Is the U.S. GDP a Reliable Tool for Hotel Business Decision Making?
By Gavin Davis Managing Principal, H-Fin Capital Advisors | August 18, 2019
Academia has placed a significant amount of attention on the relationship between changes in hotel industry lodging fundamentals such as revenue per available room (RevPAR) and changes in U.S. Gross Domestic Product (GDP). Citing from Macroeconomic Variables and Hotel Performance by Singh, Kim, Johnson, Mandelbaum (2016); collecting research and commenting that Wheaton and Rossoff (1998) analyzed the behavior of the U.S. Lodging Industry cycles from 1969 to 1995 concluding that a strong relationship exists between GDP and rooms sold.
In 1999 while working as intern for Legg, Mason, Wood, Walker Hotel REIT Equity Research, Ms. Marielle Jan de Beur, I ran a simple U.S. Hotel RevPAR(STR historical monthly data) to U.S. GDP correlation while lagging U.S. GDP by one quarter and increased the correlation coefficient (r-squared) from the low-90s as previously put forth in the hotel research cannon to high-90s.
In the intervening time, many macro-based studies using hotel industry lodging fundamentals as proxy for the broader U.S. economy have been produced In Macroeconomic Variables and Hotel Performance, the authors make several significant findings and flex ADR, RevPAR, Expense and Profit by time period (decades) to U.S. GDP, evidencing an increasing correlation alongside the growth (room count) of the U.S. industry (a suggestion to the authors as an adjustment to tighten the correlation over the entire time period)-this is a great paper and suggested read.
In our last article in Hotel Executive, "U.S. Treasury Bond Yields and Declining Restaurant Labor Personnel: Is a Recession Forthcoming? " we noted, in part, that U.S. Treasury yield curve inversions having a propensity for yield curve inversions to be: (a) "early," with significant "risk runaway" before the onset of a recession (if one arrives at all); (b) to be "inconclusive" as a sole data point in their issuance of a statistically significant number of historical false positives as recession tell-tales; and, (c) in the current environment, where U.S. and Global Sovereign Yields are affected by a confluence of new factors (it really is different this time), most prominently amongst those, the substantial and profound effect of the large-scale asset monetization of sovereign debt (and other collateral) by global central banks (e.g. U.S. Federal Reserve, European Central Bank, Bank of Japan) from quantitative easing programs, rendering historic yield curve inversions as less applicable than absent such influential factors in the bond markets.
At the same time, we provided a view into another simple metric: the monthly change in restaurant labor personnel for full-service restaurants in New York City tying it to two regularly published indices that the U.S. Federal Reserve utilizes to measure recession risk; and, evidencing early movement and sensitivity. We update our graph from that article below, and are not overly concerned as of yet regarding a U.S. recession – though in our H-Fin Capital Advisors, Inc. Weekly Newsletter (see H-Fin.com for our lowly monthly or annual subscription rates), we provide weekly 'summation' commentary on macro-currents and note global macro weaknesses.