Outlook for the Global Economy and Travel

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Nicholas Nelson
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1 Outlook for the Global Economy and Travel Adam Sacks President Tourism November 2018

2 Let s pose some questions What s happening now? Outline What could go wrong? What s backwards? What s ahead?

3 WHAT S HAPPENING NOW?

4 Broad-based global growth World GDP by major market in 2018 % change India China World United States South Korea Australia Mexico Canada Brazil France Germany United Kingdom Japan Source: Oxford Economics 0.0% 2.0% 4.0% 6.0% 8.0%

5 Momentum peaked early in the year

6 Global trade is a major reason why World trade and world trade indicators % year CPB world trade Coincident indicator (smoothed) -20 Leading indicator (smoothed) Source : Oxford Economics/Nederland CPB

7 Consumers remain exuberant

8 High labor market utilization rate

9 Wage growth picking up

10 and income is outpacing spending!

11 Business capex spending peaking this year Economic momentum remains strong heading into Q4. Manufacturing and service sectors are resilient (for now) in the face of trade uncertainty.

12 Travel in 2018: unabated growth US Travel Indicators year-over-year % change 8% 6% Hotel room nights Domestic air pax International air pax Two quick observations: Flying has increasingly been the mode of choice International is slowing 4% 2% 0% 2018q1 2018q2 2018q3 Source: STR, BTS, Tourism Economics

13 Travel in 2018: unabated growth (Beware: slowdown ahead)

14 WHAT COULD GO WRONG?

15 Risks worth watching Trade war escalation Policy dynamics (fiscal and monetary) Financial market stress

16 Escalation could mean tariffs on all China imports!

17 Everyone loses in a trade war

18 A cautionary tale y/y % change 80.0 Spending and arrivals before and after China's South Korea travel boycott Forecast Tourism boycott Source: Tourism Economics Spending from China Arrivals from China

19 Risks worth watching Trade war escalation Policy dynamics (fiscal and monetary)

Bipartisan Budget Act boost discretionary spending by $300 billion and

20 US policy to support growth into 2019 Tax Cuts & Jobs Act is worth $1.5 trillion over the next decade. Real GDP in 2018 is boosted by 0.4ppt. Bipartisan Budget Act boost discretionary spending by $300 billion and provides $90 billion in disaster relief. Adds 0.25ppt to GDP in 2018.

21 Fiscal policy effect counterbalanced by monetary policy And as this is happening 1. Reduced marginal fiscal stimulus 2. Higher inflation 3. Tighter Fed stance 4. Wider deficit 5. Higher long-term borrowing cost 6. More protectionism

22 Fed s balancing act could prove challenging Faster inflation could lead to a more hawkish Fed and a market indigestion A wider a budget deficit and reduced asset purchases from the Fed could push up long term rates

23 Higher gasoline prices pushing up inflation

24 Energy prices & reduced slack push inflation higher US: CPI inflation Food contribution Energy contribution %, year 3.5 Core contribution 3.0 Headline CPI M M M M M01 Forecast Source: Oxford Economics

25 Risks worth watching Trade war escalation Policy dynamics (fiscal and monetary) Financial market stress

26 Financial market stress A lasting 10% stock market decline would shave 0.5pp from GDP growth (This is different from a correction from short term peak)

We all love a good cliffhanger The US economy is 111 months into

0%, it would be the fastest growth since 2005.

27 We all love a good cliffhanger The US economy is 111 months into the economic expansion. The longest expansion on record was 120 months. GDP is on track for 2.9% growth in If it hits 3.0%, it would be the fastest growth since The unemployment rate fell to 3.7% in September, the lowest on record since Equities remain near record highs. Household net worth is 26% ahead of prior peak.

28 Dreaded Recession? Not foreseeable US: Probability of a recession 6 months ahead Percent, 6months lead Using the Chicago Fed National Activity Index, the real federal funds rate & the yield curve Recession shading Although uncertainties have increased this year, risks have been greater over much of the past decade Source : Oxford Economics

29 US economic growth is anticipated to slow, but remain positive Despite a trifecta of policy risks trade, fiscal and monetary the economy should maintain momentum heading in to Our October baseline forecast is for 2.5% GDP growth in 2019.

30 Nevada economy is outpacing the US in job growth Total Employment (2010 = 100) Nevada (+20%) US (+13%) Source: BEA, BLS, Tourism Economics

31 WHAT S BACKWARDS?

33 Normal: transient room demand drives growth Lodging demand by segment US, trailing twelve months, index (2008=100) Transient +45.9% since Group -9.4% since Note: Data through September Source: STR

34 Now: Group room demand is leading the charge! Transient and group room demand US, annual growth 10% Transient 5% 0% -5% Group -10% -15% -20% Note: Capital expenditures measured as nonresidential fixed investment, private, real. Source: STR; BEA; Oxford Economics

35 Why: businesses are spending freely Group demand and capex spending US, annual growth 15% 10% Capex 5% 0% -5% Group demand -10% -15% -20% Note: Capital expenditures measured as nonresidential fixed investment, private, real. Source: STR; BEA; Oxford Economics

36 Normal: room supply surges as demand falters

37 Now: room supply growth is softening The number of rooms under construction has declined in nine of the last ten months.

38 Market-level supply pressures are easing

39 Normal: international travel outpaces domestic Room demand and international travel to the US 2006= International visits 50% growth Room demand 20% growth Source: STR; NTTO; Tourism Economics

40 Now: domestic demand is leading growth Room demand and international travel to the US 2006= International visits 50% growth -1.0% over past two years Room demand 20% growth +4.2% over past two years Source: STR; NTTO; Tourism Economics

41 At least international visits grew last year! International visits to the US by region 2017 % Change 6% 5.2% 4% 2% 0% 2.0% 1.8% 2.0% 0.7% 1.5% -2% -4% -6% -8% -10% -12% -12.0% -14% Total Overseas Mideast Africa LATAM Europe Asia Source: NTTO,

42 But this year appears to be slowing down US Overseas Non-Citizen Arrivals year-over-year % change 16% 14% 12% 11% 10% 8% 6% 4% 2% 0% -2% 0% 4% -1% 5% 2% 0% 0% 4% -4% Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Source: APIS (DHS)

43 The dollar remains relatively strong

44 Normal: Emerging markets post double-digit growth US Inbound Arrivals 2007=100, 10-year CAGR China (23%) Brazil (12%) S Korea (11%) Australia (7%) Germ, Can, MX, UK (0-3%) Source: NTTO

45 Now: China and S. Korea flirting with no growth International visits to the US in 2018 % change, Jan-Sep YTD Germany Japan South Korea China Argentina Overseas Australia United Kingdom Israel India Spain France Canada Netherlands Italy Mexico Brazil -7% -5% -1% 1% 2% 2.3% 3% 3% 6% 7% 7% 8% 8% 9% 10% 10% Major market underperformance = subpar growth 14% -10% -5% 0% 5% 10% 15% Source: Tourism Economics

46 Normal: +700 million unused vacation days Days Away on Vacation Annual vacation days per worker Long-term average: 20.3 days Vacation days Long-term average Note: Estimates are based on survey results for 2013 to 2017 (GfK and Beresford Research). Estimates for earlier years are based on analysis of BLS data. Source: Oxford Economics

47 Now: 1.5 more days!! Days Away on Vacation Annual vacation days per worker Long-term average: 20.3 days Vacation days Long-term average Note: Estimates are based on survey results for 2013 to 2017 (GfK and Beresford Research). Estimates for earlier years are based on analysis of BLS data. Source: Oxford Economics

48 Reversal in trends for both short and longer trips Full and Partial Week Vacations 24-month moving avg, % of employed adults Full week - out all week for vacation Partial week - out part of week for vacation Sources: Oxford Economics analysis of BLS survey results

49 WHAT S AHEAD?

50 Economic growth continues, while slowing in key markets World GDP by major market % change India China World United States Australia South Korea Mexico Germany Canada France Brazil United Kingdom Japan Source: Oxford Economics -4.0% -2.0% 0.0% 2.0% 4.0% 6.0% 8.0%

51 ST outlook: travel demand is tapping the breaks August CTI, 3-month and 6-month LTI Index (>50=expansion, <50=decline) 53 CTI 3-mo LTI 6-mo LTI Total International Domestic Business Leisure Source: U.S. Travel Association, Oxford Economics

52 Travel continues to gain American wallet share Consumer spending, US Index (Dec. 2011=100) Growth 2011 to August 2018 Lodging (44.7%) F&B (44.1%) Recreation services (36.1%) Consumer spending (30.4%) Air (23.7%) Motor vehicle fuel (-14.2%) Note: Data is nominal, three-month moving average, seasonally adjusted and extends through August Source: Bureau of Economic Analysis; Tourism Economics

53 All age groups are spending more on travel, led by seniors Recent household spending on lodging by age Difference relative to long-term average 16% 20% 23% 24% 12% 8% 8% 1% All households Under to to to to to Household age brackets Note: Recent constant dollar spending (2013 to 2015) relative to long-term average for the same age brackets (1984 to 2015). Source: BLS; Tourism Economics

54 Opportunity: New traveling households Added households with income > $35, vs Germany Spain Australia Venezuela Canada Italy Argentina France UK Mexico South Korea Russia Brazil USA India China Millions Source: Tourism Economics,constant 2015 prices million

55 New traveling households ($100k threshold) Added households with income > $100, vs Argentina Venezuela Mexico Brazil Russia Spain Italy South Korea France Canada India Australia Germany UK China USA Millions Source: Tourism Economics,constant 2015 prices

56 Strength of demand is setting new norms (and trending upward) Room nights per capita, US Annual room nights Q2: 3.8 room nights per capita Note: Seasonally adjusted Source: STR; Tourism Economics

57 Further demand gains anticipated in line with GDP

58 But the slowdown is underway Room demand and GDP % change 10% 8% 6% 4% 2% 0% GDP Demand 4.0% 2.5% 1.5% 2.5% 2.4% 2.0% 1.5% -2% -4% -6% -8% Note: Real GDP. Source: STR; BEA; Tourism Economics

59 Journey to normalcy resumes in 2019 US Visits year-over-year % change 5% 4% Domestic overnight Overseas 3.4% 4.5% 3% 2% 2.7% 2.4% 2.1% 1.5% 1% 0% Source: U.S. Travel Association, Tourism Economics

60 SOME CLOSING THOUGHTS

61 Tourism is a major contributor to Nevada s economy Key facts In 2017, 56.3 million visitors spent nearly $40 billion in Nevada Visitor spending has increased 15% since 2013 Tourism generates $4,560 in state and local taxes for every household in Nevada Tourism Economics 64

62 High marks in terms of growth and contribution to households 1 Visitor spending reached nearly $40 billion in 2017, increasing 2.4% over the prior year 2 Visitor spending is increasing and has been for eight straight years Tourism employment has increased 5.1% since 2013 Consistent visitor spending growth has positively impacted tourism employment in Nevada Share of total Nevada employment and income sustained by tourism Income Employment 14.1% 17.2% Direct Indirect Induced 4.0% 4.3% 4.3% 22.3% of total state income 26.8% of total state employment 5.3% 0% 5% 10% 15% 20% 25% 30% Percent of state total Source: Tourism Economics; BEA

63 How important is the Nevada tourism sector? Tourism spending $109 million was spent EVERY DAY by visitors to Nevada. Taxes The $4.7 billion in state and local tourism taxes would cover the starting salaries of nearly 124,000 state school teachers Employment The number of jobs sustained by tourism (458,780) is nearly double the population of Reno. Income The $20.1 billion in total income generated by tourism is the equivalent of $19,500 for every household in Nevada.

64 The need for destination promotion Challenge Solution: Destination Promotion 1 The primary motivator of a trip is usually the experience of a destination, not just one business Articulates the brand message that is consistent with consumer motivations 2 Effective marketing requires scale to reach potential visitors Pools sustained resources to provide the economies of scale and marketing infrastructure required to generate impact

65 How destination promotion drives the economy

66 Don t take my word for it Air service is profoundly important to corporate investment and location decisions This is one of tourism s most significant contributions since the levels of air service at New Orleans far exceed what local demand could support. Secretary, Louisiana Economic Development Every tourist that comes through here is a potential business lead. As we talk to prospects, they mention past visits and good experiences. This is our open door If we do it right, the ideal brand will transcend the visitor market and support all economic development. President & CEO, World Business Chicago Executive Director, Economic Development Coalition for Asheville Economic Development Executive Officer, City of Phoenix We are learning a lot from Visit California how to take their model and apply it to economic development. Deputy Director, Governor s Office of Business and Economic Development Traveler attractions are the same reason that CEOs choose a place. President & CEO, World Business Chicago

67 Key things to remember Right now What could go wrong What s backwards Broad-based (but slowing) economic growth Great US fundamentals Travel leading the charge Trade war Fiscal and monetary policy Inflation Market correction Business travel leading Room supply under control International faltering (emergers!) Americans vacationing What s ahead Global and US economies will slow Near term travel outlook: tempered performance Demographics and income trends favor travel gains Normalcy

OUTLOOK FOR THE GLOBAL ECONOMY AND TRAVEL

January 2018 OUTLOOK FOR THE GLOBAL ECONOMY AND TRAVEL Adam Sacks President Tourism Economics @adam_sacks August 2018 Outline The Outlook for the Economy and Travel Views on the global economy Risks Will