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Several popular destinations (including: Hawaii, Mexico, and the Caribbean) experienced slowing, stagnating, or declining U.S. visitor arrivals during the first quarter of 2007. Simultaneously, consumer spending is increasing at the slowest rate since October 2006. In the month of April, growth in consumer spending was reported to be 0.3%. However, when the effect of higher gas prices is factored in, Americans actually decreased spending by 0.2%, the slowest pace since Hurricane Katrina.
The Consumer Confidence Index is at a 10-month low, indicating that consumer spending will, at least in the short-term, continue with nominal-if-any growth. Announced on June 26 by the Conference Board, the CCI (consumer confidence index) is currently at 103.9, a decrease from 108.5 in May.
Consumer confidence is adversely affected by high energy prices. Although high gas prices are not yet measurably decreasing the demand for gasoline in the U.S., consumers are spending less of their discretionary income in an effort to compensate: “60% of consumers are cutting back on the discretionary spending as a result of gas prices” (MarketWatch, see graph below).
The current state of the housing market is also exacerbating a weaker economic climate. Home prices are dropping at a record pace. During the 12 months ending in April, average home prices in the 10-city index fell 2.7%, the biggest drop in 16 years. Even in regions where home prices are increasing, price gains are slowing down substantially. Home sales have also fallen year-over-year, down 20% over the first quarter of 2007, compared to the first quarter of 2006. As home sales fall, home builders are starting to react by halting, or slowing down the progress of current projects, with the home building sector registering a decline for the past six consecutive quarters. However, even with the slowdown in housing construction, unsold inventory for the fifteen largest U.S. cities is up by 29% from May 2006.
Consumer spending, which includes transactions in the housing market, comprises 2/3 of the U.S. GDP. From 2003 up until early 2006, the average growth rate of US GDP was 3.5%; however since last year, GDP has been growing at a meager 2%. The Department of Commerce recently announced that the real GDP in the first quarter of 2007 was growing at an annual of 1.3%, the slowest growth since 2003.
With the slowly declining economy, the purchasing power of the US dollar against the Euro, also continues to decline. The current exchange rate from the USD to the Euro is .74, a 6% decline from a year ago. The travel industry is beginning to observe a trend that demonstrates the declining dollar is playing a role in the consumers’ choice of travel destinations. An increase of US outbound travel to non-Euro destinations, such as Asia, has been observed over the first several months of 2007.
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