Labor Day 2023 is now behind us, which, for most, means that the summer is officially over. Many have either gone back to school, are extending their streak of working remotely or (hopefully) have returned to the office. For most hoteliers, the month of September means that the deadline for next year’s budget is just around the corner.
Considering the Economy
Lots of economic signals to consider when estimating what the year ahead holds for the domestic lodging industry – some encouraging – others, not so much. Here is a sampling of some U.S. data:
- Unemployment Rate (U3): August 3.8% – up from 3.5% in July
- Unemployment Rate (U6): August 7.2% – up from 7.1% in July
- Labor Participation Rate: August 62.8% – up from 62.6 in July
- Net New Jobs Created: August 187,000 – down from a monthly average of 312,000 in early 2023
- Jobless Claims: August 228,000 (trending up since February 2023)
- Inflation: July 3.2% (down from 8.5% in July 2022)
- Job Openings and the JOLTS Rate: Both down slightly in August
My net takeaway from the data above is that the market is definitely slowing down. A recent release from the Conference Board mirrors this view as well:
“Consumer confidence fell in August 2023, erasing back-to-back increases in June and July,” said Dana Peterson, Chief Economist at The Conference Board. “August’s disappointing headline number reflected dips in both the current conditions and expectations indexes. Write-in responses showed that consumers were once again preoccupied with rising prices in general, and for groceries and gasoline in particular. The pullback in consumer confidence was evident across all age groups—and most notable among consumers with household incomes of $100,000 or more, as well as those earning less than $50,000. Confidence held relatively steady for consumers with incomes between $50,000 and $99,999.”
Cutting through all of the above, earlier research conducted by my friend and former colleague Jack Corgel demonstrates that the two economic variables that exhibit the most consistent correlation to the period-to-period movement in lodging demand are changes in total employment and real personal income. Recent consensus forecasts call for a continued slowdown in the two variables and that total employment and real personal income growth in 2024 will be lower than in the current period.
How Good (or Bad) Will it Be in 2024?
It is important to note that, although the signs of a slowing economy have become increasingly clear, and the probability of a recession remains elevated, this does not inherently portend a year-over-year contraction for the domestic lodging industry.
Some additional factors to consider:
- Net lodging supply growth in the U.S. remains well-below the long run average rate of approximately 1.5%. Firms in the business of forecasting supply change are estimating a growth rate of 0.4% in 2023 and another 0.8% in 2024. No real threats here.
- For many lodging markets, particularly those in the major U.S. cities, group and convention activity levels are critical to the overall health of the hotel community located therein. Recent data from the Mid-Year 2023 report issued by 2Synergize, Simpleview Sales Quarterly, provided some interesting insights to the recovery of the group meetings segment. Their data, which addresses convention activity levels in Category D cities (defined as a destination offering a convention facility with 500,000 gross square feet of exhibit space) is encouraging. When benchmarked against the same period in 2019, their report revealed the following:
- Lead volume for the first half of 2023 was 116.0% of that realized during the same period in 2019.
- The actual number of bookings, however, was only 91.0% of the volume achieved in 2019. The report goes on to note that the average expected attendance (i.e., the ratio of the number of attendees per meeting) is up. There is a sense that planners may have been consolidating smaller meetings into a fewer number of large meetings.
- The expected attendance for leads that turned definite during this period was 112.0% of that which occurred in the first half of 2019.
- One cautionary note: the number of booked room nights associated with these leads that turned definite was only 88.0% of the 2019 level.
- Overall, the momentum illustrated by these data should carry over into 2024.
- According to the U.S. Travel Association, inbound international travel to the U.S. is up 31% in 2023 and is expected to grow by another 18% in 2024. This suggests some favorable prospects for demand lift in the major gateway cities around the U.S., many of which also happen to be the larger convention cities noted above.
- The amount of money in the U.S. remains enormous. According to the Federal Reserve, the M2 money supply at the end of July 2023 was $20,902.7 billion, up from $15,396.0 billion in January 2020 (roughly 33.0%) at the beginning of the pandemic. While many experts believe that this has contributed to elevated levels of inflation over the past 18 months, it seems reasonable that some of these funds will find their way into travel activities (both corporate and leisure); hotels should benefit as a result.
- It has also been reported that much of the $1 trillion Inflation Reduction Act funds have yet to be spent. These too will find their way into the general economy with hotels receiving their share.
Looking Back to 2019
Taking the above into consideration, it may also be helpful to reflect back on how the market outlook was perceived back in late 2019. The pre-pandemic view was that the domestic lodging industry, which had had a good run throughout most of the 20-teens, was clearly slowing down. Although supply and demand changes remained generally in balance, pricing power had diminished, and a generally weak year was expected in 2020.
Another useful measure to monitor is the level of economic policy uncertainty that is present during various phases of a cycle. Using the index developed by Baker, Bloom and Davis, Economic Policy Uncertainty, there was greater uncertainty in the U.S. in December 2019, with an index of 190.5. Their most recent reading, as of July 2023, was 180.6. To help put this in perspective, this index averaged 140 during the 10-year period 2010-2019.
Looking Ahead to 2024
Taking all of the above into consideration, I believe that 2024 will be a good (not great) year for the average U.S. hotel. Revenues will be up year-over-year and will exceed the lift in expenses such that low-to-mid single digit increases in bottom-line profits should be realized. This view is supported by the aggregate of the most recent top-line forecasts released by the leading firms in this business which are summarized as follows:
An additional note: At the macro level, election years have historically not “moved-the-needle” in the lodging industry. Manchester and Merrimack, NH and Des Moines and Cedar Rapids, will realize an attractive “pop” during their primary/caucus seasons; everyone else, not so much.
Mark Woodworth, Principal of R.M. Woodworth & Associates and a 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.