HENDERSONVILLE, Tennessee—If you’ve been following HotelNewsNow.com for the past few months, you’ve noticed the Hotel Industry’s Pulse reports that are released around the first of every month. The HIP is a real-time indicator that measures the overall health of the hotel industry by capturing current economic conditions of the hotel industry to help identify peaks and troughs in the business cycle. These peaks and troughs then can be traced to the overall U.S. business cycle to better understand how the timing and degree of losses or gains in the hotel industry perform in comparison to the overall economy. In more broad terms, the HIP measures business activity in the hotel industry similar to the gross domestic product for the total United States economy.
The Hotel Industry Leading indicator is a tool that predicts future turning points in the HIP index. 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 typically have led hotel industry expansions and recessions in the past. For instance, if component X has shown signs of improvement or contraction a number of months before the industry cycle on a historical basis, then component X is assumed to “lead” the hotel industry. Thus, the HIL will give us an early indication of when to expect turning points in the HIP index. (Read “What the HIL? A new leading indicator for the hotel industry.”) On average, the HIL leads the industry’s business activity four to five months in advance. The chart below provides a graphical representation of the HIP and HIL relationship.
Developed in conjunction with economic research firm e-forecasting.com, the HIL trended up in September for the sixth consecutive month. HIL edged up 0.2 percent in September, after going up 1.6 percent in August. The latest increase brought the index to a reading of 105.7. The index was set to equal 100 in 2000.
So here is where the questions arise: Why has the HIL continued to go up for six months, when the HIP actually declined in September? If you recall, the HIP index grew in July and August, driven primarily by strong performance from the leisure sector. Once leisure demand softened in September, the normal pickup in group travel has not materialized. Remember that positive gains in the HIL lead the HIP by four or five months, on average, and it appears that in our current cycle the lead time might be extended.
October will be an important reading for the HIP as we gauge the performance of an important part of the conference and convention travel season. And although the HIL has been improving for six months, the gains made in September were below those seen in July and August. At the same time, we do still maintain our optimism that October performance will show some life, especially as occupancy comparisons to last year become more favorable the later we move into 2009. Seven of the nine components that make up the HIL had a positive contribution in September: labor market tightness; international visitors future demand; interest rate spread; new orders for manufactured goods; oil prices; housing activity and national vacation barometer. Two of the nine components had a negative or zero contribution to the HIL in September: weekly labor hours in hotels and hotel profitability. The weekly labor hours in hotels dropped, reversing a recent trend, while hotel profitability fell 7.3 percent. Profitability figures will feel the impact of a cost “floor” in future months, meaning hotels have exhausted most options left in cutting costs to maximize gross operating profit.
To wrap up the HIL discussion for the month, the six-month growth rate, a signal of turning points, went up by an annual rate of 5.6 percent in September after an increase of 4.7 percent in August. This compares to a long-term annual growth rate of 3.6 percent, the same as the annual growth rate of the industry’s overall economic activity. At the deepest depths of the recession, this growth rate was down to negative 15.7 percent, which happened in January of this year.
About HIL indicator:
The U.S. Hotel Industry Leading indicator is a monthly leading indicator for the industry. Building off the tracking success of HIP, the real-time indicator for the U.S. hotel industry, the HIL was built as a composite indicator that uses nine different components that, on average, when put together have led the industry four to five months in advance of a change in direction in the industry business cycle. The indicator provides useful information about the future direction of the U.S. hotel industry.