At the 2019 Hotel Data Conference, Adam Sacks of Tourism Economics explained that while the United States might be headed toward a recession, the U.S. hotel industry is positioned to forge through it.
NASHVILLE, Tennessee—There is no shortage of things to be worried about, Tourism Economics President Adam Sacks said at the 2019 Hotel Data Conference.
During his presentation “Expectations and risks for the economy and travel,” Sacks laid out all of the warning signs of a potential recession and the factors playing into it.
A trade war with China leads those concerns, as it drives higher prices on imports and exports, he said. Exports to China have fallen 26% while imports have fallen 30%, which is hitting profit margins and raising prices for consumers.
“It is invariably affecting both,” he said. “It is indeed a headwind. That’s why we’re seeing manufacturing slow.”
Buffering the U.S. from these concerns is the sturdiness of the overall economy, but it’s not invulnerable, Sacks said. The things that boosted the economy’s growth in 2018 and 2019 (tax cuts and spending bill) are dissipating in 2020.
“They contributed percentage points to the GDP in 2018 and they will be one-third of a point this year,” he said. “None of that exists in 2020.”
Business confidence also has fallen, Sacks said. A recent survey of CEOs shows many are planning to taper their investments, with the percentage of those looking to invest dropping from 60% to 40% within a matter of months.
On the other hand, there’s sturdiness among households and consumers, Sacks said. Wage growth has been pacing at about 3% year over year for about 12 months, and consumer confidence is elevated.
Household balance sheets are better they have been in a long time, he said. At the beginning of 2019, 15% of household income was going toward financial obligations, well below the historic average, he said. The housing sector is expected to see a boost as interest rates continue to fall, encouraging home buying and refinancing, he said.
What this all leads to is unexciting, Sacks said. The economy is expected to continue to slow gradually, not abruptly, through the year.
Inverted yield curve blues
At the time of Sacks’ presentation, the 10-year U.S. Treasury bond’s yield curve briefly inverted compared to the two-year yield curve. The yield curves invert when the rates on the short-term bond exceed that of the long-term bond, he said.
Weakness internationally, not domestically, is driving this yield-curve inversion. Foreign investors flooded the U.S. Treasury bond market because of fears in other places, such as Europe, where bonds are negative, he said.
“What it implies is investors are anticipating risk is greater short-term,” he said. “Those expectations are usually borne out. The last nine recessions have indeed been precipitated by this inverted yield curve.”
It still may be some time before a recession occurs, Sacks said. Over the past 40 years, the lag from inversion to recession can be as much as three years, with two years being the average.
Likelihood of recession
The odds of a recession happening this year are low, Sacks said. His company placed the odds at about 15%, which means it would take something unexpected to cause it.
Next year’s chances are at 40%, he said.
“That’s uncomfortably high,” he said. “It’s an undeniable possibility at this point. Add 10 percentage points and it’s a coin toss.”
The yield-curve inversion does heighten that risk, Sacks said. Banks are less likely to provide loans, which adds to the risk as well. There’s not a lot of room for fiscal boosting of the economy right now, he said.
“Look for moderating economic activity without a sharp downturn,” he said. “The fundamental assumption there is the consumer holds on, and all these drivers are enough even when buffeted by external factors to sustain us with slow growth through this hash.”
Hotel industry performance
Even among all of the global and domestic economic strife, U.S. hotel occupancy levels have remained elevated to record- or near-record-high levels, Sacks said. Also working in the hotel industry’s favor is that the current environment is nothing like 10 years ago, he said.
Even with the potential downside risks, at a national level, real inflation-adjusted revenue per available room could take a hit and still be above historic averages, he said.
While there are concerns about it over the next year, supply growth is peaking at a lower growth rate than it did before the last three recessions, he said. In 1990, supply growth was at 4% to 5% before the recession in 1991 and 1992; and supply growth peaked after the recession started in 2008 and 2009.
“We’re not there now,” he said. “We’re seeing it level off around 2%. That’s before even hitting the reality of any recession.”
Group demand continues to moderate, but has been in line with capital investment, Sacks said.
Leading travel indicators show domestic travel is holding while international travel to the U.S. is beginning to fall, contracting modestly in June, he said. However, during the second quarter, forward-looking bookings slowed while searches for travel increased.
The hotel industry sold more roomnights per capita in 2019 than ever before, Sacks said. Spending on lodging has grown 271% since 1980, outpacing the overall economy.
“If you’re looking for a canary in the coal mine, travel does not appear to be it,” he said. “The appetite for travel appears to be quite strong.”