First, let me apologize to my vegetarian and vegan readers. We’re about to embark on a meaty economic journey. OK, now let me apologize to everyone else for a bunch of really bad puns.

In 1986 The Economist magazine invented “The Big Mac Index” as a mildly entertaining way to gauge whether a country’s currency was correctly valued. The theory, simply stated, is that since a Big Mac is supposed to have identical ingredients – regardless of where it’s made – then it should cost exactly the same amount, regardless of where in the world you buy it. Makes sense. Quoting the Economist, “*Burgernomics was never intended as a precise gauge of currency misalignment, merely a tool to make exchange-rate theory more digestible.*”

See? I’m not the only one with bad puns. Well, it turns out that after converting the price of the Big Mac from the local currency (where the Big Mac is being sold) into dollars the price actually varies quite a bit, country to country. And this variation indicates whether or not the local currency is over- or under-valued. The URL below uses this example: “*…the average price of a Big Mac in America in January 2016 was $4.93; in China it was only $2.68 at market exchange rates. So the “raw” Big Mac index says that the yuan was undervalued by 46% at that time.*”

Here’s the URL: http://www.economist.com/content/big-mac-index

Chew on that conclusion for a while…and then we’ll move on, because this BLOG isn’t about a measly Big Mac. Oh no. We’re going to sink our teeth into a much bigger topic: STEAK! More specifically, I’d like to introduce my **‘Steak House Index’**, or the **SHI** for short.

What is the Terry Liebman **SHI**? Hopefully, another predictive way to accurately gauge the future performance of the US economy. Note I used the word ‘predictive’? That’s because we usually only know we’re in a recession about 6-months AFTER we’re in it. By the time we hear the GDP has shrunk for 2 consecutive quarters, any choices we make are reactive. We have little opportunity to adjust our decisions – business or personal – to deal with the change.

But if we can possibly predict when a slow-down or recession will occur, we can make better choices ahead of the curve, so to speak. Enter the **SHI**! Tasty!

Depending on who you ask, about 70% of the US GDP is generated from ‘consumer spending.’ Which means, far and away, consumer spending/consumption is the single most important economic indicator – one that bears close scrutiny if you’re trying to gauge how the economy is doing – now and in the near future.

In the macro, collectively, our behaviors are rational. Meaning, when faced with danger, we pull back. When faced with ‘financial’ danger, we do the same: we adapt our behavior to the conditions in which we find ourselves.

If we – or our company (for those of you on a company ‘expense account’) – are feeling financially pinched, are we going to take a party of 4 people to an expensive steak house for dinner on a Saturday night? Probably not. Conversely, if we’re feeling flush, sure, we’ll go to Ruth’s Chris Steak House on Saturday night and spend $200 or $300 for dinner.

So the availability of reservation ‘slots,’ at expensive steak house restaurants, might be a good indicator of current economic strength, right? Even better, a weekly ‘index’ reading that is compiled using consistent and precise methodology could, over the long term, help us gain some idea of whether or not the economy is growing or is under stress, and might begin to shrink. That’s what the SHI is.

Here is my methodology:

1. Using OpenTable I selected four (4) well know, very expensive (>$50 per person) and highly rated steak houses (by consumers), operated by somewhat national companies. Two are owned by a ‘private’ company; two are publicly traded. (See the notes below.)

2. Saturday night is the most popular night of the week to eat out. That’s when restaurants are in the highest demand…the most crowded. And while at home most Americans tend to eat dinner between 6:00 and 7:00, 7:00 to 7:30 pm – with 7:30 pm seeming to be the focal point of highest demand – seems to be the most popular ‘reservation time’. Which means, at times of high demand, those slots will not be available….but slots with ‘lesser’ demand might be open.

3. Using OpenTable, I attempted to make Saturday night reservations on the Wednesday immediately preceding the ‘dinner date.’ For a party of 4.

4. I created a matrix (chart) with reservation ‘slots’ in 15 minute increments beginning at 5:45 pm thru 9:00 pm.

5. I assigned a ‘value’ to each of the 14 time slots for each restaurant. For example, if a 7:30 slot is available at Ruth’s Chris, this is a bad sign. The most popular time…available? Hmmm…so this is a negative value of (-2). We expect this popular slot to be unavailable, however. Right? After all, we’re making Saturday reservations on Wednesday – the popular times should be booked. So, if this slot is unavailable, this value is only a +0.5. And so on. (Complete index model methodology is available – ask and I’ll gladly post it…or send it to you personally.)

6. Using this methodology, the possible weekly range of outcomes is (-44) to a positive 72. Meaning if EVERY reservation slot for the four restaurants – between 5:45 and 9:00 pm – is available, the reading is a -44. If they’re all taken – meaning NO reservations are available, the reading is a positive 72. More likely would be a reading, or index outcome, between these two end points.

7. Finally, I charted the availability – or lack thereof – for each of the 4 steak houses at each of the time slots. 14 time slots for each restaurant, or 56 possible reservation slots total. And developed an index reading for that week.

8. This process will be repeated every week – on Wednesday – so that we can create a meaningful index history which, hopefully, will prove useful in portraying current, and predicting future, economic activity.

Got it? Make sense? If not, don’t worry. Just know that I plan to apply the methodology in an identical fashion week after week.

For today, the SHI had a reading of (-1). Why so low? Well, I was surprised to see reservation slots are available at The Capital Grille for every 15 minute slot between 5:45 and 9:00 pm. On the other hand, Mastro’s Steak House was ‘booked’ until 8:15 pm – a very positive economic indicator.

So our first reading of the **SHI** is a negative 1. OK. It’s a start. Every Wednesday, from here on, we’ll get a new reading and see if the Terry Liebman **SHI** is something we can sink our teeth into – or if it’s just, unfortunately, unappetizing.

*Notes:*

* Mastro’s Steakhouse is owned by Landry’s Inc since 2013. A privately owned company with more than 500 restaurants, hotels, casinos in 35 states. Mortons Steakhouse is also owned by Landry’s Inc since 2012. **Ruth’s Chris Steakhouse is a public company, trading on the NASDAQ under the symbol ‘RUTH.’ **The Capital Grille is owned by Darden Restaurants, a publicly traded company on the NYSE under the symbol ‘DRI.’ Their annual sales are about $6.8 billion and they have over 1,500 restaurant locations across the US.*

## 50 Comments

Finally, an indicator that makes sense to me. I will follow…

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