Lodging tries to pick up the pieces as link to GDP shatters.(MANAGERS' FOCUS)

For the past two decades, the change in demand for rooms has been closely related to the change in U.S. gross domestic product. At various times there were lags in this relationship, with changes in GDP preceding changes in lodging demand by three to six months, but more recently the two variables appear to be coincident. Because of this consistency, given a relatively accurate GDP projection, one could develop a reasonable projection of lodging demand. Obviously, there are a number of variables to consider when developing a reliable forecast for the industry, but the relationship of the industry's demand to the overall economy is unmistakable.

Which brings up the question: What happened to lodging demand during the second quarter of 2008? When the latest revised estimate for the second quarter's GDP growth of 3.3 percent was released a few weeks ago, a number of economists were surprised at the strength of the economy. Given the low growth rate in lodging demand, I was not only surprised but also concerned about the deterioration in the relationship of GDP growth and lodging demand growth. While I realize that one quarter does not make a trend, there was enough of a shift that this disconnect deserves watching.

Clearly, there were reasons for the strong growth in the economy that were not immediately apparent. First was the surge in exports as the cheap dollar made U.S. goods a bargain around the world. Real export of goods increased 13.2 percent in the second quarter, compared with a 5.1 percent increase in the first quarter. Also, the government economic stimulus package put checks in the hands of most taxpayers, which led to better than expected consumer spending. Another key factor was the above average growth in the farm economy as demand surged for bio-diesel fuel.

Apparently, little of this growth benefited the lodging industry. Even as GDP grew by 3.3 percent, lodging demand actually fell slightly, down 0.1 percent. The gateway cities have experienced an increase in demand from in-bound travelers due to the cheap dollar, but that demand has not flowed through to the rest of the industry. While consumer spending did increase, only a small percentage of that spending was related to travel. As a result, there was clearly a break in the linkage between changes in GDP and lodging demand during the second quarter of 2008.

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The question then becomes how long the break in this link will last. Several of the problems are related to the travel industry specifically. With fuel costs remaining well above historical norms, the prospects for auto travel are questionable and will most likely continue to be curtailed. Airline travel is becoming increasingly more difficult as the airlines cut flights, increase fares and fees, and continue to entirely overlook the concept of customer service.

Forecasts for GDP growth for the remainder of 2008 are in the range of flat to 1.5 percent. Given that the hotel industry's problems have not subsided and in some cases continuing to deteriorate, we have adjusted our full-year 2008 projections downward. At this time, we are forecasting a decline in room demand, -0.3 percent. Combined with continued growth in room supply, occupancies could drop by as much as 3.0 percent for the year. We expect room demand declines to continue throughout the remainder of 2008 and on into 2009, with a bottom occurring sometime around spring of next year.

Randell A. Smith is CEO and cofounder of Smith Travel Research.

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