New Tax Law Invigorates Value-Add Options in Hospitality Sector;
Elevated Occupancies Reinforce Revenue Gains
Economy gets a boost from tax reform.
Economic growth surpassed 4 percent in the second quarter, lifted by strengthened consumption and business investment. The new tax law has stimulated the economy by increasing after-tax earnings and pushing consumer and business confidence to near-record levels. This combination has sparked elevated spending and accelerated job creation. Through the first half of 2018, the economy added over 1.3 million jobs, driving unemployment below 4 percent and boosting wage growth to 2.7 percent, its highest level since the onset of the recession. As a result, personal disposable income has grown by 5.4 percent over the last year, dramatically outpacing the 3.5 percent average growth rate over the past 10 years. The combination of low unemployment and more disposable income has translated into particularly strong consumption. Through the summer, core retail sales growth surged to 5.6 percent, well ahead of the 10-year average of 3.1 percent.
Rising inflation and higher interest rates could cool momentum.
Accelerated growth brings with it some new challenges. Core inflation has nudged upward to 2.3 percent, raising caution at the Federal Reserve. To rein in inflationary pressure, the Fed has already signaled that it will tighten monetary policy by raising the overnight rate a total of four times in 2018; this will push up short-term interest rates. The challenge for the Fed is that long-term interest rates have been range bound, with the 10- year rate hovering near 3 percent for the last six months. Unless the Fed can push long-term rates up, its monetary tightening policies could invert the yield curve, raising short-term Treasury yields above long-term Treasuries. An inverted yield curve is a commonly perceived sign of an impending recession, raising the risk of a slowing economic outlook.
