Unemployment has been a statistically more significant variable in driving RevPAR than GDP over the last 10 and particularly 5 years. The implications are a potentially slower RevPAR recovery than in past recessions.
GDP has been the universally accepted hotel demand driver. GDP is important, no doubt, but our regressions using more recent data show that unemployment is a statistically more significant driver of revenue per available room. While not as meaningful as unemployment or GDP, the housing price index has also been an important variable.
Here are the T-Stats and R Square from our regression of RevPAR to GDP, unemployment, and housing. As can be seen, the significance of the unemployment variable in driving RevPAR is higher than GDP in the last two 5-year periods. Moreover, the relative significance of unemployment increased in the last 5-year period.
Joel Ross wrote an interesting (at least for us geeks) article in Hotel News Now entitled “Industry Uses Wrong Metrics to Project RevPAR” that provides some insight on why GDP may not be as important. “The increases in unemployment, home foreclosures, bank balance sheet strength, lending to small business, consumer balance sheets and the entire capital markets environment are different this time” wrote Mr. Ross in explaining why there may not be a V-shaped RevPAR recovery as was experienced in past downturns. Mr. Ross goes on to say that essentially the historic relationship of GDP to RevPAR may lessen since increases in government spending are inflating GDP.
Insightful commentary, no doubt, and we would like to add a few bullets:
- Housing prices have moved more independently from GDP over the last 10 years and may continue to do so as housing remains under pressure
- Consumer leverage is still high by historical levels
- Unemployment may take longer to revert to historical norms and the wild swings over the last few years causes uncertainty and potentially a higher savings rate
- Companies don’t seem as quick to open the purse strings as in previous recoveries which means less hiring and less travel
- More government uncertainty – taxes look like they are going higher at the federal, state, and local levels to combat ballooning deficits
- Historically low interest rates may not be sustainable
- Potential for inflation
None of these factors will be good for RevPAR even if GDP continues to bounce back.