Lower Expectations Heading into Fall
More than halfway through the summer season, pent-up demand for travel has not waned. As we look to the fall, demand appears to be strong in the United States. Still, headwinds that could derail continued growth of all segments—leisure, business and international—continue to loom.
The U.S. economy contracted for the second straight quarter and according to a July Bloomberg survey of economists, the odds of a recession within the next year are increasing. Chances now stand at 47.5%—up from 30% as recently as June and 20% in March.
So, what is causing the chance of a recession to increase and what will it mean for the travel industry? We are breaking it down for you below.
Inflation and Consumer Sentiment
All eyes have been on inflation. As of the latest July data, overall inflation remains extremely elevated at 8.5% year-over-year, down slightly from 9.1%—a 40-year high—in June.
Inflation continues to erode consumer confidence and consumer sentiment has remained pretty dismal. In fact, the latest sentiment reading was the second lowest recording in the measure’s nearly 70-year history. Consumer confidence declined in July, although the present situation index remains above historical averages. Yet, the expectations index based on short term outlook signals concerns over inflation continuing to weigh on consumers.
Consumers are spending much more on gasoline and other essentials such as healthcare, housing and utilities while pulling back on discretionary spending categories such as retail clothing. American consumers’ savings are slowly dwindling, debt is increasing and consumer spending continues to shift away from goods. Still, consumer spending on services remains strong, particularly travel spending.
Strong wage growth has helped offset some inflation and in some good news, peak inflation may finally be in the rear-view mirror. We are already seeing gasoline prices decline. Crude oil prices are down 15% since peaking June 8.
Business Conditions and Expectations
The economic slowdown is not only impacting the consumer. With increased costs and labor shortages, corporate profitability has begun to decline. This has resulted in more conservative business practices across the board. Small business owners’ expectations of improving business conditions hit a new record low in June.
Executives’ uncertainty about how to manage their businesses, coupled with record low consumer expectations could tip the U.S. toward a recession if companies start trimming investments and laying off workers.
Morgan Stanley CEO James Gorman uses the word “complicated” to describe the current economic environment.
And Goldman Sachs CEO David Soloman says, “The chief concern is that the campaign to fight inflation will begin to take a toll on both corporate confidence and also consumer activity in the economy. I expect there’s going to be more volatility and there’s going to be more uncertainty in light of the current environment.”
Continued Uncertainty and Volatility
A global pandemic, a war in Ukraine, global supply chain challenges and shortages resulting in record high inflation and the strongest dollar in over 20 years has wreaked havoc on the U.S. and global economy. Continued uncertainty and volatile markets have resulted in many American organizations tightening their spending and downgrading their financial conditions, preventing recovery and continued growth.
According to Politico, both investors and executives are wrestling with one of the more complicated—and in many ways unprecedented—moments in American history, where the economy looks simultaneously strong, with solid job growth and consumer spending, but is also close to toppling over.
JPMorgan Chase CEO Jamie Dimon on the one hand says the “[American] economy continues to grow and both the job market and consumer spending, and their ability to spend, remain healthy.”
But Dimon also sees a number of warning signs and puts it this way: “Geopolitical tension, high inflation, waning consumer confidence, the uncertainty about how high rates have to go and the never-before-seen quantitative tightening and their effects on global liquidity, combined with the war in Ukraine and its harmful effect on global energy and food prices are very likely to have negative consequences on the global economy sometime down the road.”
Impact on the Travel Industry
What does this mean for travel?
- Leisure: Despite inflation and some pullback on consumer spending, demand for leisure travel continues to grow—92% of American travelers currently have plans to travel in the next six months.
- International: International inbound recovery is being hit by the double-whammy of a strong dollar and high inflation, making the U.S. expensive and not very attractive right now.
- Business: Based on a recent survey of corporate executives and business travelers, while there is a positive outlook for business travel in Q3, there are headwinds on the horizon and expectations of companies spending less on business travel in the near-term.
The big question is, what happens to travel if the economy cools to the point of a recession?
Despite the multitude of discouraging economic and consumer signals, the general thought is that any recession the U.S. may face will likely be mild and the impact from a potential recession on the travel industry will be minimal.
U.S. Travel’s latest forecast release takes into consideration the multitude of complicated and evolving factors.
The forecast projects all segments of travel, in spite of rising inflation, will surge in the short-term (this summer and into next year) due to pent-up demand and consumer savings.
In relation to the uncertainty and the travel industry, Tourism Economics President Adam Sacks, says:
“Despite warnings of gas prices derailing the recovery, high frequency data continue to show travel demand resilience and industry pricing power. Any recession we may see would most likely be a mild one due to the lack of major structural imbalances, banking risks or asset bubbles.
“Also, given the strength of household and corporate balance sheets, my view is that we could see travel react less negatively to a recession than we have seen in past recessions. There is still room for the corporate market to recover even in a slower economic environment, and we could well see households give up other areas of spending before travel.”