Lackluster Q1 GDP growth could stymie hoteliers from raising rates

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U.S. gross domestic product rose only 0.7 percent in the first quarter, with torpid consumer spending pointed to as the main culprit. The rate marked the economy’s weakest quarter since early 2014.

Consumer spending grew at a 0.3-percent rate, the smallest increase since the fourth quarter of 2009.

Americans reduced their purchases of big-ticket items, such as automobiles and home appliances; meanwhile, responsibility for sluggish GDP growth rate is also blamed on rising inflation, which has dinged paychecks.

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What It Means for the Hotel Industry

Still, there is dissonance between GDP and overall consumer confidence, particularly in relation to the hotel industry. Consider that Q1 2017 U.S. hotel occupancy, according to STR, was the highest ever on record at 61.1 percent. This prompted Mark Woodworth, senior managing director and head of lodging research at CBRE Hotels, to say, "On the surface, it seems that a quarter of weak GDP growth does not mean that much." 

And while Q1 GDP growth was less than even the 1 percent most economists expected, GDP grew also less than 1 percent in Q1 2016 and was negative 1.2 percent in Q1 2014—numbers that, as Woodworth pointed out, "Are seemingly bad news for the hotel industry."

However, he continued, "The fact that business spending and investment was positive in Q1 2017, after being negative for the previous two quarters, is a good sign. This is particularly noteworthy given the view that the new Administration is going to implement more business-friendly policies, including the tax code. Once the unknown specifics become knowns, it seems reasonable that business, and consumer, spending should accelerate."

Woodworth's colleague at CBRE, Senior Economist Jamie Lane, is similarly unconcerned over what this first GDP report of the year says. "There is noise in the numbers every quarter," he suggested. The fact is that much of the GDP's slow growth rate was pegged to spending on durable and non-durable goods, like cars. As Lane pointed out, people are still spending on services, such as lodging and recreation. "There is no decline there and none of the data tell us there will be a slow down in lodging purchases," he said.

Sentiment, Lane continued, is sanguine. "Right now there is a disconnect between hard data (GDP) and soft data (consumer confidence). The latter numbers are positive. We think it will flow down to the hard numbers," he said. 

 

The Bad News

Still, in the near-term, the news is not propitious for hoteliers looking to grow their average daily rates. Doing so in a climate as tenuous as the numbers suggest is difficult. 

"This uncertainty does contribute to weaker pricing power, and average daily rate increases will likely be modest in most markets as a result," Woodworth said.

Added Lane, "The sentiment out there is things are going to get better, which would instill confidence in hotel managers as they price."

An optimist, too, Woodworth remains unbowed. "On net, one quarter does not tell the story," he said. "In two of the past three years, economic growth in Q2, Q3 and Q4 was greater than what was realized in Q1. There is no reason to think that this will not happen again this year."

Still, you can never perfectly foretell the future. "If we hit two or three more quarters of this, there would be more cause for concern," Lane said. 

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