Economists warn of longer, deeper recession, oil hike, home decline to impact travel

More doom and gloom in 2009 for the US economy and the lodging industry was spelled out by top US economists speaking at the 31st Annual New York University International Hospitality Industry Investment Conference held in New York City.

David Wyss, chief economist, Standard & Poor’s, said housing has been in recession for three years, subtracting over a percentage point from GDP growth in both 2007 and 2008. This was offset by the strength in non-residential construction and the closing of the trade gap, each of which added back about a half point in 2007.

According to Dr. Bjorn Hanson, clinical associate professor, New York University Tisch Center for Hospitality, Tourism and Sports Management, US real GDP has been rising steadily until 2007; sharp drops have been reported from 2007 into 2008. Worst, the lodging demand/ measured in room nights sold has been falling off sharply below the GDP curve since 2002.

There will be 1 to 3 percent fewer occupied hotel rooms in the US in 2009 and a lower average daily rate of 2-5 percent, resulting in a decline in RevPAR (revenue per available room) from 2.5 – 12 percent as forecast by industry analysts. Coming off from its 2008 expected occupancy of 60.4 percent, the Smith Travel Research total US occupancy percent change report is not far off market consensus. Its 2009 forecast of -3.5 percent drop from 2008. If it bodes well, STR projects only a slight -.6 percent dip to 2010 from 2009.

Weaker overseas growth will mean less benefit from the trade deficit, despite the declining dollar. Fiscal 2008 deficit beat the 2004 record; 2009 may triple 2008. There seems to be a synchronized sinking phenomenon based on global real GDP S&P has observed, with the worst drop in 2009 reported by Japan at -8 percent, followed by Europe at -4 percent, the UK at -3.8 percent and the US at -3 percent.

Non-residential construction is plunging. And weaker employment is hurting construction with 2009’s worst unemployment dip followed very closely by the drop in non-residential building. Pertaining to the S&P/Case Shiller Home Price Indexes, Wyss said the top five ‘bubble’ cities are Charlotte, Dallas, Denver, Seattle and Portland, Oregon with marked declines reported since 2006. The bottom five and weakest bubble cities include Phoenix, Las Vegas, San Francisco, Miami, San Diego and additionally, Detroit. Wyss does not see any improvement, just yet.

The Fed has cut rates sharply. Federal fund rates has bottomed out and remains extremely low (nearly at 0 percent) until 2011, while mortgage rates will start to pick up and peak at just below eight percent by 2011, revealed Wyss.

“We expect the recession to be long and deep. An even deeper recession is possible if the financial markets remain locked up, oil prices rebound and home prices continue to drop. There’re no savings taking place but lots of debt to deal with until after 2011. Everybody’s down with the 12-month percent change in stock prices showing all negative numbers up until April 2009,” said Wyss.

Bernard Baumohl, executive director, The Economic Outlook Group, presented two scenarios held by two groups of people evaluating the economy. “Recession began when the GDP peaked in December 2007. Today, the pessimists think the recession is far from over and we still have a long way to go before any market correction. Otherwise, the slightly optimistic group thinks we are in the cycle where recession is already winding down,” he said.

The pessimistic approach, according to Baumohl, maintains that history has shown a banking crisis takes years and years to repair. “There will be more mine fields such as defaults on credit card and commercial real estate expected to rise. Consumers are traumatized after a record $11 trillion of their wealth evaporated in 2008. The automobile and residential real estate remain depressed,” he said adding the negative thinkers believe the US job market has collapsed as the March unemployment rate shows 8.9 percent – the highest in 26 years – with 10 states already exceeding 10 percent unemployment rate and 13.7 M Americans currently unemployed (of which 6.6 M or 48 percent collecting benefits), consumers are saving more, and spending/investing less.

The more positive approach to the recession focuses on the US government which has spent, lent or committed $12.8 trillion to revive the banks and the economy. They think recovery will happen but will take time; at the same time, most infrastructure projects are not ‘shovel ready’, the stimulus will add just .7 percentage points to GDP in 09 and 1.3 percent in 2010; and the current stimulus is designed to create or save 3.5 M jobs; but lost jobs will likely total more than 7 M anyway.

Baumohl describes the optimists believe in fewer filings for unemployment benefits, that consumer spending picked up in the first quarter, home sales and showroom traffic are picking up, factory inventories and housing inventories are declining but that factory orders are rising. Positive thinkers also believe consumer confidence has improved and the stock market has rebounded. Overall, they suggest that recession is winding down and recovery will begin later this year.

“Unfortunately, hotel lodging is among the hardest hit sectors as businesses and consumers cut back on travel. Nor does it help when companies are ridiculed for holding conferences at resort hotels, although smaller hotel chains may benefit,” said Baumohl who added this recovery will be tepid and will take five years or perhaps longer to resolve the financial collapse.

He also said that consumer behavior will undergo a profound change with focus on replenishing savings and spending within their means.

US exports will remain sluggish as economies abroad struggle. Baumohl said both US and China will emerge out of the global crisis first. Asia will benefit as domestic spending will increase. The Asian market will continue to grow.

Wyss and Baumohl agreed the main issue will be in rising oil prices to climb to the $85 level early next year. Both economists echoed that due to the downturn, there’s enough capacity not being used in the world. Adn soon, there will be inflation too. “But we do not have to worry about it, at least, until 3-4 years from now,” they closed.