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The leisure sector is sending ominous economic signals. A late June downgrade by Barclay's send the stocks of Starwood (NYSE: HOT) and Marriott (NYSE: MAR) over the cliff in the last couple of weeks. Yet, at the grass root level, where we actually kick the tires at some of these places on a regular basis, there are more telling signs of trouble.
Chart Courtesy of StockCharts.com
The Barclay's downgrade pointed to the fact that the key metric in the hotel sector, REVPAR, or revenue per available room has fallen off dramatically, and that it may not recover significantly until 2001.
A recent run through privately owned Hilton's Homewood Suites and Starwood's RiverWalk property in San Antonio revealed an interesting new dynamic in the hotel industry; even in full hotels, during peak times, the number of employees has been reduced significantly, to the point where service has noticeably dropped.
Here are two examples. During the included breakfast time at the Homewood Suites, which ends at 9:00 A.M., the food was gone, and the employees that were in charge of the kitchen could not be found. The coffee thermos that traditionally stays fresh at the front of the Homewood Suites also went cold and empty quite early in the day. And at the Westin, wait times for tble service were lengthy for both breakfast and dinner. More important, the reduced number of waiters were hurried, and the level of attention was clearly decreased.
So we tested room service, ordering just coffee on a Saturday night, a traditional slow time for room service. It took about 40 minutes.
In other words, there aren't enough employees at upscale hotels at this time to support the levels of service that some of these brands advertise and are known for, which opens up a whole new can of worms in the analytical arena.
Starwood, clearly cutting jobs and services in San Antonio recently announced that it's expanding in Bermuda, where it expects to open the first new luxury hotel on the island in several decades, and to have it operational by 2013. According to AP: "Plans by a Bermuda-based architectural firm call for the hotel to feature 140 rooms and suites, 80 luxury residences, a spa, two restaurants, a wine bar, a library and a rooftop conservatory." The cost and the terms of the hotel were not disclosed, and the company did not disclose its reasons for expanding in Bermuda where tourism is off significantly due to the global recession.
The employment trend that we noticed in the hotel industry is well backed by the June Monster Employment Index where the Arts, Entertainment and Recreation as well as the Accomodation and Food Services sub indexes both showed significant weakness.
Also supporting our observations are the latest average workweek numbers, also from June from the Labor Department. According to the report: "the average workweek for production and nonsupervisory workers on private nonfarm payrolls fell by 0.1 hour to 33.0 hours—the lowest level on record for the series, which began in 1964." Also important is this data: "In June, average hourly earnings of production and nonsupervisory workers on private nonfarm payrolls were unchanged at $18.53. Over the past 12 months, average hourly earnings have increased by 2.7 percent, while weekly earnings have risen by only 0.9 percent, reflecting a decline in the average workweek."
Conclusion
The leisure and tourism sector is a significant cog in the employment picture. Yet, as the statistics and our personal observations show, the so called recovery that the stock market was factoring in over the last four months may be more elusive than many had predicted.
In our travels through the southern U.S. over the last year, as well as Hawaii, we have noticed that client traffic was slower. Yet, we had not noticed any significant changes in either the number of people working in the hospitality and restaurant sector or in the level of service.
The fact that we are starting to see this phenomenon, especially at upscale hotels that are full, suggests that businesses are starting to become increasingly fearful about their futures and that they are continuing to shed employees while reducing the hours of those that they keep.
This is well supported by the latest data from the U.S. government as well as private bean counters, which means that the data is correlated and confirmed.
Already state governments are starting to cut back services, due to decreasing tax rolls. And if companies like Starwood would rather build hotels in Bermuda, instead of hiring workers in San Antonio, it doesn't inspire much confidence in corporate America's expectations of the U.S. business climate. This is especially poignant, given the fact that San Antonio continues to be an area of Texas where the economy seems to be holding up fairly well.
Which brings us to the conclusion that the market's tumble on Friday may be the start of something more than just a little blip. To us, it smacks of one major reality check that just hit the conventional wisdom types.
Unfortunately, there are no signs visible that any such thing is about to happen in Washington. So, here we go, possibly to test the March lows. Stay tuned.
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