Is travel recession-proof — this time?

For the past 18 months, Americans have been living with anxiety over the possibility that we will enter a recession. Apprehension is only heightened by predictions that seesaw between “certain” and “unlikely” on an almost daily basis.

For members of the travel community, the question has serious ramifications. Leisure travel is fueled by discretionary spending, and in past economic downturns, it has been among the first areas where consumers tighten their belts. 

While economists throughout the U.S. struggle to find consensus on whether recession is imminent — recent headlines include “Why there (probably) won’t be a recession this year” and “A recession is still likely. Here are 6 reasons why” — economists and analysts who focus specifically on the travel industry are as torn as economists at large.

Aaron Szyf, an economist with the U.S. Travel Association, called the current climate “an economic roller coaster.” 

“The big question,” he added, “is when we get off.”

Szyf was among recession-watchers who cited several positive economic indicators that surfaced last month: moderating inflation, including gas prices that have fallen since the summer surge; solid jobs growth; and wage moderation, which could also help cool inflation. But the negatives persist: inflation, depleted savings, a resumption of student loan payments and continued high interest rates. 

Still, in early October he said that even the Fed’s economists were predicting a “Goldilocks scenario” where there’s “no recession, falling inflation and flat unemployment.”

Predictions like this of a soft landing, with the Fed raising interest rates just enough to slow the economy and reduce inflation but avoid a recession, have been increasing. 

History, however, would suggest that a soft landing following Federal Reserve action to temper inflation is unlikely: Szyf noted that it has been achieved only once in 60 years. But the economy overall has not followed normal patterns since the pandemic, which makes forecasting so difficult. As New York Times columnist Paul Krugman wrote on the topic, “Historical analogies don’t seem nearly as useful as they usually are.”

While Szyf thinks we may get that soft landing, he still predicts a mild travel slowdown starting this fall and into 2024, noting that airlines are already seeing a decline in demand and that hotel occupancy is struggling to surpass 2019 levels. 

“Given this background, we are expecting that travel will continue to moderate, while remaining resilient even in the event of a mild recession as we enter the final quarter of 2023 and head into 2024,” he said in a blog post. “Travel will benefit greatly if the economy ultimately manages to achieve its soft landing.”

The case for a (mild) recession 

A mild recession is exactly what Adam Sacks, president of Tourism Economics, is predicting. He believes it will happen at the end of this year and last a few months into 2024, primarily due to one overarching factor.

“If there is one culprit where all challenges emanate from, it would be inflation,” Sacks told the audience at Los Angeles Tourism’s Travel Market Outlook event in Los Angeles in late September. “Inflation is pulling back on disposable income, purchasing power … it’s adding to our trouble.”

He pointed to an area of the U.S. that is already in a recession: the housing market, where high interest rates have caused existing and new home sales to plummet. It’s an example of what happens when inflation sets the Federal Reserve “on a collision course with slowing down the economy,” engineering a recession. 

Sacks said even the strong U.S. employment picture, which many people believe has kept recession at bay, is showing cracks: Temporary employment, a leading indicator for overall employment because it’s where companies pull back first, is beginning to contract.

“Workers are starting to lose their mojo just a little bit,” he said. “They are not quitting with quite as much enthusiasm or willingness as they once were, and that’s happening as wage growth is also softening.”

Between that and higher interest slowing the credit markets, “when we look into the next six months, we expect consumers to pull back a bit,” Sacks said. 

How travel will fare 

The good news for the industry is that Sacks predicts this recession will take much less of a toll on travel than previous economic downturns. 

“Let me say that if things were to behave like they usually do, we should be worried,” Sacks said, adding that even in the mild recession of 1991, room demand pullback across the U.S. was four times worse than GDP contraction. “I think that’s not going to happen. I think that travel will be uniquely resilient during this expected mild downturn.”

Why? 

One reason he cited is that although consumer spending in its entirety has come back, the share spent on experiences and travel is still lower than it was before the pandemic. “We have more headroom to get back to normal,” he said. 

He also pointed to data showing excitement for travel being at its highest ever and companies, including Marriott International, showing very strong forward bookings. 

Importantly, he said, consumer savings are still relatively high. 

“There’s actually another $500 billion in additional savings that remains in bank accounts to be put toward things like travel,” Sacks said. 

He also cited research showing that among business travelers, intent to travel continues to build. The high percentage of people not working together in offices actually makes face-to-face meetings more important. “Remote work has accentuated the need for business travel,” he said. 

MMGY Global executive chairman Clayton Reid, who spoke at the same event in Los Angeles, thinks there will not be a recession. But he does believe the economy will change who travels over the next year — and how they travel. 

Reid told the audience that at the end of 2022, 70% of economists thought the U.S. would fall into recession. By June of this year, that number had fallen to about 20%.

Recession-predicting, he said, is not “a science. It became a perpetuated narrative and everybody moved in one direction.”

Reid cited several tailwinds for travel, including people being “generally positive. They don’t trust institutions. They don’t trust government, but they do feel good about their own circumstances. They’re still saving some money. They still feel good about their lifestyle.”

He suggested people pay attention to industry executives talking about demand and what people on the ground — those running hotels, attractions, etc. — are seeing. Reid quoted Scott Kirby, United’s CEO, who was “looking at the numbers and saying, ‘I don’t see [a recession coming].’”

Reid said that MMGY data indicates that although parts of the travel industry, such as leisure, that had been strong during and coming out of the pandemic may be softening, the opposite is happening in areas that are coming back more slowly, such as group and business travel. 

“So the travel industry is threading the needle,” Reid said in a follow-up conversation in October. “We’ve had all this leisure demand while we didn’t have business demand, and as households are getting squeezed a little bit and maybe they’re going to move back to normalized leisure patterns, corporate travel is growing fast. And it’s going to more than make up the difference.”

Regarding IHG’s most recent earnings report last month, he said, “They crushed it. And they crushed it because business travel is growing faster than anybody thought.”

Reid didn’t deny the headwinds, agreeing with Sacks that inflation remains problematic, especially when it comes to consumer perception. 

“Although we brought inflation down, it is still, especially in the minds of travelers, a major impact,” he told the audience in Los Angeles. “Covid is no longer even a top concern for travelers the United States. Price is No. 1.”

High prices are among the reasons MMGY data shows that consumers now say they are much less likely to travel over the next year than they did a year ago. 

As a result, Reid said, there will be “pockets of success” in travel going forward. 

“We can’t talk about recovery in a broad swath,” he said, agreeing that American household savings is significant but down massively since 2020. Much of what remains resides with the affluent. Americans also have over a trillion dollars in credit card debt at an average interest rate of 22%, a combination Reid said was not sustainable and most likely to impact those already “on the margins of being able to travel.”

“My view would be that current overall recession dynamics don’t affect travel to nearly the degree they affect other industries,” he said, adding that “travel is still primarily the province of the wealthy.”

More tailwinds

Another bright spot for travel suppliers in the U.S., both Reid and Sacks said, is that international inbound travel to the U.S. is coming back after lagging behind. 

Reid said that pre-Covid there were about 2.8 million trips a year to the U.S. from China alone. 

“It was almost nothing last year,” he said. “Everybody was going to Europe, now everybody’s going to come here. China’s starting to grow again, India’s starting to come on.”

And if unemployment does go up, there is the potential benefit for the travel industry of getting back some of the workforce it had lost. 

“We need prices to come down, but we also need people to take full-time jobs in the travel industry and in the service industry,” Reid said. “And I think a little bit more unemployment is a good thing for travel because it produces more workers in our industry. We are still understaffed in some pockets.”

Reid said he believes travel advisors are very well positioned to continue to thrive. Demand for cruise, high-end lodging and tour packages, all of which make up high percentages of travel agency business, are all strong. And, Reid noted, MMGY data indicates that affluent travel will over-index the general market by 220% in 2024.

“So I think for travel advisors focused on the long-haul leisure market, they’re in a pretty good spot,” he said. “And travel is more and more complicated. More and more people tell us in our surveys that they want to talk to someone about their travel plans. Advisors continued to be in a great, great position for the recovery dynamics.”