Weak Job Market: Still a Drag on Consumer Companies

S&P Ratings surveys the outlook for the gaming and lodging, airline, and technology sectors as unemployment rises and housing struggles

From Standard & Poor's RatingsDirect

(This is the second of two parts. Read part one.

With the U.S. unemployment rate at its highest in more than a quarter-century and likely to rise further, industries that depend on discretionary consumer spending may not rebound soon. Here, Standard & Poor's Ratings Services reviews the outlook for key consumer groups:

Gaming, Lodging, and Leisure Sectors: No Holiday

Among the sectors most affected by consumers' discretionary spending is gaming. Naturally, as unemployment rises and Americans open their wallets primarily for necessities, casinos are among the first to suffer.

S&P expects that consumers will remain frugal when it comes to leisure spending well into 2010, or at least until job growth and wages start to increase. While spending may grow a bit now that the worst of the economic slump seems to have passed, we simply don't think consumers will be particularly better off, and unemployment, if it falls at all, isn't likely to do so dramatically.

"Consumers are making choices that are not in favor of a quick return to anywhere near where we were," says S&P Managing Director Craig Parmelee. "The worst may be behind us, but things may flatten at best. Gaming and lodging will probably suffer a bit more in the first half of 2010, with maybe slight growth offsetting that in the latter part of the year."

On the plus side, companies have trimmed costs through such actions as layoffs and cuts to spending. But we will see additional capacity in the gaming, lodging, and cruise industries, which will pressure prices. "In gaming, the capacity growth is mostly in Las Vegas, rather than in the rest of the country," Mr. Parmelee says. "Gaming performance is likely to differ by market, with Las Vegas suffering more than most."

Lodging companies may be near the bottom of their slump and demand may grow a bit in the second half, but pricing pressure is still likely to be a problem. Beyond a dependence on consumer spending, lodging providers rely on business travel. Given the prospects for unemployment, this doesn't bode well for hoteliers.

In any case, the continued relative stability of credit quality in the industry relies heavily on a return to sustainable growth in the U.S. economy into 2010, the hopes that swine flu concerns don't reemerge in a way that curbs travel, and the continuation of lodging companies' shoring up their balance sheets. A major sign signaling investors' belief that hotel demand will improve (or at least won't get much worse) in the next year came in the form of lodging companies' ability to raise a collective $2.5 billion in the capital markets during the summer of this year.

Airlines: Cutting Fares and Flights to Fill Seats

Like lodging companies, airlines depend on both leisure and business travelers—a customer base that is further divided into those flying domestic and international trips.

Business travel has declined, both domestically and internationally, and overseas leisure travel has slipped as customers trade down, taking less expensive vacations that keep them closer to home. In response, airlines have aggressively trimmed capacity, grounding many older planes. This, combined with the fact that domestic leisure travel allows for some price elasticity, has helped airlines to fill flights—albeit with cheaper fares.

Overall, we have seen more consistency across airlines in response to the recent recession than we have in past downturns. All airlines, large and small, have scaled back. "For the large airlines, this meant shrinking; for the low-cost, smaller airlines, this meant stopping growing," says S&P Managing Director Philip Baggaley. "As a result, we've had what is tantamount to the removal of one large airline from the system."

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