NASHVILLE, Tennessee — While the U.S. economy may be slowing, it’s still growing, and the long-term prospects are generally positive for the hotel industry, said economist Aran Ryan.
During his presentation on the U.S. economic outlook at the 2024 Hotel Data Conference, Ryan, director of industry studies at Tourism Economics, an Oxford Economics Company, said consumer spending has been steadily slowing and disposable income has declined.
“We’re at this interesting spot where we’re actually growing our incomes at a slower pace than growing our spending,” he said. “The sort of thing that drives some of the headlines recently about concerns about [whether] the economy [will] dip into recession.”
When the U.S. came out of the pandemic, it experienced a surge of inflation due to a number of factors, Ryan said. Inflation was close to 9% year over year at this point a few years ago, but that has slowed to 4.3% last year and then 3.2% at the time of the presentation.
The latest consumer price index reading from July showed inflation grew by 2.9% year over year, according to the U.S. Bureau of Labor Statistics.
The Federal Reserve’s response to inflation was to raise its policy rate to 5.3%, its highest in decades, and hold it there to slow parts of the economy, Ryan said. It slowed some residential investment, business investment and generally led consumers to apply the brakes on their own spending.
This contributed to some of the normalization of labor markets, he said. There had been a lot of job openings that employers struggled to fill, especially in hospitality. More recent data shows this has normalized as employers have been able to bring back more workers to the labor force.
There’s been an uptick in the unemployment rate, and that can lead to concerns over a possible recession, he said. While that may be concerning given the near-term data on the economy slowing, once it’s balanced with the fact that there’s still job growth, the unemployment rate uptick isn’t as concerning as it otherwise might be.
Oxford Economics’ baseline view of the economy is that the U.S. is in a transition to more sustainable growth, Ryan said. Gross domestic product growth for 2025 will be 1.8%, slower than what’s projected for this year given the nominal consumer spending.
“Consumers are going to be pulling back on the amount that they're spending, but we see that happening as more of a sustainable transition to slower growth without tipping into recession,” he said. “We expect the economy is achieving a soft landing here.”
Travel Outlook
One thing that mitigates the risk of consumers pulling back on travel spend is that so much travel activity comes from higher-income households, Ryan said. More than 60% of consumer spending on hotels comes from the top income segments.
“There is some concern that households will be pinched in the year ahead, that the economy is slowing, but it's balanced by what makes up the purchasing power of that travel economy,” he said.
Looking at business and group travel expectations, the concerns over remote work affecting travel demand have not played out, he said. Had he been told in the past that companies would move a quarter of their workforces to remote, he said he would have predicted less need for travel to be together in person.
But the numbers disprove that theory, he said. Estimates for business and group travel in 2023 show room night demand about 5% to 10% below 2019 levels.
"That’s a pretty full recovery for something that’s gone through such substantial change,” he said.
Businesses can get wary and decide to cut travel spending, but they’re operating from a good spot with near-record levels of corporate profits, Ryan said. Businesses have the capability to make investments, including in human resources, which often translates to spending more money on travel.
Surveys show that business travel intentions are growing, he said. Younger travelers are particularly anticipating an increase in travel ahead. Destination marketing organizations have been busy in their markets.
“This has been slowly rebuilding, and we're just now getting back to the point where the room nights that they're putting on the books for all future dates are back up to that 2019 pace,” he said.
Overseas arrivals to the U.S. are still down 17% from 2019 levels, but they’re rebuilding, particularly from the Asia-Pacific region, Ryan said. Outbound and domestic travel has recovered ahead of international inbound, creating a travel deficit in which U.S. travelers are spending more abroad than the U.S. in bringing in. International inbound is expected to continue to grow, though.
Risks to Travel
Oxford Economics surveys its clients quarterly to assess the risks they see and to make sure the company is modeling what is in the clients’ focus, Ryan said. Geopolitical tensions are a global concern; clients worry specific areas of conflict could escalate and negatively affect global GDP.
These conflicts, however, are concentrated within their own regions, whether that’s in the Middle East or Europe. The U.S. is mostly insulated from that.
With the upcoming U.S. presidential election, Oxford Economics modeled two scenarios in which either the Democrats or Republicans each won full control of the White House and both houses of Congress. The models ran through possible economic policies each party would put into place.
Under a Republican administration and Congress, the model assumed tax cuts that would contribute to initially stronger GDP growth tied with tariffs and a possible trade war with China, leading to travel restrictions, which would have longer-term negative connotations.
“When they run those particular policies to the model, they come up with a net effect that's slightly negative on GDP, but I think it just gives you the range of uncertainty as well,” he said.
With Democrats in the White House and Congress, there’s an assumption of greater childcare support for families, creating a boost in GDP because more people would be available for the labor force, he said. That would be offset by an increased corporate tax rate.
Both of these scenarios, however, would have minimal impacts in the first year of office, he said. These also assume full control by each party as opposed to the more likely scenario of a divided government.
Artificial intelligence has the potential to be both a boon as well as a risk, Ryan said. When economists look at a new technology, they consider the job displacement and income effects it may have. Using AI can lower operating costs, freeing up money to be spent on other things, including travel.
And technology can have a potentially big impact on GDP down the road, he said. AI advances, coupled with strong corporate investments in research and development, led Oxford Economics to increase its view on future productivity growth, to as large as a 10% increase in U.S. GDP by 2050.