US hotels on edge of fiscal cliff
 
US hotels on edge of fiscal cliff
27 AUGUST 2012 7:52 AM

As fiscal-year 2012 comes to a close, U.S. lawmakers either must allow tax increases to go through or add to the federal deficit. Either decision could hurt the hotel sector, sources report.

REPORT FROM THE U.S.—The U.S. hotel industry is inching closer to the edge of a cliff—a fiscal cliff, that is.

U.S. lawmakers will face a difficult choice as 2012 draws to a close: allow several tax increases and budget cuts to go into effect, which could lead to another recession, or cancel the scheduled tax increases and budget cuts, which would add to the federal deficit. The decision in front of lawmakers has been dubbed the “fiscal cliff.”

Either choice, sources say, could have dire implications for the hotel industry and could threaten to bring another downturn back to the fore. Enacting tax increases would take money out of the wallets of consumers, which might impact travel spend. And adding to the deficit (which the Congressional Budget Office said will total $1.1 trillion at the end of the 2012 fiscal year on 30 September) might hurt gross domestic product, to which the hotel industry is aligned.

So far in 2012, the U.S. hotel industry has been chugging along as it fights to get back to prior peak levels. Year-to-date through July, the U.S. hotel industry has shown increases in the key performance metrics, according to STR, parent company of HotelNewsNow.com. Occupancy was up 2.9% to 62.3% over the same period a year ago, while average daily rate increased by 4.3% to $105.53 and revenue per available room rose 7.3% to $65.77.

Further, demand increased by 1% with 105,964,171 rooms sold, breaking the July 2011 record of 104,957,596. Still, Jan Freitag, VP of global development at STR, said the industry remains below prior peak levels. ADR as of the middle of July was $104; ADR in the middle of 2008 was $108.

But in a report last week, the CBO warned the U.S. economy could head into another recession if scheduled policy changes go into effect.

Tino Korologos
Deloitte Financial Advisory Services

Tino Korologos, managing director at Deloitte Financial Advisory Services, said any uncertainty in the macro environment hurts the hotel industry because it introduces volatility to the market.

“When that sits out there, it puts more and more weight on the camel’s back,” he said. “How much weight is the camel’s back going to support?”

Importance of GDP
Current-dollar GDP totaled approximately $15.6 trillion during the second quarter, up 0.8% from the first quarter of 2012.

“On a very high level, there is a relationship between demand and GDP,” said Freitag.

U.S. hotel demand saw big year-over-year percentage declines during the years when U.S. GDP has slowed or turned negative, according to data supplied by STR and the U.S. Bureau of Economic Analysis.


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“I don’t know if there is a magic number, but generally across the board, economists would like to see GDP above 2% right now,” said Jamie Lane, an economist at PKF Hospitality Research.

The CBO is forecasting GDP growth of 2.25% during the second half of 2012 with unemployment to remain at more than 8%.

Importance of tax cuts
Despite the connectedness GDP has to hotel demand, it doesn’t necessarily trump the tax-cut issue, Lane said.

Jan Freitag
STR

“GDP is not going to grow if people don’t have money to spend,” Freitag said. “Overall, it means less money in the consumer’s pocket, which is probably not good for travel spend.”

He added that hoteliers also are facing the prospect of companies cutting back on travel spend, too, as budgets are cut.

All that said, Korologos indicated he remains bullish over the industry’s potential future performance, “if we can figure out where we’re going as a macro economy.”

“It’s encouraging,” he said of the outlook, “but the caveat in the hotel sector, like other industries, (is) subject to other uncertainties.”

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