The Economists
  The Economists

30th Annual New York University
International Hospitality Industry
    Investment Confere...
Panelists
David A. Wyss, Ph.D.
Chief Economist, Standard & Poor’s



Bernard Baumohl
Executive Director,
The Economic Outl...
The U.S. Lodging Industry and
        The Economy




          Bjorn Hanson, Ph.D.
          Principal – Hospitality & Le...
U.S. Lodging Demand and The
                      Economy

  For the past 25 years, the relationship
  between growth of l...
Demand Elasticity and Correlation to
                Real GDP
             Time Period                                    ...
Demand Elasticity and Correlation to
                   Real GDP
  1987 value = 100
   180
   170
                        ...
Demand Elasticity and Correlation to
                   Real GDP
  1987 value = 100
  180
  170
                          ...
Nominal and Real Gasoline Price Long
               Term Trend
   Unleaded Regular Price per Gallon
    $4.00
            ...
Lodging Demand Sensitivity to
                    Gasoline Prices
     PwC has calculated that when real gasoline
     pri...
The Economic Outlook:
    Oil and Bubble




      David A. Wyss, Ph.D.
      Chief Economist
      Standard & Poor’s
The Economic Outlook:
Fasten Your Seatbelts
David Wyss
Chief Economist
Standard & Poor’s

June 2, 2008


CONFIDENTIAL AND ...
The U.S. Is In Recession


       • The economy has moved into recession.

       • Housing has been in recession for two ...
Home Prices Were Too High
      (Ratio of average home price to average household disposable income)



        4.5

     ...
Home Price Declines
                                       (1-year change in home prices, First quarter)




             ...
The Fed Is Done Cutting


            (Percent)


              10
                8
                6
                4
 ...
The World Is Ignoring The U.S. Sniffles


       • World growth remains solid

       • Slower growth in the US and Europe...
And Comes Mostly From Asia


              (IMF purchasing power weights, 2006)



                                       ...
Oil Prices Hit New Records

           ($/barrel, WTI and deflated by CPI;
           household energy purchases as percen...
What’s Ahead for the U.S. Economy




            Bernard Baumohl
            Executive Director
            The Economic ...
New York University International Hospitality
        Industry Investment Conference
                              June 2,...
Are we now in recession?
          Question is irrelevant!
• People behave the same whether the
economy shrinks by 1%… or ...
% Decline in Home Prices Last 12 Months

   S&P/Case-Shiller                          - 14.4%
   20 U.S. Metropolitan
   a...
Record High Foreclosures

    U.S. default/foreclosures jumped 112% in IQ ‘08 versus
    year ago.
    One of every 194 ho...
Housing Market Index (HMI) and the Three Components: 1995 - Present
                    Housing Market Index (HMI) and The...
Housing’s Impact on the Economy


Home construction alone: 5% of GDP
Home construction plus homebuyer
purchases (appliance...
Housing Will Bottom Early 2009

    Some Good News                      But Recovery Will Be
• Anecdotal signs lenders
   ...
--- CREDIT STILL SCARCE ---
              Who is to blame? Just about Everyone!!



Consumers borrowed irresponsibly for y...
Comparing Losses:
      Where does the latest financial crises rank?

Costliest natural disaster in U.S. history: Katrina ...
Comparing Losses:
      Where does the latest financial crises rank?

Costliest natural disaster in U.S. history: Katrina ...
Comparing Losses:
      Where does the latest financial crises rank?

Costliest natural disaster in U.S. history: Katrina ...
Comparing Losses:
      Where does the latest financial crises rank?

Costliest natural disaster in U.S. history: Katrina ...
Construction Spending Activity
                                  $ Billions, monthly annualized


                 Residen...
Lodging Construction Activity
                        $ Billions, monthly annualized

  38
  36
  34
  32
  30
  28
  26
 ...
%Change in Price of Lodging for Consumers - Monthly

     2.5
       2
     1.5
       1
     0.5
       0
    -0.5
      ...
Credit Markets Should Begin to Function
     More Normally by Mid-2009?

• Federal Reserve Board has moved aggressively to...
Consumers to Cut Back on Spending


• Job market is weakening

• Household income not keeping pace with inflation

• Ameri...
Job Market is Deteriorating
                        Monthly Change in Business Payrolls

Thousands of jobs
    300
    250...
Growth in Real Earnings
                        Average Weekly Earnings, 1982 dollars
12-month % change

    3

    2

   ...
Reg. Gasoline: To Peak $5.00/gallon Within 1 - 2 Yrs.
 The highs are getting higher AND lows are getting higher too!




 ...
% Increase from 2000 to 2007

    90
    80
    70
    60
    50
    40
    30
    20
    10
     0
                      ...
Reasons To Be Hopeful About Consumers


• Unemployment rate to remain historically low

• Applications for jobless benefit...
What Does It All Mean For The Economy?

     Output (Real GDP)                   WE’RE MORE THAN
                         ...
Biggest Risks Next 12 - 24 Months?

Domestic Shocks
-- One or more major lenders fail (40% probability)
-- Oil touches $20...
The Economic Outlook Group




               Bernard Baumohl
            The Economic Outlook Group, L.L.C.
             ...
Economic Forecasts
                                                                Standard & Poor’s                 The E...
www.lodgingresearch.com


                   PwC Hospitality Suite
                 The Duke of Windsor Suite
            ...
Panelists
David A. Wyss, Ph.D.
Chief Economist, Standard & Poor’s



Bernard Baumohl
Executive Director,
The Economic Outl...
Hospitality Lawyer with pearls from NYU - Bjorn Hanson & Economists  6 2 08
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Hospitality Lawyer with pearls from NYU - Bjorn Hanson & Economists 6 2 08

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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. 1. The Economists The Economists 30th Annual New York University International Hospitality Industry Investment Conference June 2, 2008
  2. 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. 3. The U.S. Lodging Industry and The Economy Bjorn Hanson, Ph.D. Principal – Hospitality & Leisure PricewaterhouseCoopers LLP
  4. 4. U.S. Lodging Demand and The Economy For the past 25 years, the relationship between growth of lodging demand and economy has averaged 0.9:1 The range, excluding 1991 and 2001, has been 0.17:1 (in 2006) to 4.3:1 (in 1987) © 2008 PricewaterhouseCoopers LLP
  5. 5. Demand Elasticity and Correlation to Real GDP Time Period Elasticity* * All statistically significant at p=0.05. 1967 – 1991 1.2 1991 – 2000 0.7 2002 0.2 2003 0.5 2004 1.01 2005 0.91 0.70** 2006 0.17 0.38** 2007 0.35 0.58 YTD 2008 0.29 Source: PricewaterhouseCoopers LLP. **Adjusted for hurricanes Katrina and Rita. © 2008 PricewaterhouseCoopers LLP
  6. 6. Demand Elasticity and Correlation to Real GDP 1987 value = 100 180 170 US Real GDP 160 150 140 130 120 110 100 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 Sources: Lodging demand – PricewaterhouseCoopers LLP based on Smith Travel Research data; Real GDP- U.S. Bureau of Economic Analysis; Air travel demand - Air Transport Association. © 2008 PricewaterhouseCoopers LLP
  7. 7. Demand Elasticity and Correlation to Real GDP 1987 value = 100 180 170 US Real GDP 160 150 140 130 Lodging Demand 120 (Room Nights Sold) 110 100 87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07 Sources: Lodging demand – PricewaterhouseCoopers LLP based on Smith Travel Research data; Real GDP- U.S. Bureau of Economic Analysis; Air travel demand - Air Transport Association. © 2008 PricewaterhouseCoopers LLP
  8. 8. Nominal and Real Gasoline Price Long Term Trend Unleaded Regular Price per Gallon $4.00 May 2008 over May 2007 Nominal Price Change +19.7% Nominal Price Per Gallon Change +$0.64 $3.00 Real Gasoline Price $2.00 $1.00 Nominal Gasoline Price $0.00 Dec-80 Dec-81 Dec-82 Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Dec-92 Dec-93 Dec-94 Dec-95 Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Source: Energy Information Administration, May 2008 Monthly Energy Review, Bureau of Labor Statistics © 2008 PricewaterhouseCoopers LLP
  9. 9. Lodging Demand Sensitivity to Gasoline Prices PwC has calculated that when real gasoline prices increase by 10 percent, US lodging demand declines by 0.5 percent. If real gasoline prices had remained at 2006 Q4 levels, occupancy in 2007 would have been > 0.2 occupancy points. If real gasoline prices remained at 2007 levels, occupancy in 2008 would be > 0.4 occupancy points. © 2008 PricewaterhouseCoopers LLP
  10. 10. The Economic Outlook: Oil and Bubble David A. Wyss, Ph.D. Chief Economist Standard & Poor’s
  11. 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. 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. 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. 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. 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. 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. 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. 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. 19. What’s Ahead for the U.S. Economy Bernard Baumohl Executive Director The Economic Outlook Group, LLC
  20. 20. 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
  21. 21. 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
  22. 22. % 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
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. --- 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
  28. 28. 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
  29. 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. 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 & 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
  31. 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. 32. 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
  33. 33. 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
  34. 34. %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
  35. 35. 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
  36. 36. 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
  37. 37. 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
  38. 38. 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
  39. 39. 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
  40. 40. % 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
  41. 41. 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
  42. 42. 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
  43. 43. 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
  44. 44. 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
  45. 45. 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.
  46. 46. www.lodgingresearch.com PwC Hospitality Suite The Duke of Windsor Suite Fourth Floor © 2008 PricewaterhouseCoopers LLP
  47. 47. 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

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