HENDERSONVILLE, Tennessee, and DURHAM, New Hampshire—The U.S. hotel industry contributes more than US$200 billion a year to the U.S. economy in terms of output. While we might be a small fish in a big pond in the total U.S. economy, it was surprising that we could not find a monthly indicator to gauge business activity in the industry. That issue was solved when the HIP—the Hotel Industry Pulse, which is a real-time monthly indicator for the hotel industry that captures current conditions—was released.
Once you have a reliable monthly indicator to gauge business activity, you can get a timely picture of the state of the industry. This indicator is a snapshot of the industry and provides readers with a simple line chart so you see when it is going up, when it is going down, and for how long it has been going in that direction. It also measures the hotel industry compared to the overall U.S. economy. This helps show the point at which the industry went into recession, how long the recession lasts, and how it compares to the total U.S. economy.
(Read the most recent HIP press release.)
But enough about HIP. What everyone wants to know is the future direction of the U.S. hotel industry. That’s where HIL comes into play. HIL—the Hotel Industry Leading indicator—is a new monthly leading indicator we have developed for the U.S. hotel industry.
What does a leading indicator do? It helps you see the expected future direction of the industry by combining the growth or decline of individual components that have typically led hotel expansions and recessions in the past. For instance, if component X has shown signs of improvement or contraction a number of months prior to the industry cycle on a historical basis, then component X is assumed to “lead” the hotel industry.
There were three phases in developing the HIL: First, we had to figure out what to make it “lead.” That was the easy part, because we're interesting in gauging the overall economic environment in the hotel industry. The HIP report gives us a snapshot of the current situation, but we wanted to forecast future performance. Second, we turned to our global database to find what components have historically and consistently predicted turning points in the industry. After much testing, the following components were identified:
- Hours worked in hotel industry
- Hotel profit margins
- U.S. travel plans index
- International tourism demand for visiting the U.S.
- National employment conditions
- Oil prices
- Financial market conditions
- Incoming orders for high-ticket items
- Housing market conditions
Lastly, all components were combined following a similar process to how we developed the HIP. We made adjustments to better align components as they’re reported in very different ways, weighted them accordingly so one component wouldn’t overshadow any others, trended them and finally rebased the index to equal 100 in 2000. Making the leading indicator an index is helpful so you can easily make comparisons with a reference point.
With all three steps complete, HIL was born. The history starts in January 1969, so it’s a great tool to analyze what has happened in the past. The HIL can be used in the present to gain a better understanding of where the industry is headed. A good rule of thumb is that if the month-to-month changes in the indicator consecutively go in the same direction for three to four months, it’s a good sign that the industry is poised to turn, from boom to bust or vice versa. Another part of HIL that is useful is to study the six-month growth rate. Looking at that measure, you get the sense of how deep a recession is or how good the industry is performing. We have found the long-term trend of the industry to be 3.7 percent. Based on this, we would say that whenever the growth rate is below this, the industry is in recession, and when above it is in growth.
The first HIL report will be officially release in mid-September, but taking a look at the most recent reading of HIL, here is a summary:
HIL went up 2 percent in July, after going up 0.5 percent in June. This was the third consecutive monthly increase in the leading indicator. All nine components that make up HIL went up for the month. The six-month growth rate improved, although still negative, registering negative 0.4 percent. This is an improvement over its worst month, which was January 2009 where it reached negative 15.7 percent.
What you can take away from the latest HIL reading is that things look to be improving for the industry in the next four to five months, which is the average leading time of the indicator. We will feel more confident with that statement if the above trends continue. By saying we think things are improving, we do not mean you’ll begin to see positive demand growth, but the industry should begin to see some stabilization in the rate of losses.
So there you have it. Yet another monthly tool that will be released to help give you a sense of the state of the industry, in case you hadn’t had your fill of ADR and RevPAR reports already.