The recent failures of Silicon Valley Bank and Signature Bank, which could be a signal of more problems to come in the banking arena, are only the latest concerns regarding the U.S. economy. But this is not the only time analysts have talked about recession lately. Nick Timiraos recently penned a piece in the Wall Street Journal entitled, “Why the Recession is Always Six Months Away”, in which he coins the term “Godot Recession”. The piece draws a parallel between Samuel Beckett’s character, Godot, who never appears, and the much-anticipated U.S. recession which may (or may not) be just around the corner.
In the past 50 years, we have seen seven inverted interest rate curves. In each instance, a recession followed. This yield curve inversion notched another record this year when the 10-year Treasury dropped more than 0.85 percentage points below the two-year yield in early February. That broke the recent widest point, set in December 2022, to become the most inverted since 1981.
Some other concerning news of late:
- Credit card debt rose to a record high in 2022. Credit card interest rates also rose to a record high – Americans are starting to fall behind on their obligations. The Federal Reserve Bank of New York announced that credit card delinquencies have been rising at a faster pace than any time since 2009 for people in their 20s. Americans in their 30s have racked up a huge amount of debt since the pandemic began and that debt is still growing. Individual credit ratings are suffering as a result.
- While the level of job growth continues to be surprisingly favorable, which in turn has helped retail sales, many people are struggling. Persistent high inflation has surpassed wage growth such that real take-home pay has been negative.
- When consumers pull back on spending, businesses traditionally do the same. This in turn leads to layoffs and a cycle of negative economic events. Recent purchasing managers indexes, which show how business owners feel about their company sales and revenue, have fallen to some of the lowest levels seen since mid-2020.
- The stock market has historically been a good indicator of household confidence levels. For the first 2.5 months of 2023, the DJIA is down 3.3 percent and is down approximately 7.1 percent over levels seen a year ago.
Unfortunately, a complete discussion of the economic headwinds impacting the U.S. today would be a long one.
There are indications that the U.S. hospitality industry, on the other hand, may fare okay, in the near and long term.
- Industry performance through the first two months of 2023 continues to improve. RevPAR levels in 2023 are well-above those achieved during the comparable period in 2019.
- Advanced bookings for traditional hotels through Q3 2023 in all three key demand segments – group, corporate, and leisure – remain strong. Information from AirDNA reveals that double-digit increases in short term rental (STR) bookings through the third quarter of this year portend a favorable period ahead for these investors as well.
- While the credit problems cited above are an issue for some, a large number of households continue to fare Many Americans are spending big on drinking and dining and buying new furniture and electronics. As we have seen in past cycles, when the gap between the haves and the have-nots widens, those with the resources to travel (time and money) do just that.
- Certain U.S. markets have begun to benefit from the re-opening of Asia, a trend which should escalate in the months ahead and could serve to offset the negative effects of the aforementioned domestic economic headwinds.
- On the employment side, layoffs in the Warehousing sector has clearly begun to benefit Leisure and Hospitality employers (these workers, in many cases, are returning to the jobs they left during the pandemic). While upward pressure on wages persists, the recent influx of these employees should serve to mitigate the magnitude of these cost increases.
- 2023 U.S. lodging industry performance forecasts from the leading firms in this space (all prepared between January and early March of this year) call for RevPAR growth ranging from 4.4 percent (STR) to 6.3 percent (LARC). Within these estimates, STR and LARC have average daily rates increasing by 2.0 percent and 4.3 percent, respectively.
- My old firm, CBRE, expects RevPAR growth of 5.8 percent in 2023, of which 4.2 percent comes from average daily rate growth. All of these estimates are well above historic annual long-run average changes.
From a longer-term perspective (say the back half of 2024 and beyond), the outlook is clearly positive. Some soon-to-be-released research from my friend and former colleague Jack Corgel, of CBRE, reveals that the overall labor participation rate in the U.S. peaked around the year 2000 and now roughly equals that from the 1980s. Also, the number of weekly hours worked, while increasing slightly of late, is well below what we saw in the 1950s. Jack also makes note of the current trend among companies offering employees four-day work weeks, which has positive implications for leisure travel. The combination of fewer hours worked and fewer people working can be viewed as a meaningful shift away from hours spent at work to more time spent on leisure activities.
On the supply side of the equation, net annual inventory growth over the past five years has ranged from 1.9 percent in 2018 to just 0.5 percent in 2022. While the pandemic-induced challenges that plagued virtually all construction inputs (supplies, materials, furniture/fixtures and equipment, labor) have begun to dissipate, economic uncertainty in the near term and the dramatic increases in the cost of capital over the past year have made the rationalization of new development exceedingly difficult in many markets. CBRE forecasts that net domestic supply growth will likely average about 1.0 percent over the next five years, well below the historic long-run average in inventory growth.
So, while the rest of the U.S. economy may be waiting for Godot, the outlook for U.S. hotels in 2023 remains cautiously optimistic; the mid-to-long-term looks even better.
– R.M. Woodworth
Mark Woodworth, Principal of R.M. Woodworth & Associates and Board Member of Hotel Investor Apps Inc., brings over 40 years of hospitality industry advisory experience, including at CBRE Hotels and PKF Consulting, to inform his perspective on the current economic outlook for the U.S. lodging industry in this exclusive Hotel Investor Apps article.