US tourism poised to cool as global economy ebbs
The US tourism industry has enjoyed a spurt of robust growth since being battered by the global recession and financial crisis more than a decade ago. A domestic economy which fired on all cylinders in 2018 is now poised to glide onto a slower growth trajectory, and tourism demand will relax along with it. Economic growth outside the US is fading even more quickly. This is not to say that demand will suddenly evaporate, but industry participants should be prepared for a pullback as various forces that have been engines of growth run out of steam.
Big (consumer) wheel keeps on turning
Although the general US economy will slow over the next few years as business investment, housing and government provide less support, consumer spending will remain the backbone of the economy through at least 2020. This positive outlook begins with the labor market, namely the fact that unemployment rate (3.6% in April) is the lowest since 1969. Even better, the rate at which employees are quitting jobs for better ones is improving, resulting in rising wages across most sectors, and drawing some previously discouraged Americans back into the workforce. This organic improvement in income is being supplemented by recent cuts to personal tax rates, which began padding bank accounts for most Americans last year. If that wasn't enough to boost consumer confidence, the stock market has been outdoing new all-time highs with regularity in the last couple years. Each of these positive, cyclical trends will remain in place for the next year or so, ensuring that US consumers maintain a healthy appetite for domestic travel in the near term.
Despite these positives, one downside of the strong economy is that travel costs are likely to rise. This is especially true for tourism services such as hotels and restaurants, where wages are rising faster than average given the stiff competition for labor in these sectors. Construction costs are also elevated. If business owners are to maintain profit margins, they must either pass on these costs to consumers or cut costs elsewhere, and risk disappointing their customers with a lower quality experience. Fortunately, transportation costs remain relatively low, especially in the case of airline fares, which have been in a steady decline for nearly five years. According to April's consumer confidence survey from the Conference Board, 28% of US consumers reported plans to take a vacation and travel by airplane within the next six months, compared with 23% planning to travel by automobile.
Little help from abroad
Buoyant demand for domestic tourism is critical, because the chances for an uptick in foreign demand are slim. The global economy has slowed noticeably and is much more vulnerable to an outright downturn, with the euro zone, China, Japan and many emerging markets struggling. The ramifications of downside risks such as a global trade war and Brexit are could tilt the scales in the wrong direction.
Foreign visitation to the US is already under pressure due to the strength of the US dollar, and slumping economic growth abroad or a recession would further stifle this important source of demand. Competition from other foreign countries also poses a threat, even if overall demand for foreign travel firms under a best-case scenario. According to the US Travel Association, while inbound visitation to the US managed to grow 0.7% in 2017, the share of global international travel captured by the US fell to 12.2% from 13.8% in 2015. Expansion of affordable airline routes, tourism marketing campaigns, exchange rates, and changing global politics are factors that have made competition for global tourism tighter than it has been in the past.
Down the road
Beyond the next couple of years, long-term economic, demographic, and technological trends will impact the way the US tourism industry evolves. The US, like much of the advanced global economy, is host to an aging demographic and slowing population growth. This has negative implications for both the supply and demand sides of the tourism industry. One way to fix this is to advocate for reformed immigration policies that encourage young, skilled workers to enter the US and take the place of a workforce that will be more geared toward service-based spending as they age. In addition, bringing more foreign-born people to the US would be a natural demand driver for visiting family members and country members.
The US tourism industry could also improve its competitiveness by upgrading its infrastructure system to meet the expectations of21st century travelers. High speed rail, airport upgrades, and building "smart cities" that integrate travel and technology are all productivity-enhancing ideas worth consideration in both the public and private sectors.
The willingness, or lack thereof, of the tourism industry to incorporate digitally-based experiences into the traditional travel experience is another factor that will shape the industry's success. In the last few years, consumers have proven that technology and connectivity are essential for ride-sharing, home rentals, social media engagement, and virtually all aspects of day-to-day life --and travel should be no different. Rather than this new dynamic being perceived as a threat to business as usual, it should be welcomed by the tourism industry as an opportunity to engage with its customers. Businesses (and destinations) that do so successfully stand a better chance at winning over travelers who have increasingly infinite options.
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We expect travel to rise by 1.5 million from last year as 42.8 million travelers are expected to take to the rails,… https://t.co/5p8Urvk4fq