Georgia Headed into Troubled Economy Before Fully Recovering From 2001 Recession

A report released today by the Georgia Budget and Policy Institute concludes that even as the current economic slowdown hit, Georgia families were still trying to recover from the 2001 recession and its aftermath. The report, State of Working Georgia 2008, examines job growth, unemployment, income, and benefits, using data from the Current Population Survey and American Community Survey, among other sources.

The key findings surrounding the current economic slowdown include:

* From September 2007 to September 2008, Georgia lost 61,100 nonfarm jobs and was one of only five states to experience a statistically significant employment decrease, according to preliminary Bureau of Labor Statistics (BLS) data.
* The number of unemployed workers rose by roughly 100,000 between September 2007 and September 2008, for a total of 317,500 out-of-work Georgians in September 2008. Georgia had the 15th highest unemployment rate in the nation in September.

Data for 2007 on underemployment, incomes, and benefits show that Georgia workers had not fully regained the ground lost during the 2001 recession. In short, before the 2008 economic crisis started, Georgians were still trying to recover from the 2001 recession, as was the case in many states. Data from BLS and Census Bureau surveys show:

* About 8 percent of workers were underemployed in 2007, compared to 6.3 percent in 2001. Underemployed includes unemployed workers, marginally attached workers, and part-time workers who would like full-time jobs.
* Median household income in 2007 remained statistically unchanged compared to 2001, after adjusting for inflation.
* The poverty rate remained high at 14.3 percent in 2007, compared to 11.7 percent in 2001.
* In 2006-2007, 59.9 percent of non-elderly Georgians were covered by employer-sponsored health insurance, compared to 64.4 percent in 2000-2001. The percent of Georgians lacking health coverage rose from 15.0 percent in 2000-2001 to 17.6 percent in 2006-2007.

"The employment conditions in Georgia pose both short-term and long-term challenges, as policymakers must confront the current slowdown and the continued effects of the 2001 recession," noted Sarah Beth Gehl, Deputy Director of GBPI. "For the short-term, our leaders must protect vital public services as workers face unemployment and increased income insecurity. For the long-term, policymakers should focus on raising adult education levels and strengthening work and income supports for workers in low-paying jobs."

The report also examines employment conditions and income based on race, gender, and education, as well as income earned by each income quintile. The report provides budget and policy recommendations for both the current economic crisis and the long-term economic challenges faced by low-income working families.

Short-term recommendations -

* Call on Congress to pass an economic recovery package that includes additional weeks of unemployment benefits, a temporary increase in Food Stamp benefits, and state fiscal relief. (For estimates on the additional funds Georgia would receive under U.S. House and Senate packages, find tables at the end of this report by the Center on Budget and Policy Priorities.)
* Target budget cuts to lower priority programs. With a potential $2 billion state budget shortfall, the state has made across-the-board budget cuts to most state agencies. As Georgia families experience dramatic financial strain in 2008, leaders must ensure that vital government services are adequately funded. Medicaid, PeachCare, child care, and education, to name a few, should be spared as much as possible.
* Raise revenues through strategic tax increases. Rather than relying overwhelming on budget cuts, there should a balanced approached to the budget shortfall, including strategic tax increases. Raising the cigarette tax or implementing a temporary income tax surcharge, for example, would provide needed revenues to avoid further cuts to public services.
* Use the revenue shortfall reserve. Through good fiscal management, Georgia has a $1 billion rainy day fund. Now is the time to use it.

Long-term recommendations -

* Increase the capacity for adult basic education. Georgia invests around $14 per adult without a GED in adult basic education, compared to the national average of $64. Georgia should increase its investment in this area, along with outreach efforts towards nontraditional students and support services for families seeking education opportunities.
* Undertake additional outreach efforts for Medicaid and PeachCare. Of the 300,000 uninsured children in Georgia, an estimated 200,000 are eligible for Medicaid or PeachCare, but not enrolled. Getting eligible children and families enrolled in existing programs can increase the efficiency and effectiveness of available healthcare programs. The federal government covers a majority of the cost of these programs, with an almost 2 to 1 match for Medicaid and 3 to 1 match for PeachCare.
* Increase child care assistance for low- and moderate-income working families. Georgia uses federal dollars to assist low-income families with child care costs, but continues to have a waiting list for assistance. At the same time, Georgia subsidizes child care through the tax system, with millions of forgone tax dollars subsiziding child care for upper-income families. Policymakers should end the child care subsidy for higher-income Georgians and more fully assist low-income working families.
* Create a state earned income tax credit (EITC), enhance outreach efforts around the federal EITC, and raise the state minimum wage to the federal level.

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Survey Indicates U.S. Hotels Will Bottom Out in 2009

PRNewswire/ -- A new study released today by PKF Hospitality Research (PKF-HR) reveals that demand for U.S. hotel rooms will contract for the next two years. Compounding the negative impact of declining demand is a projected concurrent increase in supply. PKF-HR is forecasting a combined net increase in 2008 and 2009 of nearly 275,000 new hotel rooms compared to year-end 2007. This represents a 6.2 percent jump in accommodations over this two-year period.

With supply and demand levels moving in opposite directions, occupancy rates are projected to decline in both 2008 and 2009. Considering the 0.3 percent occupancy decline reported by Smith Travel Research in 2007, the result is three consecutive years of fewer accommodated roomnights for the average U.S. hotel.

These findings are based on the recently released third quarter 2008 edition of Hotel Horizons(SM), PKF-HR's quarterly forecast report for six U.S. chain-scales and 50 major markets. The forecast was released at The Lodging Conference 2008 in Phoenix this morning.

"Because of the extended slowdown of the U.S. economy, compounded by the negative consequences stemming from airline capacity cutbacks, we are now forecasting a 0.2 percent decline in lodging demand in 2008, followed by another loss of 1.1 percent in 2009," said Mark Woodworth, president of PKF Hospitality Research. "According to data from Smith Travel Research, this is the first time since 1988 that the U.S. lodging industry will experience two consecutive years of decline in lodging demand."

Slow ADR

Through the first half of 2008, the one saving measure for hotel owners and operators was the ability to maintain rate integrity. Despite a 2.5 percent decline in occupancy during the first six months of the year, managers were able to raise their average daily room rates (ADR) by 4.2 percent. Persistent yield management plus contractual rate agreements helped to buoy room rate levels.

"With supply and demand moving in opposite directions, the typical hotel manager will not be able to maintain their aggressive approach to raising room rates," Woodworth commented. "Accordingly, we are forecasting ADR growth for the entirety of 2008 to be 3.6 percent, followed by a minimal 1.3 percent gain in 2009." Looking forward, PKF-HR does not foresee ADR growth to exceed the pace of inflation until 2012, according to Woodworth.

Declining occupancy, plus slow ADR growth, combines for a dismal near-term outlook for revenue increases. PKF-HR projects RevPAR to increase a mere 0.8 percent in 2008, followed by a 3.2 percent decline in 2009. Given the strong contribution of rooms revenue, PKF-HR is forecasting total hotel revenues to remain virtually flat in 2008 (0.2 percent increase) and then decline in 2009 (negative 2.5 percent).

Expense Controls

"Historically, U.S. hotel managers have answered reductions in revenue with more vigilant cost containment. Fewer rooms occupied do lessen the need for staffing, plus inspire management to find expense reductions throughout the operation. Unfortunately, less controllable costs, such as utilities, property taxes and insurance, are on the rise," Woodworth noted.

PKF-HR believes that average operating expenditures will drop 1.0 percent in 2008, thus allowing unit-level net operating income (NOI) to increase 3.1 percent. However, the forecasted 2.5 percent decline in revenue for 2009 will be too much to overcome. Despite another 2.3 percent reduction in operating costs, the average U.S. hotel is projected to suffer a 3.0 percent decline in NOI during 2009. For the purposes of this analysis, NOI is defined as income before deductions for capital reserve, rent, interest, income taxes, depreciation and amortization.

"Fortunately, the U.S. lodging industry was in good financial shape entering the current trough in the business cycle. Unlike other forms of real estate, lodging was not experiencing any material amounts of foreclosures," Woodworth said. "A sample of 1,500 hotels that participated in our annual Trends in the Hotel Industry survey generated sufficient cash from their operations to cover their reported interest payment by a ratio of 1.86. This implies that most U.S. hotels can withstand a fairly substantial decline in NOI and still have the ability to meet their debt service obligations."

On The Horizon

"The current credit crisis may be unfairly punishing developers with sound market and financially justified projects. However, the lodging industry will eventually benefit from the near-term development difficulties," Woodworth noted. "PKF-HR believes the existing restrictive financing environment will linger into 2009, thus delaying or preventing the start of hotel projects currently in the pipeline. Given the 12 to 24 month time needed to construct most hotels, PKF-HR projects a window of one to two years when the amount of hotel openings will be very limited. The pace of new supply growth is forecast to drop to 1.4 and 1.8 percent, respectively, in 2010 and 2011.

"By 2010, we will start to see a reversal of current trends. While the pace of supply growth will be waning, we will start to see a return in the demand for lodging accommodations," Woodworth said. PKF-HR is forecasting a 2.2 percent increase in demand for 2010, followed by another 3.1 percent gain in 2011. With growth in demand exceeding supply, national occupancy levels will begin to rise again in 2010 and continue to increase through 2012.

Despite the forecast of growth in occupancy from 2010 through 2012, the outlook for increases in ADR is somewhat constrained. "As we have observed during the initial years of historical periods of recovery, occupancy gains precede ADR growth. Given the depth of the projected lodging industry slowdown in 2009, the newly built competitive properties added to most markets, and forecasts of below average CPI growth, we are forecasting average daily room rates to increase at a compound average annual rate of 2.7 percent, just equal to the long-term rate of growth for ADR," said Woodworth.

A Trough In 2009

"Seven years since the terrorist acts of 2001 -- the primary event that led to the last low point in the U.S. lodging performance -- a new, but familiar, set of circumstances is propelling the industry towards the next trough. Capital market turmoil is undermining asset values, a situation last seen in the late 1980's and early 1990's. The projected industry slowdown won't be as deep as the ones observed in 1981 or 1991, but it may take a little longer to fully recover," Woodworth concluded.

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