Signs of hopefulness emerge from a comparison of today’s data and indicators against those of 2008, but that only means the next recession will be quite different from the last one.
NASHVILLE, Tennessee—Economists seem to agree that the U.S. economy is headed for a recession, though the timing is somewhat in question.
The thing about economists is they’re wrong much more often than they’re right, Chad Church, VP of client services at STR, said during a presentation at the Hotel Data Conference titled “Peak to Peak: 2007 vs. 2019?” (STR is the parent company of Hotel News Now.)
A review of recessions between 1992 and 2014 across 63 countries shows that economists accurately predicted only five out of 153 in April of the year preceding the recession.
That’s not necessarily good news for hoteliers anxious about a downturn, as where economists erred was in predicting a recession that was later and less-severe than what actually occurred, Church said.
“Economists often do not predict a steep enough decline of GDP, and predict it will happen later than it actually happens,” he said.
The general consensus today is that the risk of a recession is low in the near term, but rising sharply beginning in 2020, Church said. Based on the historic accuracy of such predictions, that could mean the recession has already started, or is at least more imminent than estimates suggest, he said.
“There was lots of confusion in the last recession; lots of people said there was no recession,” said William Simone, senior director of topline revenue and competitive analysis at Marriott International, who presented with Church.
“The truth is you don’t really know you’re in a recession until you’re fully in it. Chad and I don’t think we’re in it now, but we don’t know. I think we’ve got another couple of months.”
- More on the likely causes and outcomes of a downturn:
Broader economic factors
Whatever the timing, the presenters noted the next recession will be different from the one in 2008, pointing to a number of variances in economic indicators.
For example, a rising unemployment rate usually signals trouble for the economy, but unemployment now is at a record low in the U.S.
“Right now, the labor participation rate is also quite low,” Simone said. “There are a lot of people who are not looking for work but are not included in the unemployment number. If you add those back in, the unemployment rate may be higher. That’s part of why wage growth hasn’t spiked to the same levels as we might expect.”
Another indicator, personal consumption expenditures, which make up 70% to 80% of GDP, were slowing in 2007-08, according to Federal Reserve Economic data, “but we’re not seeing that today,” Simone said.
Fixed non-residential investment, which is a measure of business spending and investment and tends to track closely with demand growth for business travel, also looks positive currently.
“This is not a great forward indicator of any kind of downturn,” Simone said, “but it does track closely as a current indicator.”
A decline in manufacturing new orders—spending by businesses on products to sell in the future—usually signals a recession a few months later, but based on data through June 2019, “it doesn’t look like it’s going down,” Simone said.
Church noted there are “other factors at play this time that could push those (indicators) negative quickly,” such as an escalating trade war with China.
But “barring any major event, we feel like there is some room left on the runway for the industry,” he said. “What we saw last time is not materializing today. That doesn’t mean it won’t, but it’s different today.”
Within the hotel industry, the story is really all about demand and rate, Church said.
“The net positive is demand, on a 10-year cycle, is still growing around 2%. If you offered that to anyone 10 years ago, they’d take it,” he said.
“This is a time in the lodging industry unlike any we’ve ever experienced in the past. Even if we do see negative occupancy, understanding that demand is still holding up and occupancy is a function of supply, that gives in most cases confidence to somebody setting prices, to someone currently operating in a market.”
But average daily rate is the other side of the story, he said.
Inflation-adjusted “real ADR” has been negative the past four quarters and is essentially flat over a two-and-a-half-year period in terms of growth, he said.
“Still, we’re at the point where we have the highest real ADR level that there’s ever been, and even holding ADR at this point is a win,” he said. “Even if it’s not growing, that doesn’t intrinsically mean things are bad. We see a few negative months, but based on forecasts for 2020, we’re still in a pretty good spot overall.”
Supply growth ahead of the recession in 2008 was at about 3%, and “is basically at its peak today” at about 2%, Church said, but he noted that other key performance indicators likely will lessen that blow in a downturn.
“Even if we do come into a downturn in 2020 or 2021, one positive that is different from 2008: We won’t get the worst of both worlds at the same time, with the occupancy and RevPAR declines that we saw then. We’re not there today,” he said.
He added that performance data is in constant flux.
“You look at the data today; tomorrow it’s different,” he said. “It’s important to take everything in stride, and look at it in the lens of what’s available.”