Those seeking bright spots in the economy should take a look at the hotel and casino industries.
Both sectors recorded strong third quarters. Lodging leader
Starwood Hotels and Resorts
more than doubled its profits and beat Wall Street's expectations, and
reported 45% profit growth as room rates and occupancy rose. Meanwhile, casino giants such as
posted heady profit growth and record earnings again.
Strong consumer demand for travel, gambling and entertainment continues to help drive growth. More notable, perhaps, is increased business spending for conferences, conventions and travel, because it reflects increased corporate confidence in the economy -- welcome news given the cautious levels of corporate spending during the current recovery.
"We've seen a turnaround in business travel to Las Vegas," said Charmaine Buskas, an economist who studies the city's economy at
"The way we look at it is midweek occupancy at hotels, and it's been picking up over the past several months. It suggests businesses are becoming more positive on sending employees out on business meetings and conferences."
Outside Las Vegas, the outlook for business travel, which lagged the leisure sector in recovering after the Sept. 11, 2001 terrorist attacks, appears strong as well.
"We do believe that business travel budgets are expanding at a decent clip next year as opposed to this year," said Joseph Greff, an analyst at Fulcrum Global Partners LLC in New York. "That indicates that corporations may be feeling positive about business prospects for next year, although it could also reflect to some degree that they expect travel costs to go up. Still, we feel it tells us that corporations are feeling pretty optimistic."
cited increased demand from business travelers as a key revenue driver in the third quarter when it reported a 79% increase in earnings.
Joe McInerney, president of the American Hotel and Lodging Association, said conventions and meetings are being booked months in advance, a bullish sign that first started appearing around the beginning of the year. In 2002 and 2003, after the Sept. 11 attacks, companies were waiting until a couple of weeks ahead of an event to make a booking, he said, adding that now, "Companies are saying they need to be out there to meet with customers, that they really need to be out there pressing the flesh."
Still, observers trying to read the tea leaves should note that the lodging industry tends to lag a general economic recovery by about six months. Also, wider barometers of business confidences aren't giving such bright readings.
A recent survey by the Philadelphia Federal Reserve found that only 23% of companies plan to increase capital spending significantly in 2005, while 33% anticipate a slight increase. About 30% expect no change, and 15% said spending would be lower.
What's more, new hiring has been sluggish, with nonfarm payrolls averaging growth of 103,000 a month over the past three months. More than half of the gains came from the government sector or temporary employment companies.
Even with the tough job market, those consumers who already have steady jobs continue to spend on leisure travel and gambling. On top of that, continued home refinancing has helped keep wallets flush.
"Rates have remained fairly low, because the
started its tightening cycle," Buskas said. "That gave consumers lots of money to spend on refurbishing their homes or going on trips. We expect going forward that as mortgage rates start to rise, that avenue of spending growth might turn around."
American leisure travelers aren't the only ones filling U.S. hotel rooms recently, either, noted McInerney of the American Hotel and Lodging Association. "After 9/11, we experienced a tremendous loss of international travels, first because of security, then because of people disagreeing with the
U.S. government's position on Iraq," he said. "Until March or April of this year, it was negative, but June, July and August have been especially positive. The strength of the euro is helping."
U.S. hotels are also likely benefiting from visits by Americans opting for a domestic vacation instead of a European one, given the U.S. dollar's weakness against the European currency, McInerney said.
Of course, a significant part of the current good news, especially for the gaming industry, is a local story. The Las Vegas economy is roaring along faster than the nation's, as new residents and businesses pour into the area, driving up demand for homes and office space and boosting crowds in casinos and entertainment venues.
"Clearly, regional economic, demographic and migration trends continue to boost business; in particular we point to strong home sales (up 25% year to date through August, new home permits up 40%) and jobs data (nearly 29,000 new jobs created year over year through August and unemployment at 4% -- the lowest level in the last four years and significantly lower than the national average) in the Las Vegas economy," wrote Mark Abramson, a Bear Stearns analyst, in a research note about
, which caters to the locals market in Las Vegas and which reported earnings growth of 47% year over year.
Looking ahead to next year, analysts expect hotel and casino room rates to increase and bolster margins, even if occupancy rates grow more slowly.
Of course, there are always risks to any outlook. A terrorist attack, a significant downturn in the job market, sharply higher interest rates or continued high oil prices could depress consumer spending on travel and gambling. A slowdown in economic growth or a terrorist attack could weaken business optimism and travel budgets.
Still, consumer demand was surprisingly resilient in the downturn that followed 9/11, noted Greff at Fulcrum Global Partners. Although consumers were afraid to fly to Las Vegas in the immediate aftermath, they gambled nonetheless, turning to local casinos and riverboats until they again felt safe about flying.