Hospitality Lawyer with pearls from NYU - Bjorn Hanson & Economists 6 2 08

The Economists

30th Annual New York UniversityInternational Hospitality Industry

Investment Conference

The Economists

June 2, 2008

PanelistsPanelistsDavid A. Wyss, Ph.D.Chief Economist, Standard & Poor’s

Bjorn Hanson, Ph.D.Principal, PricewaterhouseCoopers LLP

Bernard BaumohlExecutive Director,The Economic Outlook Group LLC

The U.S. Lodging Industry and The Economy

The U.S. Lodging Industry and The Economy

Bjorn Hanson, Ph.D.Principal – Hospitality & Leisure

PricewaterhouseCoopers LLP

© 2008 PricewaterhouseCoopers LLP

For the past 25 years, the relationship between growth of lodging demand and economy has averaged 0.9:1

For the past 25 years, the relationship between growth of lodging demand and economy has averaged 0.9:1

U.S. Lodging Demand and The Economy

The range, excluding 1991 and 2001, has been 0.17:1 (in 2006) to 4.3:1 (in 1987)


1967 – 1991 1.2

Time Period Elasticity*

Source: PricewaterhouseCoopers LLP.

1991 – 2000 0.71991 – 2000 0.72002 0.22002 0.2

2003 0.5 2003 0.5 2004 1.01 2004 1.01

Demand Elasticity and Correlation to Real GDP

2005 0.912005 0.91

**Adjusted for hurricanes Katrina and Rita.

2006 0.172006 0.172007 0.352007 0.35

0.70**0.38**0.58

YTD 2008 0.29YTD 2008 0.29

* All statistically significant at p=0.05.



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140

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160

170

180

87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07Sources: Lodging demand – PricewaterhouseCoopers LLP based on Smith Travel Research data; Real GDP- U.S. Bureau of Economic Analysis; Air travel demand - Air Transport Association.

1987 value = 100

US Real GDP



100

110

120

130

140

150

160

170

180

87 88 89 90 91 92 93 94 95 96 97 98 99 '00 '01 '02 '03 '04 '05 '06 '07Sources: Lodging demand – PricewaterhouseCoopers LLP based on Smith Travel Research data; Real GDP- U.S. Bureau of Economic Analysis; Air travel demand - Air Transport Association.

1987 value = 100

US Real GDP

Lodging Demand(Room Nights Sold)


Nominal and Real Gasoline Price Long Term Trend

Source: Energy Information Administration, May 2008 Monthly Energy Review, Bureau of Labor Statistics

$0.00

$1.00

$2.00

$3.00

$4.00

Dec-

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00De

c-01

Dec-

02De

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Dec-

04De

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Dec-

06De

c-07

Nominal Gasoline Price

Unleaded Regular Price per Gallon

May 2008 over May 2007Nominal Price Change +19.7%

Nominal Price Per Gallon Change +$0.64

Real Gasoline Price


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.

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.

Lodging Demand Sensitivity to Gasoline Prices

David A. Wyss, Ph.D.Chief Economist

Standard & Poor’s

The Economic Outlook: Oil and Bubble

The Economic Outlook: Oil and Bubble

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.

The Economic Outlook: Fasten Your Seatbelts

David WyssChief EconomistStandard & Poor’s

June 2, 2008

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.

13.



Home Prices Were Too High

2

2.5

3

3.5

4

4.5

1975 1979 1983 1987 1991 1995 1999 2003 2007 2011

Existing New Quality-adjusted

(Ratio of average home price to average household disposable income)

Source: BEA, Census

14.



Home Price Declines

0% to -3%0% to +3%

-3% or worse

(1-year change in home prices, First quarter)

+3% or more

Source: OFHEO

15.



0

2

4

6

8

10

1995 1997 1999 2001 2003 2005 2007 2009 2011

Federal Funds Rate 10-Yr Bond Yield Mortgage rate

(Percent)

The Fed Is Done Cutting

Source: Federal Reserve

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

17.



And Comes Mostly From Asia

US20%

Eurozone15%

Japan6%

Other Adv11%

China15%

India6%

East Eur7%

Other 20%

(IMF purchasing power weights, 2006)

US12%

Eurozone9%

Japan3%

Other Adv7%

China30%

India11%

East Eur11%

Other 17%

Percent of World GrowthPercent of World GDP

Source: IMF

18.



Oil Prices Hit New Records

0

20

40

60

80

100

120

1980 1985 1990 1995 2000 2005 20103%

4%

5%

6%

7%

8%

9%

Oil price (WTI) 2005 dollars % of disp. income (right)

($/barrel, WTI and deflated by CPI; household energy purchases as percent of disposable income)

Source: BEA

Bernard BaumohlExecutive Director

The Economic Outlook Group, LLC

What’s Ahead for the U.S. EconomyWhat’s Ahead for the U.S. Economy

Will the Economy Will the Economy Delight, Dismay or Depress?Delight, Dismay or Depress?

New York University International HospitalityNew York University International HospitalityIndustry Investment ConferenceIndustry Investment Conference

June 2, 2008June 2, 2008

The Economic Outlook Group, LLCThe Economic Outlook Group, LLC

Bernard Baumohlwww.EconomicOutlookGroup.com

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

Are we now in recession?

The Economic Outlook GroupThe Economic Outlook GroupThe Economic Outlook Group

% Decline in Home Prices Last 12 Months

S&P/Case-Shiller20 U.S. Metropolitan areas (April ‘08)

- 14.4%

OFHEO(1Q ‘08 from year ago)

- 3.1%

Existing HomesNational Assoc. Realtors (Median price- April’08)

- 8.0%

New HomesUS Commerce Dept. (Median price - April’08)

+1.5%


Source: S&P/Case Shiller; NAR, US Dept. Commerce

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 foreclosureNearly 3 million foreclosed properties will be on the market in 2008 and 20099 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

The Economic Outlook GroupThe Economic Outlook GroupThe Economic Outlook GroupSource: RealtyTrac; Economic Outlook Group

0

10

20

30

40

50

60

70

80

90

100

1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

HMISF Detached: PresentSF Detached: Next 6 monthsTraffic of Prospective Buyers

Housing Market Index (HMI) and The Three Components: 1995-Present(Seasonally Adjusted)

Source: NAHB/Wells Fargo Housing Market

Housing Market Index (HMI) and the Three Components: 1995 - PresentSeasonally Adjusted


Housing’s Impact on the Economy

Home construction alone: 5% of GDPHome construction plus homebuyer purchases (appliances, furniture and etc.): 23% of GDPHomebuilders hire 11% of total U.S. work force


Housing Will Bottom Early 2009

Some Good News• Anecdotal signs lenders

loosening up

• Home affordability is highest in5 years

• Stock of unsold new homes lowest in 3 yrs.

• Pent up demand for houses

• More lenders reluctant to foreclose

But Recovery Will Be Slow

• Job market very weak

• Fewer mortgage originators out there

• Lenders will remain cautious issuing loans

• Home price appreciation to be modest


--- CREDIT STILL SCARCE ---Who is to blame? Just about Everyone!!

Consumers borrowed irresponsibly for years.Consumers borrowed irresponsibly for years.

Lenders doled out money recklessly (NINJA mortgages).Lenders doled out money recklessly (NINJA mortgages).

Investors, frustrated by low yields, demanded securities with Investors, frustrated by low yields, demanded securities with higher returns.higher returns.

Financial firms happily complied; crafted a panoply of asset bacFinancial firms happily complied; crafted a panoply of asset backed ked securities lead by subprime mortgages.securities lead by subprime mortgages.

Rating agencies stamp their top approval on these bonds.Rating agencies stamp their top approval on these bonds.

All that easy money PLUS low interest rates firedAll that easy money PLUS low interest rates fired--up real estate up real estate sales and swelled household debt.sales and swelled household debt.


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!!





Losses and write downs (so far) from subprime disaster: $235 billion






Losses & write downs (so far) from subprime disaster: $379 billion






Losses & write downs (so far) from subprime disaster: $379 billion



400

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500

550

600

650

700

J F M A M J J A S O N D J F M

Residential Spending Non-Residential Spending

2007 2008

Construction Spending Activity$ Billions, monthly annualized

The Economic Outlook GroupThe Economic Outlook GroupThe Economic Outlook GroupSource: Commerce Department

20222426283032343638

J F M A M J J A S O N D J F M

Lodging Construction Activity$ Billions, monthly annualized

2007 2008

The Economic Outlook GroupThe Economic Outlook GroupThe Economic Outlook GroupSource: Commerce Department

-2.5-2

-1.5-1

-0.50

0.51

1.52

2.5

200820072006

%Change in Price of Lodging for Consumers - Monthly

Source: Bureau of Labor Statistics

The Economic outlook GroupThe Economic outlook GroupThe Economic outlook Group

• 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 in2nd half 2008; Mid-2009 will look better.

Credit Markets Should Begin to Function More Normally by Mid-2009?


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.


-150-100

-500

50100150200250300

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

Job Market is DeterioratingMonthly Change in Business Payrolls

Thousands of jobs

2006 2007 2008


-3

-2

-1

0

1

2

3

J F M A M J J A S O N D J F M A

Growth in Real EarningsAverage Weekly Earnings, 1982 dollars

12-month % change

2007 2008


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


Source: GasBuddy.com

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ian

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ome

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ldD

ebt

% Increase from 2000 to 2007

Sources: Commerce Department; Federal Reserve’s Flow of Funds


• 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

Reasons To Be Hopeful About Consumers



Time

What Does It All Mean For The Economy?

Output (Real GDP)

Recession

Trough

Recovery

Expansion

Peak

Recession TroughRecovery

WE’RE MORE THAN HALF WAY THROUGH

DOWNTURN

OUTPUT PEAKED NOV/DEC ‘07

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 GroupThe Economic Outlook Group

Bernard Baumohl

www.EconomicOutlookGroup.com

The Economic Outlook Group, L.L.C.475 Wall Street

Princeton, New Jersey 08540

(609) 529-1300

Economic ForecastsStandard & Poor’s The Economic

Outlook Group

2007 2008 2009 2008 2009

Euro / Dollar Exchange Rate (Year-end)

Real GDP

CPI

Interest Rates – 3-Month T-Bills (Year-end)

Employment Percentage ChangePeak Oil (Barrel)

S&P 500 (Year-end)

2.2 1.3 1.3 1.3 2.4

2.9 3.9 2.3 3.4 2.6

3.0 1.6 3.0 3.25 4.20

0.2 0.1 -0.6 -0.31.1

$150 $125 $155 $110

1,500 1,620 1,490 1,5701,468

$87

Sources: Bureau of Economic Analysis, US Energy Information Administration, Standard & Poor’s, and The Economic Outlook Group.

1.41 1.50 1.53 1.61 1.68

PwC Hospitality SuiteThe Duke of Windsor Suite

Fourth Floor


www.lodgingresearch.com

Panelists

David A. Wyss, Ph.D.Chief Economist, Standard & Poor’s

Bjorn Hanson, Ph.D.Principal, PricewaterhouseCoopers LLP

Bernard BaumohlExecutive Director,The Economic Outlook Group LLC

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