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How to analyze the US hotel business cycle
July 20 2009

The ebb and flow of the hotel industry doesn’t always match the overall U.S. business climate. Now there’s a way to measure it.

Editor’s note: This is a preview of a breakout session with Maria Simos, CEO of e-forecasting.com and Chad Church, manager of industry research at STR, to be held during the inaugural Hotel Data Conference presented by Magnuson Hotels in August (see below for more conference information, or by visiting www.HotelDataConference.com.)

DURHAM, New Hampshire and HENDERSONVILLE, Tennessee—The business cycle is a phrase we hear all the time, particularly now that we’re in a recession. The U.S. business cycle, the hotel business cycle, recession, expansions. What is a business cycle? Why is it important? How can we measure the U.S. hotel industry business cycle?

Before we take an in-depth look at the hotel business cycle, let’s look at the overall U.S. business cycle. Thinking of the business cycle as a wave, you have force building as the economy grows and expands until it reaches a peak. When the cycle hits that peak, forces in the opposite direction begin to pull the wave down into a recession and eventually to a low point, or trough. After that, it’s back up to a peak through another expansion.

It is important to understand the timing of the cycle, and most importantly the turning points (i.e. when the cycle moves from expansion to recession). At the national level, public policy makers and central banks, such as the Federal Reserve, are responsive to business cycle indicators. The policy makers and banks respond especially when cycle indicators begin to show signs of worsening by redesigning policies to avoid escalation or try to escape a further downturn.

It would be easy if all business cycles moved at the same time and with the same degree of change; however, that is not the case. We can look for a quick example to the last major recession of the U.S. and the hotel industry. During the last recession, the value of gross domestic product for hotels and motels adjusted for inflation dropped by an annual rate of 7.6 percent in 2001, following a 7.9-percent jump in 2000. During that same period, the overall U.S. economy slowed to a growth rate of 0.8 percent in 2001, after going up 3.7 percent in 2000. Looking at this, you can see that the timing and degree of changes in the U.S. and hotel business cycle can vary considerably.

To further drive home this point, the table below positions the hotel industry and national business cycle, showing that the timing of recessions and expansions can vary from eight months after to four months before:

From this table, we can also make the following observations:

  • The hotel industry experienced a recession during 2002-2003 that does not correspond to any national recession;
  • Peaks in the hotel industry on average come three months earlier than peaks of the national economy;
  • And troughs of the U.S. hotel industry, on average, start two months before the national economy exits a recession.

The Hotel Industry Pulse, or HIP for short, is a real-time monthly indicator for the hotel industry that captures current conditions. These conditions are the ups and downs of the hotel business cycle, which can vary from the U.S. cycle.

The HIP takes several different measures of the U.S. hotel industry and combines them in a composite indicator. E-forecasting.com, in conjunction with Smith Travel Research, has performed extensive research to assemble a composite indicator based on the following major components for the HIP: consumer’s expenditures on hotels, hotel occupancy rate and hotel employment, along with other key economic factors which influence hotel-business activity. Using the composite, throughout the past 25 years we have determined the industry’s business cycle by its monthly changes into periods of expansion and recession.

The latest reading of the HIP shows that the U.S. hotel industry has entered its 20th month of recession. It also shows that it is quite close to matching the industry’s previous worst recession, which occurred in 1980 and lasted for 21 months. That being said, we also see that there is improvement in the indicator and that its six month-growth rate, which measures the severity of a recession/expansion, has been improving.

It is with tools such as the HIP that hoteliers are better equipped to understand how the industry is faring and help make important policy decisions that fit the current state of the industry.

About the Hotel Data Conference

The Hotel Data Conference presented by Magnuson Hotels will be held 4-5 August at the Renaissance Nashville Hotel in Nashville, Tennessee. The conference will cover many topics such as: U.S. hotel industry forecasts from STR, PKF Consulting, and PricewaterhouseCoopers; revenue-management techniques during a recession; consumer business and leisure travel; hotel demand and industry cycle; and STR data overviews, including top markets, customer segments, chain scale, pipeline and hotel operation statistics.

Speakers and panelists at the conference include: Mark Lomanno, president of STR; Scott Berman, the U.S. industry leader of the Hospitality and Leisure Consulting Group of PricewaterhouseCoopers L.L.P.; Brian Ferguson, vice president of supply strategy and analysis for Expedia, Inc.; Kate Henriksen, senior vice president of investment and portfolio management at RLJ; Robert Morse, senior director of corporate revenue management for White Lodging; Webster O’Brien, vice president of SH&E; Gary Portuesi, vice president of lodging account development for American Express; Mark Woodworth, executive vice president of PKF Consulting; Maria Simos, CEO of e-forecasting.com; Dr. Evangelos Otto Simos, strategist and chief economist at e-forecasting.com; Nate Fristoe, director of RRC Associates; Robert Bowers, Jr., senior vice president of operations for STR; Vail Brown, vice president of global sales and marketing for STR; Brad Garner, vice president of operations and client relations for STR; Duane Vinson, vice president of content management for STR. Moderators include Jeff Higley, vice president of digital media and communications for STR and Lana Yoshii, vice president of new product development for STR.

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