Converging Factors: Is a Soft Landing Possible?

As we enter the final quarter of the year, is this recession still happening? And what does this mean for travel?

Optimism, among some: To the delight of many, in recent weeks, the term “soft landing”—an ideal situation when the Fed can raise interest rates just enough to curb high inflation but without causing a recession—has been gaining traction. In fact, Goldman Sachs has significantly cut their recession odds over the next 12 months to just 15% (which is basically the odds in any given year), down from 35% in March. Here are two key reasons:

• Moderating inflation, which means the Fed is likely ‘done’ with raising rates. 
• ‘Solid’ (though slowing) jobs growth, with wages that are growing faster than inflation, allowing consumers to spend more.

If these economists are correct, this ‘soft landing,’ in the face of increased rates, is a big deal—as it has only been achieved once in 60 years.

But pessimism persists: While a significant minority of economists are increasingly optimistic, the Bloomberg consensus of economists is still calling for a 60% chance of a recession.  

These economists, including those at Oxford Economics and Raymond James Financial, are arguing that a number of factors have been converging in a worrisome way. These factors include:

• Slowing jobs growth and a noticeable decline in job openings.
• Used-up savings buffers: Consumers have spent up most of their covid-era savings. 
• Resumption of student loan payments: After an interest-free relief period of more than three years, student loan interest on federal student aid resumed this month and payments will be due starting in October. This affects more than 40 million Americans and will limit their disposable income that could be used for travel.  
• High borrowing rates—coupled with a tightening of lending standards following the failure of some regional banks—has made it is increasingly difficult for both consumers and businesses to obtain loans.
• Tighter fiscal policy: With the need for more responsible spending given the skyrocketing deficit, the government will likely not spend as much to stimulate the economy. 
• Elevated gas prices, which are keeping inflation from appropriately slowing down.

What else: With a government shutdown increasingly likely, there are potential “knock on” economic effects caused by a delay in government worker paychecks and the cessation of some government services. This would affect many industries including the travel industry.

A silver lining? A government shutdown that leads to a slowdown in short-term consumer spending may allow the Fed to cut interest rates, which will have a positive impact on the stock market.

• Additionally, lower rates would help undercut the dollar’s recent rally and make the U.S. more attractive to international visitors.

Not a doomsday scenario: Even the gloomier predictions are noticeably more optimistic than what was projected last year at this time. For example, in their own language, Raymond James is predicting a “mild recession” while Oxford Economics is accepting that the predicted mild downturn may “not officially qualify as a recession.” 

Why this matters to the travel industry: Historically, the state of the travel industry has strongly correlated with the strength of the economy. 

Our latest forecast has already factored in a mild slowdown in fall 2023 travel and into 2024. We are largely expecting that forecast to materialize.

• While there has been some positive news such as Trip Advisor’s projection that U.S. Travel will remain strong this fall, many airlines have been noticing a recent decline in travel demand and hotel occupancy has struggled to surpass 2019 levels.  
   
  • STR and Tourism Economics have, in fact, lowered their hotel occupancy and revenue growth expectations for both 2023 and 2024 in their latest U.S. Hotel Forecast, while still expecting growth to remain above the long-term historical average.

Given this background, we are expecting that travel will continue to moderate—while still remaining resilient even in the event of a mild recession as we enter the final quarter of 2023 and head into 2024.