HENDERSONVILLE, Tennessee—Now that the United States hotel industry is in the later part of the up cycle and revenue per available room is primarily driven by average daily rate, it is worthwhile to re-examine the past downturn to look for tell-tale warning signs that indicated the recession. This article examines various macroeconomic indicators to understand if they could be used as a “canary in the data mines” to suggest an impending slowdown and subsequent upturn in demand.
We overlaid the 12-month moving average of room-demand percent change over a variety of publicly available data sources, such as:
- Consumer Confidence Index, published by The Conference Board;
- airfare and enplanement figures, published by the Federal Aviation Administration;
- employment figures, published by the Bureau of Labor Statistics;
- home prices, published by Zillow.com; and
- yen to U.S. dollar exchange rates, published by the Bank of Japan.
We found CCI, some FAA data and housing data have some limited predictive value and reacted earlier than room demand to the macro shocks.
Consumer Confidence Index
It stands to reason the CCI is closely related to leisure travel intent, so we charted transient room demand against it. The CCI dropped sharply during the downturn and has since recovered. The raw data of the CCI shows that it is still well below prior peaks of 2007. But, despite ongoing volatility of the monthly values, the chart seems to have upward momentum. As CCI increased, so did transient room demand. However, a look at the percent changes in both metrics might be more insightful.
When charting the percent change of CCI and transient demand on separate axes, a closer relationship between CCI and demand becomes clear. The data seems to move in lockstep, with the exception of early 2008, when CCI change was a leading indicator to demand percent change. The recovery in hotel demand during 2010 went hand in hand with the recovery in CCI. And even during 2011 and 2012, the slowdown in growth for CCI was mirrored in slower growth rates for transient demand. Intuitively this finding makes sense because as the public feels better about its situation, it is more prone to travel again. That said, we focused on the most recent past for a possible exception to this finding.
The CCI percent change during 2012 and 2013 was well above 10% for more than a year. At the same time, transient demand grew, but only moderately, in the 4% to 6% range. If indeed an increase in CCI is a precursor to transient demand, why was this relationship severed over the last year?
One possible reason could be the cutback of government travel and related expenditures. In other words, the most recent increase in confidence caused private sector workers to travel, but this increase was negated by the continued lack of government travelers. Given the wave of austerity measures it is probably fair to assume any significant lift in transient demand has to come from the private sector.
Airfare and enplanement figures
The FAA publishes airfare and enplanement numbers for domestic carriers. It is probably fair to assume that as demand for air travel increases there should be a noticeable effect on room demand. Obviously airlines have the distinct advantage of taking inventory out of commission and parking it literally in the desert when demand fluctuations dictate it. This supply constraint can come in handy to manipulate prices and yield.
Despite the airlines’ ability to ward off steep pricing cuts in late 2008, airline pricing followed ADR changes and declined sharply during the last recession. The increases in room rates and airfare were equally as swift, but airlines were considerably better at making up lost ground. Part of the reason might have been their ability to keep load factors high as inventory was idled. During the most recent past, the airfare increases have slowed, and it will be interesting to observe if this is a sign of things to come for U.S. room rates.
Because the top 25 markets are the engine of the U.S. hotel industry we decided to relate their demand changes to overall demand for airplane seats. As the growth in enplanements has slowed, or actually declined, the room-demand growth in the top 25 largest hotel markets has slowed down as well. What is worth noticing is the difference in magnitude; as enplanement grew just about 2%, room demand still grew approximately 4% to 5%.
An interesting FAA data point is the number of enplanements on global flights on domestic carriers. It is probably fair to assume some passengers are actually going home, rather than originating in the U.S., and the top 25 hotel markets are often the places those global customers visited as evidenced by transient demand numbers.
The chart overlays only the international enplanements with transient demand in the top 25 markets. As the data shows, the international enplanement numbers have been increasing and the growth has accelerated. At the same time, the transient room-demand growth has been steady and growth has been stronger for overall demand in the top 25 markets.
Employment
The BLS publishes monthly employment and unemployment figures. It stands to reason a higher employment number bodes well for room demand. During the recession, layoffs caused a drop in disposable income and room demand declined. As the drop in private employment slowed and companies sent their existing employees back on the road, room demand slowed its decline as well. It is likely the existing employees were sent back on business trips first and then, as demand for goods and services picked up, new staff were hired and those new employees started to travel more. As the growth rate of new employment steadied, so did room demand.
A more detailed look at the employment for only financial and professional services and transient demand shows the same picture. People in these professions have a high propensity to travel and their numbers impact the U.S. hotel industry.
It is worth noting the decrease in employment was much less dire than for all industries and that the job recovery is characterized by stronger positive change. It is probably correct to assume that as the number of financial jobs increase, the transient room demand will continue to increase as well, even though the pace of change has evened out.
Home prices
Zillow publishes home values for the U.S. We assume as home prices recover and consumers “feel” richer because their house appreciates in value, they have a stronger desire for leisure travel and that demand numbers will increase.
The data seems to be related, although only superficially. As home values decreased in mid- to late-2008, room demand eventually followed suit. Home values also led the recovery. In other words, after the negative change started to ebb and home price deterioration was less pronounced, room-demand declines also started to ease.
High-end home prices (approximated here as homes with four bedrooms) dropped sharper than general home values, but the recovery cycle back to positive percent changes was exactly as long as for the general housing market: 60 months, or five years.
Demand for luxury hotels returned much earlier, and this is probably a function of home values as well as white-collar employment figures, which bottomed out in 2010 as shown above. With job security and a less dire outlook for high-end home prices, the perception was probably that it was “safe” again to go on a luxury trip (or stay in high-end hotels for business trips).
Exchange rates
For global leisure travelers, the attractiveness of a U.S. destination stands in inverse relation to the strength of the U.S. dollar. While it is difficult to establish a strict relationship between demand and foreign currency, Hawaii is singularly reliant on Japanese leisure tourists and so perhaps a relationship between luxury demand and the yen can be established.
The Bank of Japan publishes this data. What sticks out is the U.S. dollar was quite weak and continued to deteriorate during the financial crises; however, room demand plummeted as high-end travelers from the mainland and Japan were also hit hard financially. As the dollar remained weak throughout the upturn, there was probably an added incentive to combine a high-end vacation with “bargain shopping” on U.S. soil. Over the last few quarters, U.S. currency has gained tremendously against the yen, and the demand growth for luxury hotels in Hawaii has slowed.
Another factor in the slowdown of demand could be that the average occupancy for luxury class hotels in Hawaii has been well above 65% for the last three years, so the market is running at peak capacity in the high season.
Summary
A variety of macroeconomic data sets are available and can be easily charted against room demand. Relationships are not always clear or easily discernible other than to say that most macro indicators declined between 2008 and 2010 and rose since then.
Room demand followed the same pattern. Consumer price index percent change, international enplanement change and home values percent change seem to lead room demand percent change, and those data sets require additional scrutiny to understand their possible function as leading indicators.