Economists expect long, lackluster cycle
Economists expect long, lackluster cycle
03 FEBRUARY 2020 9:45 AM

The broader economic cycle is expected to continue unabated, said a pair of top economists speaking at the 2020 Americas Lodging Investment Summit, but there seems to be little stimulus on the horizon to improve supply-demand dynamics.

LOS ANGELES—Economists speaking at the recent Americas Lodging Investment Summit saw a pretty simple scenario with both good news and bad news for the broad U.S. economy and the hotel industry.

The good news is the economy is in “a very extended cycle and it doesn’t look like there’s an end to it,” said Richard Barkham, global chief economist for CBRE. He added he believes the elongated cycle is “largely because of the absence of inflation.”

The bad news, Barkham said, is that we currently “live in a world of weak-ish demand and excess supply, and that keeps prices down.”

A lack of pricing power has indeed plagued the hotel industry in recent years, and that phenomenon is projected to continue into the coming year.

Ryan Severino, chief economist for JLL, said he agreed with that general assessment.

“I think the economy is in a good—but maybe not great—place, at least as far as underlying momentum goes,” he said.

Geopolitical headwinds
Both economists acknowledged several macroeconomic headwinds that have been grabbing major headlines of late.

The most recent is the outbreak of a new strain of coronavirus in China and its global spread, which Severino described as an economic “wildcard.” He said, just like in cards, its economic impact will be determined by the other cards the economy is holding.

“That’s how I tend to think about the geopolitical situation,” he said. “In and of itself, (disruptive forces) tend to be a lot of background noise and tend to not have a lot of impact, unless you get the wrong thing, or the wrong combination of things, happening.”

Barkham pointed out that the SARS outbreak of the early 2000s, to which many are already comparing the coronavirus, “certainly affected Asia, but it did not affect the global economy, which was recovering nicely in 2003 and continued to recover nicely.”

“A lot of this is how the press deals with this and hypes it up,” he said. “Certainly, it can affect travel. Certainly, it can affect local areas. But will it knock a powerful economic expansion in the U.S. off its tracks? I don’t think so.”

The economists also didn’t believe that the impeachment trial of President Donald Trump would have a lasting, negative impact on the economy, although Severino pointed out there isn’t a lot of historical precedent to base that opinion on.

Andrew “Johnson was impeached in 1868,” he said. “I don't see that being tremendously relevant to the economy or society in 2020. But the two more recent examples, one of which was an actual impeachment and one of which was just a threat and resignation. (Bill) Clinton’s (impeachment) was in the fourth quarter of 1998. If you actually look at the performance of the economy and stock market before and after, didn't really seem to have much of an impact.”

The most important metric to look at when projecting demand is likely employment growth, which has been and is expected to remain strong, Barkham said. But what he thinks should be concerning for hoteliers is a continued unwillingness for corporations to spend on travel. He noted with a slight cooldown in the jobs market, that could be a sign some executives are being overly cautious.

A drop in hiring “equates to CEOs and CFOs and business thinking, ‘Now is a good time to clamp down on travel and entertainment costs,’” he said. “It won’t be the total absence of business travel, but there will be pressure on corporate budgets.”

He said this past decade, which represents almost the entirety of the current cycle, represents a “strange world” that has thrown a lot of the conventional thinking to the side.

“Bad news is good news, because bad news takes the heat out of the economy and takes the heat out of inflation, which keeps interest rates down,” he said. “And that’s good for real estate.”

Severino said there’s little he can see at the moment that will disrupt the interest rate and inflation equilibrium, especially with a recent change in thinking at the Federal Reserve that has left that body much less eager to increase rates.

“I think you're looking at a situation now where it's hard to see the typical imbalances that build up that can potentially end the cycle that might cause the Federal Reserve to raise Interest rates a little too aggressively and overshoot to cause some disruptions,” he said.

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