Travel economy: Post-pandemic demand expected to moderate

Travel booking companies are foretelling a moderation in consumer demand to come in 2024. Pantheon Macroeconomics Founder and Chief Economist Ian Shepherdson joins Yahoo Finance as part of the Travel Guide 2024: Industry Insights special, commenting on wage growth and consumers' savings coming out of the COVID-19 pandemic.

"There's a lot less savings hanging around that was built up during the pandemic. And if you look at the distribution of where that money is still sat, it's almost entirely in the hands of the top 20%. Most households now don't have any of the pandemic savings still remain, so they can't spend it again — they spent it once, they can't do it again," Shepherdson says. "So, I think that suggests maybe a dichotomy where if you're at the top end of the business — the travel and leisure sectors, and maybe even in terms of goods as well — your customers still have money. But most households, by definition, are not in the top 20%, and they're going to find things much more difficult."

Catch more of Yahoo Finance's Travel Guide 2024: Industry Insights special coverage this week, or watch this full episode of Yahoo Finance Live here.

Editor's note: This article was written by Luke Carberry Mogan.

Video Transcript

SEANA SMITH: Can that strong consumer that reignited the revenge travel surge in 2023 still keep the economy afloat? Now, recent quarterly results from Expedia, Airbnb, Booking.com just to name a few pointing to a moderation in consumer spending. Now, this comes as Americans pull back on their discretionary spending. So what does that tell us about the consumer, and more broadly speaking, about the economy?

Joining us now as part of Yahoo Finance's travel guide 2024 industry insights is Ian Shepherdson. He's Pantheon macroeconomics founder and chief economist. It's good to have you here. So let's talk about just what you're seeing, the trends that you're noticing from the consumer because we spent months and months and months talking about the fact that nothing is prompting Americans, consumers to really pull back on spending, yet we're starting to see that shift just a bit.

IAN SHEPHERDSON: Yeah. I like the word moderation. I think that's a pretty fair description of what's likely to happen over the course of this year. You know, there's a couple of things to think about. First of all, there's just a bit less cash flow around for the consumer than there was last year. We've got slightly slower payroll growth, slower wage growth. We've got a much smaller annual uplift of Social Security payments this year, which gave 70 million people last year an 8.7% pay increase in January. This year, it's 3.2%.

And then on the balance sheet side of the consumer story, there's a lot less savings hanging around that was built up during the pandemic. And if you look at the distribution of where that money is still sat, it's almost entirely in the hands of the top 20%. Most households now don't have any of the pandemic savings still remaining. So they can't spend it again. They spent it once. They can't do it again.

So I think that suggests maybe a dichotomy where if you're at the top end of the business, the travel, the leisure sectors, and maybe even in terms of goods as well, your customers still have money. But most households by definition are not in the top 20%. And they're going to find things much more difficult. They're going to be relying on cash flow rather than savings. And they've got a lot less cash flow than they did. So I can see that bifurcation. And in the mass market, yeah, I think the moderation will become quite visible over the next few months.

BRAD SMITH: And so how does that flow through to some of the companies that we were just laying out here? Where perhaps in that discretionary spend here on the experience economy and in that travel experience are you seeing consumers at least think about perhaps trading down?

IAN SHEPHERDSON: Yes, trading down. But at the very high end, I think things are going to be fine. The stock market has boomed over the last few months, and a lot of the people in the top 20%, especially the 1%, are still holding onto huge gains both in cash and other less liquid assets that they've accumulated over the last few years. It's more the kind of middle and lower end of the market that's, I think, going to be struggling for occupancy or for people's willingness to spend on extras.

All the trading up that we saw in that sort of post pandemic surge of the revenge spending in restaurants and leisure activities and concerts and movies and all that sort of stuff, at the margin, I would expect that the extra dollar that we were seeing over the last couple of years just not to be there to quite such a same extent. I don't overdo this. I'm not looking for the consumer to roll over at all.

But real income growth after tax last year grew by more than 4%, which is almost double the long-run average. There was a lot of money around. This year, it'll be more like two, which is a little bit below the long-run average. So not terrible. But I think if anyone's in the consumer facing world just extrapolating what they saw in '23 and hoping to get a repeat performance in '24, that's going to be a struggle.

SEANA SMITH: Seeing as we have consumers pushing back on higher spending, consumers trading down in some instances, what do you think that tells us then about that last mile fight here to ease inflation? Or, in fact, are we going to see maybe inflation continue to ease in that last mile won't be as tough as maybe some forecasters had initially anticipated?

IAN SHEPHERDSON: Yeah. I mean, there's been a lot of hysteria over one, not great inflation print for January. But if you look at the performance over the second half of last year, the core PCE deflator, which is the number the Fed really cares about, that was 2% annualized in the third quarter and 2% annualized in the fourth quarter. I mean, that's the target rate.

So we've made an enormous amount of progress. And I'm not really worried that it's going to be difficult to keep it down at that rate in the foreseeable future. Yeah, you get bad months. You might even get a bad quarter. But the big picture is, I think, one of much less pressure across supply chains.

We're not seeing expanding margins like we saw in '22/'23. And in some sectors, margins have come down quite a lot. That's why used car prices are falling so fast because dealers' margins have dropped very sharply. And I think we'll see that spreading across more sectors as consumers, again, make that marginal decision with the extra dollar to keep it rather than to spend it.

So that should keep a bit of a lid on some of the inflation pressure as well. And across a big array of services, it's really all about the labor market. And the fact is that wage growth, which was at the peak 6% is now heading rapidly down to less than 4%. So all of these things are moving in the right direction. Some of it's still in the pipeline rather than in the CPI and the PCE inflation data, but it'll get there. It's just a matter of time.

BRAD SMITH: With regard to that, leisure and hospitality was, of course, the hardest hit over the course of the pandemic and then had some of the biggest comeback that it needed to make as well in the labor and employment situation. Where are we starting to see that normalize?

IAN SHEPHERDSON: Oh, I mean I think you can see pretty clearly that total frenzy of rehiring that we saw beginning in the summer of '21 and stretching really right the way through '22, that's pretty much over now. And what's interesting is that you can see that in the way that employees are behaving because what we saw in '21 and '22 was a huge increase in the number of people voluntarily quitting their jobs just so they could walk across the street to a different hotel or a different restaurant and pick up a pay raise. Great. Why wouldn't you do that?

And we saw that behavior on a scale that we've never seen before in '21 and '22. And now it's back to normal. So the quits rate, which is the official measure of this behavior is now exactly where it was in 2018/19. And we know that the number of job openings is declining pretty steadily. And we know that wage growth is slowing as well. So we've got a fairly uniform picture here of a labor market that's beginning to look recognizably normal looking back at the pre-pandemic period.

And in that pre-pandemic period, we did not have an inflation problem. In fact, most of the 10 years running up to the pandemic, we were fretting, Fed was fretting that inflation was too low. I'm not suggesting we're immediately going to go back to inflation that's too low, but I do think we're heading back to the conditions where getting to the target and staying there is an entirely sensible forecast at this point.

SEANA SMITH: Ian Shepherdson, really interesting insight. Thanks so much for taking the time to join us here this morning. Pantheon macroeconomics founder and chief economist, thanks so much, Ian.