How Falling Consumer Confidence Will Affect the Hotel Industry
According to the University of Michigan Consumer Sentiment Index, consumer confidence for February 2017 surged to 95.7%, 4.0 percentage points higher than in February 2016.
Consumer confidence was also, however, lower than the 98.5% and 98.2% levels seen in December and November 2016, respectively.
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A higher level means that consumers are positive about economic conditions. A rise in consumer confidence leads to a rise in spending, and vice versa. At ~70%, consumer spending accounts for the majority of the US economy. In 4Q16, consumer spending rose 2.8% year-over-year (or YoY), less than expected and less than the 4.2% YoY growth seen in 2Q16. However, the rise was in line with the average growth seen in the last two years.
Jobs growth has also been higher than expected. In January, 227,000 net jobs were added, compared to 156,000 jobs added in December, 216,000 jobs added in November, and 191,000 jobs added in September. In 2016, the number of jobs rose by just 2.2 million, fewer than the 2.7 million jobs added in 2015. This is, however, a lagging indicator.
The unemployment rate rose to 4.8% YoY in January 2017. Wages also rose by just $0.03, a rise of 2.5% YoY. This falling wage growth suggests weakness in the labor market and more room for labor market tightening.
Improving consumer confidence is positive for the hotel sector, as it directly affects leisure travel, which forms ~60% of total hotel sales in the United States. All of the above factors continue to point toward a positive outlook. Most economists are expecting consumer spending to rise throughout 2017, mainly due to wage growth.
Other factors that impact the airline industry include travel demand, capacity, utilization, and yield.
You can gain exposure to the consumer discretionary sector by investing in the iShares Russell 1000 Growth ETF (IWF), which invests ~20.7% in the sector and 0.36% in the hotel industry. Its holdings include 0.08% in Wyndham Worldwide (WYN), 0.19% in Marriott International (MAR), 0.08% in Hilton Worldwide Holdings (HLT), and 0.01% in Hyatt Hotels (H).
Next, we’ll look at what analysts expect from hotels going forward.