United States Business Travel Sees New Normal of Slow But Steady Growth
Despite being overtaken by China as the world’s leading business travel market, the United States is still a vital nation when it comes to both the growth of the global economy as well as for the growth of global business travel. According to the recently released GBTA Global BTI Outlook – Annual Global Report and Forecast sponsored by Visa, despite a weak start to 2016, U.S. growth will slowly strengthen for the remainder of the year. This combined with other factors such as the impact of oil prices should help to bring the global economy with it.
With respect to business travel, weakness in some of the United States’ key trading partners such as Europe, China and other emerging markets will continue to be a challenge for international outbound business travel for American businesses and American travelers. Many of the most critical macro drivers of business travel are likewise giving mixed signals leading to the modest gains of the global business travel market.
Private sector employment gains have moderated in recent months averaging only 140,000 per month in 2016, down from an average of 220,000 the year before. Wage gains, on the other hand, have accelerated this year. The combination of reported average hourly wages and hours worked have lifted overall labor income by 3.5 percent this year. Business confidence statistics, conversely, suggest tepid optimism with ample concerns. The Institute for Supply Management’s (ISM) Manufacturing PMI rose to 51.3 in May, up from a disappointing 50.8 in April and a recent low of 48 last December. Given this mixed bag of business travel indicators, managers will likely continue to keep a tight grip on corporate expenses including business travel.
Given these factors and the general weakness and uncertainty of the global economy, we expect a slower than average year for business travel in 2016, which is poised to grow just under 1 percent. Spending is expected to hit nearly $357.5 billion USD in 2020, averaging a 3.3 percent annual growth rate per year between 2016 and 2020. Business travel growth from 2016-2020 will be led by the Real Estate, Professional & Business Services, Government, Social & Personal Services, and Food Processing and Services sectors, while the Petroleum Refining and Education sectors are expected grow the fastest at a rate of 15.1 percent and 8.6 percent respectively.
As of 2016 Q1, pre-tax profits are nearly 60 percent above their recessionary trough and 20 percent above the previous peak (2006 Q3). On the other hand, business travel spending is currently ahead of its trough by just short of 30 percent, and only 6 percent ahead of its previous peak (2007 Q4) indicating that growth will continue, albeit at a slow pace.
Similarly, many key indicators of U.S. economic performance registered a sluggish start to 2016, but a more optimistic outlook is in the cards when looking at the forecast for the remainder of the year. GDP, for example, rose at a 0.8 percent rate in the first quarter. Experts have cited a number of reasons for this weak outturn including slow global growth, plunging oil exploration investment, a weak manufacturing sector and inventory reductions. While U.S. growth is historically weak, it is comparatively strong when measured against some of its major trading partners within the global economy.
Consumer spending, housing and modest government spending, continue to drive U.S. growth as a weak first quarter transitions to stronger performance for the rest of the year. Growth will remain in the 2 percent range, however, well below long-term averages. The good news is that two years of strong job gains and, more recently, rising wages, plus lower energy prices and a wealth boost from rising housing and stock prices has bolstered consumer spending. Consumer confidence continues to rise and with it, spending. Retail sales growth has improved in the first half of 2016, despite some moderation in auto and durable purchases.
The relatively good news from the consumer side of the economy continues to be offset by slower investment spending and anemic trade performance. Slower global growth is limiting contributions from net exports, capital spending and the manufacturing sector. Lower oil prices, while a windfall for consumers, are hammering oil exploration and associated equipment spending, so much so that overall nonresidential fixed investment spending fell at a -5.9 percent rate during 2016 Q1.
There is mounting evidence that this environment of slower growth has become the new normal and may be lowering future expectations of sales while raising risk premiums and heightening managerial caution. Although consumer confidence is on the rise, business confidence remains tepid. The result is more caution and less capital spending, tighter expense management and less human capital investment, and slower business travel growth. In fact, this may partially explain why record profits and cash flow have not translated into commensurate business travel spending performance on par with their long-term correlation.
The slow growth environment of the U.S. and global economies has taken a toll on many fronts leading to this ‘new normal’ of slow, but steady one to two percent progress. Favoring dividends, M&A and stock repurchases over investing in capital, people and business travel in this environment could come back to haunt U.S. businesses. When growth does re-accelerate, companies must be ready with the newest technologies, the most productive workforce and the critical customer relationships necessary to take full advantage.