Foreign economic growth will be a boon for U.S. travel and hospitality industry in 2018
By Andrew Duguay, Senior Economist
When reflecting on the lackluster growth of the travel industry and international travel during the last few years, experts have been pointing to recent geopolitical explanations as the cause for the lack of international travel to the U.S. But the reality is that the answer is economic, as the decline of international tourism has been weak since 2014. The true culprit has been the very strong U.S. dollar that began before the presidential election and continued afterward, making it more expensive for foreign travelers to come to the U.S. As a result, the U.S. travel and hospitality industries weakened. However, over the course of 2017, we've seen positive indicators that inbound travel to the U.S. will begin to pick up again; the U.S. dollar began to soften and tourism was up year-over-year from 2016.
In Asia, the economy in Japan and China are both growing. The third quarter of 2017 marked Japan's seventh consecutive quarter of economic growth. With government stimulus programs in place, unemployment is at a multi-decade low and persistent wage and price deflation have eased. We also saw strong consumer spending in Q2, followed by increased foreign trade in Q3, both of which have buoyed the economy.
The Chinese economy, for the first time, is growing on the shoulders of strong consumer spending. Even with manufacturing weakening, consistent wage growth coupled with a stable cost of living has given rise to a new Chinese consumer, as evidenced by the fact that the service sector accounted for more than half of China's GDP in 2017. Similarly, consumer sentiment in China is up, and the yuan has strengthened while the U.S. dollar softens. Overall, China's economy is maturing from a manufacturing-based to a consumer-based economy, opening up new opportunities for American companies to market their goods and experiences to the Chinese consumer. Additionally, the Chinese Millennials are benefiting from economic reforms and western-style upbringing. These Millennials have more disposable income than past generations and are paying top-dollar for spending more on travel, often spending more than $14,000 during trips to international destinations, according to the results of a survey by Singapore Tourism Board.
While strong foreign economies and a comparatively weak U.S. dollar will largely drive growth in the U.S. travel and hospitality industries in 2018, the domestic economy is also growing. As a result, domestic travel will also play a role strengthening travel and hospitality. We know that millennials value experiences and like to travel, and boomers have more disposable income than any other segment of the population thanks to the fact that they're working longer and that their wages have remained higher than at any point in history. With the opportunity to amass more wealth than any other generation, boomers have more money to spend, a portion of which we can expect to go towards domestic travel.
As we enter 2018, we can expect a good year for U.S. hospitality and travel industries, both from domestic and international travelers. But the major change for the industry will be to refine their focus towards international tourists who often plan trips to the U.S. six months to a year in advance.