ECONOMIC OUTLOOK AND THE US LODGING INDUSTRY Aran Ryan Director aran.ryan@tourismeconomics.com @AranRyan1 March 22, 2017
Some historical perspective
Room demand expansion continues Pace of demand growth has slowed close to the rate of GDP growth.
The past seven years have been unusual Room nights per capita Annual room nights, working age population 5.0 2016 Q4: 4.8 room nights per capita 4.5 4.0 3.5 3.0 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 Note: Seasonally adjusted Source: STR;
What s next?
Key takeaways Global economy accelerating Economic outlook and implications for lodging US consumers setting the pace Business confidence is elevated Risks: larger than they may appear
Key takeaways Global economy accelerating Economic outlook and implications for lodging US consumers setting the pace Business confidence is elevated Risks: larger than they may appear
Global growth weakest since 2009, but improving Global growth last year was the weakest since 2009, but momentum is improving.
Global industrial activity gaining momentum
and data releases have been tilted to the upside Economic data releases in developed countries have exceeded consensus.
Business has shrugged off Brexit for now
Excess global saving still a major constraint Advanced economies: Private sector net saving Household sector net saving Corporate sector net saving
Not much cyclical momentum for investment
China kicking the can down the road
Key takeaways Global economy accelerating Economic outlook and implications for lodging US consumers setting the pace Business confidence is elevated Risks: larger than they may appear
Household net wealth Home prices and financial markets have boosted household wealth Wealth effects typically support consumption with a lag
Households are spending less to service debt
Consumers have tilted spending growth toward lodging Consumer spending, US Index (Dec. 2011=100) 150 140 130 120 110 Growth 2011 to Jan. 2017 Lodging (41.8%) F&B (31.2%) Air (21.5%) Recreation services (21.0%) Consumer spending (20.7%) 100 90 80 70 Motor vehicle fuel (-22.2%) 60 2011 2012 2013 2014 2015 2016 2017 Note: Data is nominal, three-month moving average, seasonally adjusted and extends through January 2017. Source: Bureau of Economic Analysis;
As we near full employment, wage growth is firming As labor force slack tightens, wage increases accelerate. Labor force slack is measured here as U6 unemployment minus U3 unemployment. Wage tracker measures median percent change in the hourly wage of individuals observed 12 months apart.
Consumer spending is solid but short of elevated confidence
Inflation represents a downside for real disposable income
Key takeaways Global economy accelerating Economic outlook and implications for lodging US consumers setting the pace Business confidence is elevated Risks: larger than they may appear
Business investment remains relatively weak Business investment slowed in 2015 and 2016. Nine quarter lull
However, the mood among CEOs has improved CEO expectations are the strongest since 2015Q1.
Manufacturing activity appears to have rebounded
Strong US dollar weighs on US exports Dollar has appreciated 19% since 2014 This puts it 8.6% above its historical average.
Three Fed rate hikes in 2017 and three more in 2018
US economy expected to accelerate
Key takeaways Global economy accelerating Economic outlook and implications for lodging US consumers setting the pace Business confidence is elevated Risks: larger than they may appear
Private sector confidence reaching new highs
as businesses still uncertain after elections
Current framework of global risks Probability Outcome 40% Baseline Stronger growth led by US; higher inflation; strong dollar; euro and yen weakness sustained 5% Le Pen victory sparks Eurozone crisis Oxford Economics Global Scenarios Service 10% Bond market sell-off Fed moves more aggressively; interest rates surge; global equities fall 10% Tighter policies in China 10% Trump presidency weighs on global growth Highly protectionist and isolationist stance; fiscal stimulus fails; by late-2019 US enters recession and by 2021 the economy is 6% smaller than baseline 25% US growth surges amid Trump fiscal stimulus Lower taxes; infrastructure spending; GDP growth peaks at 3.6% in 2018 (compared to 2.6%) Source: Oxford Economics Global Scenarios Service (March 8, 2017)
Greater realization of the risks
Three outcomes depending on which levers are pulled US: GDP growth % year 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 Baseline Trump upside Trump downside Forecast How strongly will the scale tip in favor of fiscal stimulus rather than policy uncertainty, protectionism and immigration restrictions? 0.0-0.5 2015 2016 2017 2018 2019 2020 2021 Source : Oxford Economics/Haver Analytics
Sentiment toward the US is turning negative America first rhetoric US-Mexico relations strained Protectionism pulling US out of TPP; renegotiating NAFTA Travel Ban ; Extreme vetting Immigration stance Discussion of requiring international visitors to provide social media passwords
We ve seen this before Contrasting periods of time % change, CAGR 6% 5% 4% 3% 2% 1% 4.7% 2000-06 2008-16 3.2% 2.3% We anticipate a setback in overseas visits: 2017: -1% 2018: +3% 0% -1% -2% -3% -4% -3.0% Overseas visits Overseas GDP Note: 2008-2016 overseas visits data are adjusted downward based on APIS results. This produces a 4.7% CACG compared with 6.0% with unadjusted I-94 data.
Implications for lodging
Economic activity to drive modest demand gains Room demand and GDP % change 10% 8% 6% 4% 2% GDP Demand 2.6% 1.6%1.7% 2.0% Demand growth to improve moderately this year and next, but will trail GDP growth 0% -2% -4% -6% -8% 05 06 07 08 09 10 11 12 13 14 15 16 17 18 Note: Real GDP. Source: STR; BEA;
Two separate trajectories of travel propensity Business and leisure trip propensity U.S. Domestic Travel, 1994=100 120 110 100 Leisure trips per employee 90 80 Business trips per employee 70 60 1994 1998 2002 2006 2010 2014 Source: U.S. Travel Association,
Sustained setback in group activity Hotel Room Demand by Segment US luxury and upper upscale class hotels, trailing twelve months, index (2008=100) 140 130 Transient +35.4% since '08 120 110 100 Group +3.1% since '08 90 80 70 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Note: Data through February 2017. Source: STR
Supply growth remains moderate Rooms in construction as predictor of openings Rooms, in thousands 180 160 140 120 100 80 60 In construction as of December of the prior year Actual opens during the year 145 134 145k rooms under construction to open this year points to supply growth of: 2017: 2.0% 2018: 2.2% 40 20 0 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Note: In construction limited to rooms under construction with planned opening date in the next year. Source: STR;
Disproportionate supply growth in certain markets Ten major markets with +5% new supply under construction
Late-cycle occupancy declines weigh on RevPAR Occupancy and ADR growth % change 9% 7% 5% 3% 4.2% 3.4% 2.4% 1.6% 5.6% 1.4% 3.8% 4.2% 4.6% 4.5% 3.8% 0.1% 3.1% 2.8% 2.8% ADR contribution RevPAR: 2016: 3.2% 2017: 2.5% 2018: 2.6% 1% -2% -0.3% -0.2% 10 11 12 13 14 15 16 17 18 Occupancy contribution Source: STR;
Tighter labor markets bring wage cost increases Nominal wage growth by industry Twelve-month moving average of median wage growth, % 6 5 4 3 4.0% annual growth Leisure and hospitality: 3.9% Overall: 3.5% 2 1 0 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 Note: Historical data through January 2017. Source: Federal Reserve Bank of Atlanta
Key takeaways Global economy is accelerating US consumers setting the pace Business confidence is elevated Risks: Larger than they appear Will policy deter or promote growth? But structural constraints point to only modest global growth over the next decade. Wage growth is improving, but inflation will act as an offset But will it drive spending and investment? Expectations rest on promised deregulation, lower taxes, and infrastructure spending. But antiimmigration and protectionist elements pose risks and inbound travel is particular exposed. Lodging will benefit from improved economic outlook and confident consumers, but demand growth will trail GDP. New supply growth weighs on ADR gains, even as cost inflation picks up.
March 2017 All data shown in tables and charts is own data, and is copyright Tourism Economics, except where otherwise stated. To discuss the topics further please contact: Aran Ryan Director aran.ryan@tourismeconomics.com @AranRyan1