

The above chart from BlackRock shows GDP growth of the most recent economic recovery periods where the starting period is taken from the prior peak. The current recovery looks relatively weak compared to the recovery from other recessions. This might lead you to two conclusions; either we have a weak recovery that could easily be cracked, or we have a long way to go before the next bust.

However BlackRock re-based the time axis and matched up different points of the economic cycles, and this produced a different picture.

GDP on different time axis

When you look at the current recovery measured with an altered time axis you see that the current recovery is at potential and we are entering the late stage of the cycle. This is consistent with my restaurant observations above.

When you look at unemployment on the altered time axis, you see again that this recovery looks very consistent with other recovery periods. In addition, this chart also points to the present being at the late stage expansion before the economy over-heats.


Portfolio Thoughts

These observations seem to suggest to me that we are perhaps a year or two away from the next recession. It’s then natural to ask – do I want to time my asset allocation?


All the data seems to point to a reasonable late stage expansion and calling the date of the next recession would be impossible.

I think the biggest danger is to the next batch of early retirees and sequence of returns risk. For those retiring in the next year or so there is a real danger of entering retirement during a recession and the concomitant market drops. As we know capital losses early in the drawdown phase poses large solvency risks.

[Oooohh! That was smarty-pants actuary-speak huh? Just say that last sentence out loud in front of a mirror and pretend to be an actuary. Go on – I give you permission!  Said in plainer English I meant that if you start your retirement and the market crashes then you are have a much higher risk of running out of money later in life, and that’s a bummer.]

If I was early retiring over the next couple of years I might pare back my equity allocation simply to try and mitigate sequence of returns. I’m not sure I have the conviction to reduce my portfolio risk significantly but perhaps an additional 20% in bonds feels about right. I would then be ready to ramp up the equities as my retirement progressed.

Whadya think? Have you had any poor retail experiences that made you question your investment strategy? Have you ever pretended to be an actuary in front of the mirror? (go on, you can tell me!)

7 thoughts on “The Macro Economy of Vermont Restaurants”

  1. I can so relate to your Vermont restaurant woes, as their neighbor in New Hampshire 15 minutes away. We are indeed at full employment here in the Upper Valley, as evidenced by “Hiring” and “Help Wanted” signs all over the place. We have noticed, in the 8 years that we’ve lived here, that restaurant service in general is poor. We moved in from Atlanta, and noticed that the lack of competition (or at least that’s my non-actuary understanding of the situation) has resulted in lackluster service across the two states. Of course, with the addition of inability to retain staff because they have so many employment choices, you’re in for a really terrible experience. Oh well! At least you got your bloody Mary?!

    1. actuary on FIRE

      More than one bloody Mary Laurie – believe me!
      I’ve also heard due to full employment Maine can’t get enough staff to plow snow.
      You shouldn’t need to worry about restaurants with your ice fishing skills – you’re practically self-sufficient!

  2. I am not sure you can explain all of the poor service and food on the economy. There are several places in Europe (Germany, northern Italy) and other parts (Mumbai, India) where they have a similar growth economy and we get great service and great food.
    I believe there are other issues at work: many Americans unwilling to cook at home (esp my Millennial children), poor prep in restaurants that put $$ over quality, and general lack of quality service in American restaurants.
    I do, however, appreciate your macroeconomic overlay and your very humorous articles. Keep them coming. Had a good chuckle this morning.

    1. actuary on FIRE

      Humorous?! This is a serious blog!
      j/k I appreciate you visiting and commenting – thanks Doc B. I also don’t disagree with your points.

  3. This post is poignant for me. I am FIRE and in full retirement, so I actually am in the middle of the FIRE. It is not theoretical. Every month for the next 40 or 50 years I have to make my nut. I’m done working, I’m not doing any side gigs or any of that, pretending to be retired though I could. I’ve become way too jealous of my time to con myself into thinking a side gig is “fun”. You can put whatever language you like on it, it’s a job.

    I purchased my portfolio over many decades. My portfolio is designed to give me security in this non working stage of my life, no matter the macro economy. When I purchased my portfolio I purchased assets, when combined, give me a certain return (money over and above savings also called interest) and with that I also purchased a certain risk, which is a probability my return will fail or even go to a loss. One way to look at return, is to understand you pay for return with risk. Once you understand this you can ask “am I paying with too much risk for my return”, and this is the KEY QUESTION! What is the correct risk premium for a given return. So the question becomes truly about AA. If your AA is too risky you’re hosed. If your AA is not risky enough your return is hosed.

    The Fed I think saved us from deflation. Buying toxic assets and replacing them with short term assets which they could control with interest rates saved the economy. What that did however was force investors into buying stocks because bonds debt and interest were essentially paying nothing in return. So people got comfortable and in fact cocky buying stocks. Stocks are inherently risky. A little Math

    VTSMX the excellent total stock market Vanguard fund has a risk of 15.36% and a return of 9.73%

    The Bogelhead3 (VTSMX, VGTSX, VBFMX in some random 50:30:20 ratio) is 12.88% risk and 7.22% expected return

    A 63/37 VTSMX, VBFMX portfolio has 9.78% risk and 7.95% return

    So a 100% VTSMX portfolio returns 18% more than the 63/37 portfolio BUT the VTSMX portfolio is 38% less risky. So you are paying a huge risk premium for a little bit more return. You might say yay yay but I got steel balls I can take it. Well the part not analyzed is time.

    If you have $10,000 in VTSMX and suddenly the market craps 50% You now have $5000 of VTSMX If you have $10,000 of 63/37 your predicted drop is 34% less so you drop to $6600. Now the time part. To get back to $10,000 the 100% VTSMX portfolio may take 5 years to make up the $5000 dollars. The 63/37 portfolio may take only 3 years to make up the $3400 dollars lost. By the time Mr VTSMX is even Mr 63/37 is maybe 18% ahead. That is the power of diversity.

    Notice how inefficient the presumed better diversified Bogelhead3 is compared to 63/37. When the market dumps the bogelhead3 dumps only 17% less than VTSMX. The problem with the bogelhead 3 is its diversity is really pretend diversity. VTSMX and VGTSX are correlated at 86% and when it hits the fan that high level of correlation provides no protection.

    Bonds Stocks and interest are all 90% off the mean of their projected value which means there is a regression to the mean going to happen. It can happen slowly as in the presumed 6% real growth becomes only 2% real growth or it can be all at once with a several thousand point market drop. Either way regression to the mean means you are going to be paying WAY too much for the risk you own. The solution to too much risk is to sell some risk and buy something less risky. In the long term I’ll collect that 18% I make as the market goes back up in a less risky portfolio. I may suffer 4 or 5 market drops in my investing lifetime. Also consider the time in the market. The longer in the more interest accrues. If you’re carrying too much risk, today may be a good day with the market this advanced to move some into less risky assets. In retirement investing you get paid for being smart not for having brass balls. When I retired I moved some into bonds (de-risking) and long term tips (inflation protection). I’ve recently raised cash (prior to the crash) to pay for inevitable taxes I’m going to incur on Roth conversions over the next 4 years. I sold high. In 6 or 7 years when SORR is a little less concern I will have some cash to reinvest in a little riskier portfolio. Hopefully by then we will be closer to the mean. or I be that much closer to my demise and won’t be around to suffer the consequence of my thinking.

    That’s my mean mr. macro perspective from the middle of the FIRE. I’ve also cut back on restaurants but Outback has a deal on steak and lobster and my 88 y.o. mama loves her some steak and lobster so I’ll force myself to go till the special is over. Poor me.

    Sorry for the long reply. Guess I should start my own blog

    1. So sorry! This got caught in the spam folder for some reason.
      Dunno why it’s suddenly spamming you Gasem.

  4. I heard Robert Shiller in an interview yesterday say something like “Party like it’s 1928 again!”. I think you are both on the same page, or at least both trying to get that same table at the same restaurant.

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