As the US economy matures from absolutely go-go to “doing OK,” numerous overlooked sectors of the economy will be the focus of attention in 2001.  When investors were concerned that interest rate tightening might bring on recession, not just a slowdown, many sectors appeared risky.  Now that the economy appears to be still resilient, an expansive list of industries and companies are showing promise.  These include retailers (drug-based), home construction, aerospace electronics companies, and electric utilities.  Over the long-term, however, investors would do well to stay with the real drivers of the economy – financials, tech, and health care.

What about the lodging sector?  In 2001, supply risk should subside and RevPAR is expected to post higher growth rates (projected at 3.9 percent over 2000).  By the end of 2001, a sustained upswing for lodging stocks could occur.  However, such a recovery scenario is partially contingent upon tech stocks tumbling and remaining low (the NASDAQ on the order of 1,500) for an extended period.  What can hotel investors expect in 2001?  Here are some hints.
 

Although investors could find themselves sailing through uncharted waters in 2001, US economic fundamentals should remain positive. The New Economy (which already sounds a bit passé) turned out to be subject to Old Economy forces and values after all.  We are also now entering a new market cycle and are making a successful transition to an economy that is on a more moderate, but still solid growth track.  

During the exuberant years of 1998 and 1999, stock prices rose beyond reasonable measures of corporate value.  At the same time, both companies and consumers accumulated debt to pay for their spending.  So far, neither the falling market nor the unprecedented debt levels seem to be slowing consumption or halting investment.  

In 2000, we were going uphill – the Fed was raising interest rates.  Now the Fed is less hectoring, which will be a major help.  Instead of being irrationally pessimistic, market watchers should praise the Fed for bringing the high-flying economy and over-valued stock market in for a safe landing.

The Fed, at its November policy meeting, indicated that interest rate cuts would wait until it was assured that inflation, at 3.4% in the last 12 months, was in check.  In large part because of easing oil prices, inflation should remain contained.  Moreover, the amount of goods and services that each worker creates will keep increasing.  Unemployment is at a low that would normally spur inflation, but when workers produce more, they can be paid more without upsetting the inflationary balance; the technology revolution has almost by itself led to an increasingly productive economy.  Many analysts expect to see the jobless rate increase to nearly 4.5% by mid-2001 from its current 3.9%, which would still be considered remarkable by historical standards.

Economists predict that gross domestic product, the prime measure of national economic output, will grow by a respectable 3.3% in 2001.  Corporate profits are also expected to grow, though not as fast as in recent years, and investors must remind themselves that corporate profitability has been significantly above the historic average over the past few years.  

The Commerce Department’s recent report on third-quarter gross domestic product indicates that business strength remains high.  High margins – earnings per dollar of sales – show that companies are still able to attain significant productivity gains.  The Commerce Department reported that corporate profit margins were at 12%, exceptionally strong by historical standards.  According to Morgan Stanley Dean Witter, operating earnings growth over the next five years for the S&P 500 companies is estimated at a reasonable 12.5%.  According to First Call/Thomson Financial, the projected fourth-quarter growth rate for the S&P 500 is 10.7%, while the overall forecast for 2001 is at 11.8%.  

On the whole, the US economy, despite the media’s overly pessimistic news and tendency to create self-fulfilling prophecies, seems to be in much better balance than in 1998 and 1999, supported by the following positive indicators.

Strengths of the US Economy in 2001

1. Productivity advances continue
2. Budget surpluses allow the government to pay down debt, lowering interest rates
3. Strong dollar is attracting foreign investment
4. Long bull market has created high levels of residual wealth
5. Low unemployment
6. Low inflation

What should be reassuring to investors and what they need to focus on is that the high-tech revolution is just beginning.  The Semiconductor Industry Association reports that computer chip manufacturers should be able to keep boosting chip performance for at least 15 years.  A technology strategist at Intel Corporation predicts that memory chips will consist of 64 billion transistors by the year 2015, a 1,000-fold increase over the 64 million today for standard memory chips used in personal computers, and microprocessor speeds could reach 3,600 megahertz versus 733 megahertz today.  In other words, the best is perhaps yet to come.  

Looking abroad, China’s one-billion-population market will be more open to competition and US products in 2001, boosting American exports.

Quintus Horatius Flaccus (Horace) wrote in his 20 BC Ars Poetica: “many shall be restored that now are fallen and many shall fall that now are in honor.”  It might sound like cold comfort to those with fears of a sharp slowdown mounting, but it does remind us of a fundamental truth: the course of economic expansion never did run smooth.

Anwar R. Elgonemy is an Associate with PKF Consulting, an international real estate advisory firm headquartered in San Francisco.