Is America Losing Its Appetite?

McDonald’s (NYSE: MCD) had a great second quarter, but lurking in the company’s conference call was an ominous warning.

“The U.S. remained challenging as visits across the industry by low-income consumers once again declined by double digits versus the prior year period,” said CEO Chris Kempczinski. “Reengaging the low-income consumer is critical as they typically visit our restaurants more frequently than middle- and high-income consumers.”

Indeed, most observers attribute McDonald’s stand-out results — which included a 2.5% increase in same-store sales and a 5% jump in revenue — to the $5 value meal it launched last year.

It also echoed another trend that we’ve seen with the likes of Walmart (NYSE: WMT), which is that higher-end customers are bargain shopping while lower-income Americans are simply falling back. 

The broader decline in the fast-food industry is another red flag. 

KFC and Pizza Hut both reported a 5% drop in second-quarter sales in their most recent quarter. Wendy’s reported a 3.6% drop. And Popeyes posted a 0.9% decline. 

Slightly higher end fast-casual trends are experiencing a downturn, too.

Bloomin’ Brands (NASDAQ: BLMN) — the parent company of U.S. restaurant chains Bonefish Grill and Outback Steakhouse among others — just saw its stock tank 40% after the company cut its forecast.

It reported a 5.8% drop in comparable sales at Bonefish Grill and 0.6% drop at Outback, resulting in an 11% drop in net sales. The company also expects comparable sales to fall as much as 1% in the current quarter.

Salad slinger Sweetgreen (NYSE: SG) has lost 30% of its value in the past month, as it too reported a decline in same-store sales and lower guidance.

And that’s not all. 

Restaurants are also being squeezed by higher input costs for food staples, like eggs, beef, and coffee.

Egg prices are up 27% in the past year. Ground beef costs 10% more. And coffee prices are up 13.5%.

There are numerous reasons for this including extreme weather, bird flu, tariffs, and labor issues. And it’s not exactly clear when or by what degree those price pressures will be alleviated.

Obviously, that’s a problem for millions of Americans standing in line at the grocery store as well.

Grocery prices surged a full 3% in June, which explains why so many more people are choosing to dine in rather than out.

Piling on even further, the latest batch of labor data was shockingly bleak. 

Employers added just 73,000 jobs in July, well below the 110,000 consensus estimate. And worse, they revised down the job growth of the past few months by 258,000.

Big revisions like that aren’t exactly routine — but they aren’t terribly uncommon, either. And they tend to show up when the economy is at an inflection point, which may well be the case.

Also troubling is that the majority of industries (53%) are cutting jobs, as opposed to adding them.

It’s possible that companies are simply holding tight until they get a clearer picture on policy. 

President Trump’s tariffs have been applied in fits and starts with moving deadlines and rapid-fire dealmaking. 

They’ve also been mitigated by a proactive approach that saw many market participants load up on materials and merchandise before the taxes took effect. 

However, those inventories have been dwindling for months and may soon have to be backfilled with higher-cost replacements.

The higher prices won’t do much to loosen up consumer spending or make things easier on restaurants that have to pay more for ingredients.

It’s still too early to draw a definitive conclusion, but restaurant dining has become a clear liability for the economy. So investors would do well to steer clear of the sector for the time being.