Protected: HCRZ
Hotel Impact on “Tourism”: Methodology for Estimating Economic Impact
Issue
This impact analysis was created by Julie Flowers, a retired statistician for the South Carolina Parks and Recreation Department, using Travel Industry of America (U.S. Travel Association) data. Julie is a pretty sharp statistician and does a nice job of outlining what is important when thinking about tourism impacts.
Analysis
Ms. Flowers uses IMPLAN to create a final economic impact based on TIA data. To create an economic impact, we need either spending or employment patterns by industry. As Ms. Flowers points out, there is no “tourism” industry. Our closest proxy is the Hospitality and Leisure super-sector. When it comes to hospitality, the big dog is lodging (hotel and motels). This is not apparent at first glance, but without this industry there is no tourism other than tenting! Within the hospitality industry it is clear that other businesses leverage lodging’s strength.
Hotel Impacts
TIA developed a strong method for collecting and analyzing hospitality data that is generally available to the public. What comes to light when exploring economic relationships within the travel industry is that for every dollar spent on lodging, $3.60 is spent on travel-related items – food, retail, recreation, etc. In employment, that number leaps to 5.3 jobs* for every job in the hotel industry. In other words, the hotel industry provides the anchor for other businesses to flourish. TIA data states that every $1 million in travel spending creates 13.5 jobs outside the hotel industry. Therefore, every million dollars spent in hotels likely generates over 70 jobs in hospitality-related industries!
Conclusion
Hospitality analysis requires a fair amount of data to create economic impacts, in this case supplied by TIA. Furthermore, TIA provides a solid methodology for justifying these spending patterns. Ms. Flowers’ process starts with a analysis of spending, then plugs the data into an economic analysis program, IMPLAN. With this transparent method further analysis is possible, uncovering the deeper relationships within this cluster. In this case, the end result provides a more clear picture of how supporting the hotel industry leads to significant gain in both employment and industry output within hospitality related industries.
*Spreadsheet addition error in report.
Boeing’s Effect on Employment Distribution – Shannon-Weaver Diversity Index
I was interested in the effect the Boeing employment (aircraft manufacturing) would have on the Charleston county industry diversity. So I used the Shannon-Weaver Diversity Index Calculation, a measure of the extent to which the employment of a region is distributed among its industries. It ranges from 0 – perfect inequality, or no diversity – to 1 –perfect equality or diversity. This index is deployed in IMPLAN® Version 3.0, which describes the distribution of employment in any given study area.
A geographic region with a high level of diversity will typically be more robust, and adapt more quickly to changes in the broader economy. Geographic regions with a lower diversity index are more vulnerable to economic change. For example, a region dependent on one major employer such as a military base, paper or textile mill. A shift in the economy that affects the dominant industry can result in either windfall employment gains or catastrophic losses.
Charleston County’s Shannon-Weaver Diversity Index is .68624 without Boeing employment. The index with Boeing, an estimated 4,000 employment increase, is .68836 – or a jump of about 0.03 percent. With the addition of Boeing jobs, Charleston County increases it industry diversity. If we do the same analysis with food and drinking places in Charleston County, except in this case decrease jobs by 10,000, the index moves from .68624 to .69438, or a 1.2 percent gain. That also reflects a more diverse industry base.
This brief analysis shows that Charleston County is under-represented in aircraft manufacturing and over-represented in food and drinking places, given our industry mix. Economic development opportunities lie on the fringes of dominant industries that are looking to increase their supplier base or demand base, while emerging industries take advantage of established local industries that can service new ventures.
Biological Field Example Calculation
Hotel Occupancy and Revenue Per Room
The Issue
The Post and Courier recently published and article on the regional hotel occupancy forecast for 2011. We are not exactly sure how they derived these numbers, but they are important enough in this community that we need to shed some light on the impact of these data.
I am not convinced there is going to be a rebound in occupancy levels with national growth recently being reported to be under 2 percent. Having said that, those results are probably statistically insignificant as a result of noise in the data. In addition, we always need to include this caveat in South Carolina hotel research: With any inkling of a hurricane, all bets are off. This is one reason that August, September and October tend to be very volatile months, with occupancy slipping from highs achieved in the first six months of the year.
Demand, Occupancy and Money: The Trifecta of the Hotel Business
To make forecasts in the hotel industry, a researcher needs historical occupancy data. My source is the venerable STR Global. There definitely is seasonality to these data, so I stay with the annual data which are adjusted slightly by STR at the end of each year.
I reviewed two data sets: occupancy and revenue per available room (RevPAR). I chose to compare three geographies; Charleston/West Ashley, the state of South Carolina and the entire nation (PDF). It appears that Charleston has done a better job of managing occupancy than the state as a whole, but has paid the price in a lower RevPAR. Instead, it opted for market share. In a market with declining demand, hotels need to create and execute a strategy to grab market share. However, if hoteliers believe there is going to be a measurable increase in demand, keeping prices high likely would be the winning strategy. As capacities creep to more than 80 percent, they can demand higher room rates. Unfortunately, this is not likely the baseline scenario going into 2011.
Community Economic Impact
A back of the envelope calculation nets the following impacts: On average there about 6,ooo hotel rooms in STR’s study area. A calculation using annual RevPAR, occupancy and days returns a gross annual income of $147 million. A small adjustment of just 1 percent in occupancy increases this number by $2.1 million. In 2005 the average daily rate, sightly different than RevPAR, was $128.61 with occupancies at 70 percent. Those numbers result in $51.5 million positive difference in revenue.
Therefore, from a community standpoint, it is important to consider the effect policy has on these numbers. As we can see, small changes in the customers perception of Charleston and/or the state of the economy can and do have significant impact occupancy and room rates, which ultimately affect the community as a whole.
Deep Water Horizon Rig Employment
Off-Shore Moratorium
The economic impact of shutting down a deep water drilling rig is no doubt massively expensive. But employment impact is different. As a benchmark, the employment on the BP rig was 126 persons. It is reported that wages average about 100k per year for those workers. However, I could not find that person anywhere, except in the management ranks according to National OES data! Furthermore, most if not all support workers, according to the BLS, make less than 1/2 that unsubstantiated amount.
Interestingly, as soon as we get into a multiplier discussion, the numbers start off ridiculously high and go up from there. But a multiplier over two is not reasonable or supported in any research and especially not in this case. One primary reason is the service nature of the JOBS we are talking about, NOT the industry multipliers.
Rig Count
Of all the rigs out there, only 4% are off shore! (Baker Hughes) Therefore few if any support persons are going to be affected by a stoppage of drilling; as a result of 94 percent of their support services not being located off-shore. A potential economic impact is close to 400 million a year, which includes a multiplier. More likely however, those wages are moved to another location, or just paid, the result being no impact. The reason is most companies can not afford to idle (loose) those skilled workers.
Simple calculation: (number of rigs, 33 * employment, 126/rig * wages, 100k)
Hotel Industry 2008
A recent article in the Post and Courier quoted data on the prosperity for 2008 of the Leisure and Hospitality (L&H) industry here in the Low-Country (Berkeley, Charleston, and Dorchester Counties). It is possible some of this information may not be explained clearly enough, so I have added additional data that provides a more complete analysis of these industries.
The article indicates that L&H employment wages were off about 100 million. That is a lot of money. In fact, the latest figure for total GDP for the accommodation industry alone is approximately 417 million. These data would suggest that a little under 25 percent of GDP was lost in employment wages. Given the size of this number, it probably is a misprint and should read 10 million. However, let’s take a look at these data. A review of CES data suggests that, although there are wild swings in employment, at best the industry average is down probably no more than ~500 jobs year over year. According to quarterly employment statistics, the average annual wage of these workers is approximately $16,186. Simple multiplication indicates that likely the wage loss is closer to $8.1 million. This number is quite a bit lower than the 100 million printed, but close to 10 million if it was a misprint. Regardless, the number represents a relatively small fluctuation in employment compared with total employment in the region. Of course, this interpretation of the correct wage loss does not mean that it is unimportant, only that the industry may be at minimum employment as a result of the structured employment necessary to run a hospitality or leisure business. Note: as recently 3/27/09 both layoffs and new-hires have been announced. I expect L&H to continue to show swings in employment. See Chart 1.
Calculations for economic impact are often based on visitor surveys. To my knowledge it has been a number of years since an accurate visitor survey has been completed and much has changed since that time as indicated in the article by the increase in foreign travelers. Visitor surveys are an important tool for estimating L&H economic impact. A problem with visitor surveys is identifying whether the person interviewed is local or from outside the region. Economic impact, by definition, is NEW money (for retail sales, only the Margin is counted in the impact) brought into the region, so local patrons like myself (a frequent visitor to Charles Town Landing) should not be included in the final count. As a result of this type of error, these data estimating (decreased) economic impact have likely been understated. One of the ways to cross-check the visitor data is to review hotel occupancy. A review of Smith Travel Statistics indicates that occupancy was down on average in 2008 about 7 percent. Smith does a great job of describing the method used and has adhered to their statistically accurate process. However, gaps in the data do leave some hoteliers out of the sample based on size. Typically the smaller and less expensive hotel, catering to construction workers or non-leisure customers, is under counted. We know the negative impact that has besieged the housing market. Typically it is these smaller operators that serve persons in construction. In years past, this phenomenon would not be present in the data, thus not impacting results, but this year the gaps are worth noting. Smith gives us some clues to this issue when analyzing the different regions in the low-country. North Charleston was down 9.1 percent, Charleston 1.4 percent, and Mount Pleasant 8.0 percent. More disturbing though are the huge decreases during some of our busiest months, namely the second and third quarters of 2008. On a weighted average basis, these months play a big role in the industry’s success though out the year. With the above estimates, it is reasonable to estimate that the accommodations industry occupancy rate was actually down close to 14 percent in real terms year over year. Further analysis of tax collections support this estimate. See Chart 2.
Unfortunately, with these estimates, we would expect the decline in economic impact to be significantly more than 1.3 percent. Without having access to the method used to calculate the 1.3 percent, we are not able to determine which numbers were “tweaked” to derive only a slight loss. Barring that information, a back of the envelop calculation reveals a very different picture. The primary reason we would expect a greater decrease in economic impact is that the multiplier effect works just as well in reverse as it does in forward. As an example, for every billion dollars spent in the region within these industries, the area can expect to experience a 400 million dollar indirect and induced effect, or a multiplier of 1.4. Therefore, the 14 percent direct decrease in out-of-region spenders is significant. In spending, a one-to-one relationship 14 percent decrease equates to 140 million. With a 1.4 multiplier, that calculation means a LOST impact of almost 200 million (ouch), of direct, indirect, induced spending, per billion spent in the economy. No wonder everyone is grumbling! These numbers are conservative, since each lost hotel visitor represents a significant multiply of spending (over a local person) and non-recoverable demand. Even with this sizable shortfall, I believe Charleston has fared significantly better than most communities- something to build on.
The bottom line is that these data are important and need to be taken more seriously by all involved since L&H do represent a significant portion our our economy. Therefore, we must look at the data through a clear lens because these analyzes are used both by community leaders and businesses to make strategic plans for the future.
January 2009 Local industries Boeing and Alcoa
Financial Times stated that Boeing is cutting 4500 jobs or 7 percent of its workforce. Orders fell by 53 percent and deliveries by 15 percent. We make the Dreamliner here, but there is no news whether, in fact, the cutbacks will affect these employees. Meanwhile, Alcoa is cutting 13,000 jobs (that’s a big number!) or 13 percent of the workforce. Again no mention of any effects locally. Clearly though, we are seeing cutbacks in almost all areas of manufacturing.
I guess not. What we now know is just the opposite, with Boeing actually building a major manufacturing facility. Interesting Toyota one of the worlds premier manufacturers is having a terrible year. Pedal problems and now brakes- will the wheels fall off next!
