Hotel Lawyer in NY. We cover many topics at wwwHotelLawBlog.com, but ne of the things that has fascinated me about the hospitality industry for more than 20 years now, is the close -- almost intimate -- relationship of industry performance to the U.S. economy's performance. Some might say this is intuitive, that when the economy does well, all business does well. But that is not always true. There are some businesses which do better in hard times, like discount and bargain stores, and there are some that seem impervious, like ultra luxury goods. However the relationship of the lodging industry's performance to the general economy, has been carefully documented by the experts, and it is worth noting. The implications are interesting.
Here is the presentation made at the NYU Hotel Investment Conference on June 2, 2008, along with his other panelists about the current state of our domestic and global economy, along with implications for the hospitality industry.
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Hospitality Lawyer with pearls from NYU - Bjorn Hanson & Economists 6 2 08
1. The Economists
The Economists
30th Annual New York University
International Hospitality Industry
Investment Conference
June 2, 2008
2. Panelists
David A. Wyss, Ph.D.
Chief Economist, Standard & Poor’s
Bernard Baumohl
Executive Director,
The Economic Outlook Group LLC
Bjorn Hanson, Ph.D.
Principal,
PricewaterhouseCoopers LLP
3. The U.S. Lodging Industry and
The Economy
Bjorn Hanson, Ph.D.
Principal – Hospitality & Leisure
PricewaterhouseCoopers LLP
10. The Economic Outlook:
Oil and Bubble
David A. Wyss, Ph.D.
Chief Economist
Standard & Poor’s
11. The Economic Outlook:
Fasten Your Seatbelts
David Wyss
Chief Economist
Standard & Poor’s
June 2, 2008
CONFIDENTIAL AND PROPRIETARY.
Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
Copyright (c) 2008 Standard & Poor’s, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
12. The U.S. Is In Recession
• The economy has moved into recession.
• Housing has been in recession for two years, subtracting over a percentage point
from GDP growth in 2007.
• But that was offset by strength in nonresidential construction and the closing of
the trade gap, each of which added back over a half point.
• Weaker overseas growth will mean less benefit from the trade deficit, despite the
declining dollar.
• Nonresidential construction is beginning to decline
• The fiscal stimulus package will cause the fiscal 2008 deficit to more than double,
and could beat the 2004 record. But it should boost the economy late this year.
• The Fed has cut rates sharply.
• The recession should be mild because of the fiscal and monetary stimulus
• But probably long.
• And a deeper recession is possible if the financial markets remain locked up, oil
prices continue to rise, and home prices continue to drop.
CONFIDENTIAL AND PROPRIETARY.
12. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
13. Home Prices Were Too High
(Ratio of average home price to average household disposable income)
4.5
4
3.5
3
2.5
2
1975 1979 1983 1987 1991 1995 1999 2003 2007 2011
Existing New Quality-adjusted
Source: BEA, Census
CONFIDENTIAL AND PROPRIETARY.
13. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
14. Home Price Declines
(1-year change in home prices, First quarter)
+3% or more
0% to +3%
0% to -3%
-3% or worse
Source: OFHEO
CONFIDENTIAL AND PROPRIETARY.
14. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
15. The Fed Is Done Cutting
(Percent)
10
8
6
4
2
0
1995 1997 1999 2001 2003 2005 2007 2009 2011
Federal Funds Rate 10-Yr Bond Yield Mortgage rate
Source: Federal Reserve
CONFIDENTIAL AND PROPRIETARY.
15. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
16. The World Is Ignoring The U.S. Sniffles
• World growth remains solid
• Slower growth in the US and Europe is offset by stronger growth
in Asia
• The train has more engines attached
• And the world is thus less dependent on US growth
• We expect a slight slowdown in world growth, to 3.9% from 4.9%
in 2007
• But the big trade and capital imbalances are a risk
• And higher oil prices could still slow growth more
CONFIDENTIAL AND PROPRIETARY.
16. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
17. And Comes Mostly From Asia
(IMF purchasing power weights, 2006)
US
Other US Other
12%
20% 20% 17%
Eurozone
9%
East Eur East Eur Japan
7% 11% 3%
Eurozone
Other Adv
15%
India 7%
6%
India
Japan
11%
6%
China
Other Adv
15% China
11%
30%
Percent of World GDP Percent of World Growth
Source: IMF
CONFIDENTIAL AND PROPRIETARY.
17. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
18. Oil Prices Hit New Records
($/barrel, WTI and deflated by CPI;
household energy purchases as percent of disposable income)
120 9%
100 8%
80 7%
60 6%
40 5%
20 4%
0 3%
1980 1985 1990 1995 2000 2005 2010
Oil price (WTI) 2005 dollars % of disp. income (right)
Source: BEA
CONFIDENTIAL AND PROPRIETARY.
18. Permission to reprint or distribute any content from this presentation requires the written approval of Standard & Poor’s.
19. What’s Ahead for the U.S. Economy
Bernard Baumohl
Executive Director
The Economic Outlook Group, LLC
20.
21. New York University International Hospitality
Industry Investment Conference
June 2, 2008
Will the Economy
Delight, Dismay or Depress?
Bernard Baumohl
The Economic Outlook Group, LLC www.EconomicOutlookGroup.com
22. Are we now in recession?
Question is irrelevant!
• People behave the same whether the
economy shrinks by 1%… or grows by
1%!
• Fact: Housing is in recession
• Fact: Credit is scarce
• Fact: Consumers have cut spending
• Fact: Business remains cautious and
have scaled back on expenditures
The Economic Outlook Group
The Economic Outlook Group
23. % Decline in Home Prices Last 12 Months
S&P/Case-Shiller - 14.4%
20 U.S. Metropolitan
areas (April ‘08)
OFHEO - 3.1%
(1Q ‘08 from year ago)
Existing Homes - 8.0%
National Assoc. Realtors
(Median price- April’08)
New Homes +1.5%
US Commerce Dept.
(Median price - April’08)
Source: S&P/Case Shiller; NAR, US Dept. Commerce
The Economic Outlook Group
The Economic Outlook Group
24. Record High Foreclosures
U.S. default/foreclosures jumped 112% in IQ ‘08 versus
year ago.
One of every 194 homes is in some stage of foreclosure
Nearly 3 million foreclosed properties will be on the
market in 2008 and 2009
9 million borrowers are “underwater.”
Worst states: Nevada 1 out of 54 homes
California 1 one of 78 homes
Arizona 1 out of 95
Florida 1 out of 97 homes
Source: RealtyTrac; Economic Outlook Group The Economic Outlook Group
The Economic Outlook Group
25. Housing Market Index (HMI) and the Three Components: 1995 - Present
Housing Market Index (HMI) and The Three Components: 1995-Present
Seasonally Adjusted
(Seasonally Adjusted)
100
90
80
70
60
50
40
30
20
HMI
SF Detached: Present
10 SF Detached: Next 6 months
Traffic of Prospective Buyers
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: NAHB/Wells Fargo Housing
Market
The Economic Outlook Group
The Economic Outlook Group
26. Housing’s Impact on the Economy
Home construction alone: 5% of GDP
Home construction plus homebuyer
purchases (appliances, furniture and
etc.): 23% of GDP
Homebuilders hire 11% of total U.S.
work force
The Economic Outlook Group
The Economic Outlook Group
27. Housing Will Bottom Early 2009
Some Good News But Recovery Will Be
• Anecdotal signs lenders
Slow
loosening up
• Job market very weak
• Home affordability is highest in
5 years • Fewer mortgage originators out
there
• Stock of unsold new homes
lowest in 3 yrs.
• Lenders will remain cautious
issuing loans
• Pent up demand for houses
• More lenders reluctant to • Home price appreciation to be
foreclose modest
The Economic Outlook Group
The Economic Outlook Group
28. --- CREDIT STILL SCARCE ---
Who is to blame? Just about Everyone!!
Consumers borrowed irresponsibly for years.
Lenders doled out money recklessly (NINJA mortgages).
All that easy money PLUS low interest rates fired-up real estate
sales and swelled household debt.
Investors, frustrated by low yields, demanded securities with
higher returns.
Financial firms happily complied; crafted a panoply of asset backed
securities lead by subprime mortgages.
Rating agencies stamp their top approval on these bonds.
The Economic Outlook Group
The Economic Outlook Group
29. Comparing Losses:
Where does the latest financial crises rank?
Costliest natural disaster in U.S. history: Katrina (2005): $80 billion
Most catastrophic attack on U.S. soil: 9/11 (2001): $50 billion
Losses and write downs (so far) from subprime disaster: $235 billion
IMF projects total cost of subprime disaster: $945 billion!!
The Economic Outlook Group
The Economic Outlook Group
30. Comparing Losses:
Where does the latest financial crises rank?
Costliest natural disaster in U.S. history: Katrina (2005): $80 billion
Most catastrophic attack on U.S. soil: 9/11 (2001): $50 billion
Losses and write downs (so far) from subprime disaster: $235 billion
IMF projects total cost of subprime disaster: $945 billion!!
The Economic Outlook Group
The Economic Outlook Group
31. Comparing Losses:
Where does the latest financial crises rank?
Costliest natural disaster in U.S. history: Katrina (2005): $80 billion
Most catastrophic attack on U.S. soil: 9/11 (2001): $50 billion
Losses & write downs (so far) from subprime disaster: $379 billion
IMF projects total cost of subprime disaster: $945 billion!!
The Economic Outlook Group
The Economic Outlook Group
32. Comparing Losses:
Where does the latest financial crises rank?
Costliest natural disaster in U.S. history: Katrina (2005): $80 billion
Most catastrophic attack on U.S. soil: 9/11 (2001): $50 billion
Losses & write downs (so far) from subprime disaster: $379 billion
IMF projects total cost of subprime disaster: $945 billion!!
The Economic Outlook Group
The Economic Outlook Group
33. Construction Spending Activity
$ Billions, monthly annualized
Residential Spending Non-Residential Spending
700
650
600
550
500
450
400
J F M A M J J A S O N D J F M
2007 2008
Source: Commerce Department The Economic Outlook Group
The Economic Outlook Group
34. Lodging Construction Activity
$ Billions, monthly annualized
38
36
34
32
30
28
26
24
22
20
J F M A M J J A S O N D J F M
2007 2008
Source: Commerce Department The Economic Outlook Group
The Economic Outlook Group
35. %Change in Price of Lodging for Consumers - Monthly
2.5
2
1.5
1
0.5
0
-0.5
-1
-1.5
-2
-2.5
2006 2007 2008
Source: Bureau of Labor Statistics
The Economic outlook Group
The Economic outlook Group
36. Credit Markets Should Begin to Function
More Normally by Mid-2009?
• Federal Reserve Board has moved aggressively to improve
conditions in the financial sector.
• Lenders are making progress repairing their balance sheets.
• More confidence that worst is over --- though more losses and
write downs are likely.
• Interest rate spreads are narrowing.
---> Result: Credit freeze will (slowly) start to thaw in
2nd half 2008; Mid-2009 will look better.
The Economic outlook Group
The Economic outlook Group
37. Consumers to Cut Back on Spending
• Job market is weakening
• Household income not keeping pace with inflation
• Americans struggle with debt. De-leveraging
underway
• Household wealth is on the decline. People feel
poorer now than a year ago.
The Economic Outlook Group
The Economic Outlook Group
38. Job Market is Deteriorating
Monthly Change in Business Payrolls
Thousands of jobs
300
250
200
150
100
50
0
-50
-100
-150
J F M A M J J A S O N D J F M A M J J A S O N D J F M A
2006 2007 2008
The Economic Outlook Group
The Economic Outlook Group
39. Growth in Real Earnings
Average Weekly Earnings, 1982 dollars
12-month % change
3
2
1
0
-1
-2
-3
J F M A M J J A S O N D J F M A
2007 2008
The Economic Outlook Group
The Economic Outlook Group
40. Reg. Gasoline: To Peak $5.00/gallon Within 1 - 2 Yrs.
The highs are getting higher AND lows are getting higher too!
QuickTime™ and a
decompressor
are needed to see this picture.
Source: GasBuddy.com
The Economic Outlook Group
The Economic Outlook Group
41. % Increase from 2000 to 2007
90
80
70
60
50
40
30
20
10
0
Disposable
Employment
GDP
Household
Price New
Personal
Median
Income
Home
Debt
Sources: Commerce Department; Federal Reserve’s Flow of Funds
The Economic Outlook Group
The Economic Outlook Group
42. Reasons To Be Hopeful About Consumers
• Unemployment rate to remain historically low
• Applications for jobless benefits below recession
levels
• Households are in the process of de-leveraging
• Not all regions of the country are hurting
• Second stimulus package likely early 2009
The Economic outlook Group
The Economic outlook Group
43. What Does It All Mean For The Economy?
Output (Real GDP) WE’RE MORE THAN
HALF WAY THROUGH
DOWNTURN
OUTPUT PEAKED NOV/DEC ‘07
Peak
Expansion
Recession Recovery
Recession Trough
Recovery
Trough
Time
The Economic Outlook Group
The Economic Outlook Group
44. Biggest Risks Next 12 - 24 Months?
Domestic Shocks
-- One or more major lenders fail (40% probability)
-- Oil touches $200 a bbl. (30%)
-- Dollar continues to depreciate (70%)
Foreign Shocks
-- Hamas & Hezbollah deploy longer-range missiles (60%)
-- Lebanese civil war erupts (50%)
-- Military strike against Iran’s nuclear facilities (65%)
-- Terrorist attack on Saudi Arabia’s oil facilities (75%)
The Economic Outlook Group
The Economic Outlook Group
45. The Economic Outlook Group
Bernard Baumohl
The Economic Outlook Group, L.L.C.
475 Wall Street
Princeton, New Jersey 08540
(609) 529-1300
www.EconomicOutlookGroup.com
46. Economic Forecasts
Standard & Poor’s The Economic
Outlook Group
2007 2008 2009 2008 2009
Real GDP 2.2 1.3 1.3 1.3 2.4
CPI 2.9 3.9 2.3 3.4 2.6
Interest Rates – 3-Month
3.0 1.6 3.0 3.25 4.20
T-Bills (Year-end)
Euro / Dollar Exchange
Rate (Year-end) 1.41 1.50 1.53 1.61 1.68
Employment Percentage
Change 1.1 0.2 0.1 -0.6 -0.3
Peak Oil (Barrel) $87 $150 $125 $110
$155
S&P 500 (Year-end) 1,468 1,500 1,620 1,490 1,570
Sources: Bureau of Economic Analysis, US Energy Information Administration, Standard & Poor’s, and The Economic Outlook
Group.
48. Panelists
David A. Wyss, Ph.D.
Chief Economist, Standard & Poor’s
Bernard Baumohl
Executive Director,
The Economic Outlook Group LLC
Bjorn Hanson, Ph.D.
Principal,
PricewaterhouseCoopers LLP