Due in large part to restaurant operators’ dampened outlook for sales growth and the economy, the National Restaurant Association’s Restaurant Performance Index (RPI) fell sharply in October. The RPI – a monthly composite index that tracks the health of and outlook for the U.S. restaurant industry – stood at 99.5 in October, down 0.9 percent from September. In addition, October represented the first time in 14 months that the RPI fell below 100, which signifies contraction in the index of key industry indicators.

“Although restaurant operators overall continued to report positive same-store sales in October, their short-term outlook for sales growth and the economy is decidedly more pessimistic,” said Hudson Riehle, senior vice president of the Research and Knowledge Group for the Association. “Nearly two out of five restaurant operators expect business conditions to worsen in the next six months, which is double the proportion that expect conditions to improve.”

The Current Situation Index, which measures current trends in four industry indicators (same-store sales, traffic, labor and capital expenditures), stood at 99.3 in October – down 0.6 percent from a level of 99.9 in September. While same-store sales remained positive in October, declines in the labor and customer traffic indicators outweighed the performance, which resulted in a Current Situation Index reading below 100 for the third time in the last four months.

Although restaurant operators reported positive same-store sales for the 17th consecutive month in October, results continued to soften from recent months. Forty percent of restaurant operators reported a same-store sales gain between October 2011 and October 2012, down from 48 percent in September and the lowest proportion in 17 months. Meanwhile, 36 percent of operators reported lower same-store sales in October, essentially unchanged from 35 percent in September.

While sales remained positive overall, restaurant operators reported a net decline in customer traffic levels in October. Thirty percent of restaurant operators reported higher customer traffic levels between October 2011 and October 2012, down from 36 percent who reported positive traffic in September. In comparison, 41 percent of operators reported lower customer traffic levels in October, unchanged from September.

Along with the softer sales and traffic results, restaurant operators reported a slight drop in capital spending activity. Forty-six percent of operators said they made a capital expenditure for equipment, expansion or remodeling during the last three months, down from 49 percent who reported similarly last month.

The Expectations Index, which measures restaurant operators’ six-month outlook for four industry indicators (same-store sales, employees, capital expenditures and business conditions), stood at 99.7 in October – down 1.2 percent from September. October represented the first time in 14 months that the Expectations Index fell below 100, which represents a pessimistic six-month outlook for the four industry indicators.

Restaurant operators’ outlook for sales growth deteriorated significantly in recent months. Thirty-one percent of restaurant operators expect to have higher sales in six months (compared to the same period in the previous year), down from 45 percent last month and the lowest level in three years. Meanwhile, 21 percent of restaurant operators expect their sales volume in six months to be lower than it was during the same period in the previous year, up from 11 percent last month.

Similarly, restaurant operators are increasingly pessimistic about the direction of the overall economy. Only 20 percent of restaurant operators said they expect economic conditions to improve in six months, down from 26 percent last month. In contrast, 38 percent of operators said they expect economic conditions to worsen in the next six months, up from 18 percent last month and the highest level in nearly four years.

Despite the uncertainty, more restaurant operators are planning for capital spending in the months ahead. Fifty percent of restaurant operators plan to make a capital expenditure for equipment, expansion or remodeling in the next six months, up from 44 percent who reported similarly last month.

The RPI is based on the responses to the National Restaurant Association’s Restaurant Industry Tracking Survey, which is fielded monthly among restaurant operators nationwide on a variety of indicators including sales, traffic, labor, and capital expenditures. The full report and a video summary are available online.