State of the Economy: The 2023 Summer Travel Boom
For the past year, the underlying sentiment was that the US was headed on a one-way trip towards a recession induced by the Federal Reserve’s aggressive rate hiking campaign. Over a year removed from when the central bank began raising rates, the US economy has however continued to defy expectations and edge closer to the coveted soft landing.
A promising economic landscape
Unemployment remains at a historically low rate, with solid job growth as of May. GDP is on course for its fourth consecutive quarter of positive growth, per the Atlanta Federal Reserve. Most importantly, though, is the fact that prices have cooled to a more than two-year low as of May – further underpinning the strength of the US economy during a time where bank failures and the now-resolved debt ceiling crisis piled on to the uncertainty. In tandem with falling prices is that consumers’ short-term inflation expectations also declined to their lowest levels in over two years, per the Federal Reserve Bank of New York – adding to growing sentiments that the country will evade a downturn this year while seeing inflation retread back to baseline levels.
As the landscape continues to look more promising, along with the warm weather upon us, consumers are eyeing a busy summer to put their dollars to work after consumer spending had mostly been muted for the better part since late last year. The trend of softening consumer spending is already breaking; real personal consumption expenditures (PCE is a measure of consumer spending and one the Fed eyes closely) increased in April after contracting for four of the past five months. Coinciding with April’s jump in consumer spending is the fact that in April, the personal savings rate fell for the first time since November 2022.
The Atlanta Fed’s solid GDP growth forecast (2.2%) for Q2 further reinforces the probability of robust consumer spending in Q2, especially seeing as consumer spending accounts for nearly 70% of US GDP. The expectation of robust spending throughout summer is also fueled by the fact that wage growth has outpaced inflation for the first time in over two years as of May, amplifying households’ purchasing power in due time. And keeping in line with the same trajectory of monthly improvements, where inflation continues to fall, wage gains are strong, alongside solid jobs growth, the first half of Q3 will also exhibit strong consumer spending.
This summer’s travel boom
And households have their eyes on one area to put their dollars to work throughout summer: travel. Forthcoming Mintel research shows six in ten consumers are planning to travel either domestically or internationally from June to August. In the past three years, consumers have been dealt a bad hand when it comes to travel. First came the pandemic that thwarted vacation plans throughout 2020 and 2021, and last year brought with it the worst bout of inflation in over 40 years, right in the middle of June, causing many households to shift their budgets to more pressing matters and put off their travel plans. Fourth time’s the charm, however, and with consumers feeling that the worst of inflationary pressures are behind them, along with the economic outlook improving month by month, this summer promises to be a busy time for the travel industry.
“Thinking about how you spend your money, which do you plan to do over the next 3 months?”
The opportunity for financial institutions
For financial services brands, the upcoming travel rush is encouraging for issuers from both a retention and acquisition point-of-view. Travel cards that carry high annual fees (e.g. Amex’s Platinum Card, Capital One’s Venture X) will retain their target audience in higher net-worth customers, with issuers’ value propositions for these cards remaining pertinent throughout summer, especially given these affluent consumers’ higher proclivity towards domestic travel. Similarly, issuers also have the chance to drive acquisition for their travel cards among those in middle asset classes, who also exhibit a higher-than-average appetite for international travel.
Furthermore, those middle asset classes are ones that have in the past shown higher interest in premium card offerings. Mintel research shows 40% of those with a net worth of $100K-250K said that they would pay a higher annual fee for better credit card benefits, and 38% of those in that asset class would also pay higher annual fees if it meant better rewards. So while opportunities remain plenty for issuers to cater to their jet-setting affluent clientele, mid-net-worth consumers’ pent-up travel demand is also a chance to extend these premium offerings to a newer audience.
Premium card offerings will not, however, resonate with the notoriously credit-card-averse Gen Z generation – the group that displayed the heartiest travel appetite out of any generation (45% of Gen Zers plan on traveling domestically within the next three months, while 28% plan to travel internationally). This significant travel propensity can be the chance for credit cards’ younger sibling in buy now, pay later, to derive higher adoption and interest from a Gen Z segment that is already a core part of these providers’ audience. BNPL brands’ messaging that conveys the experiential aspect of traveling, but also uses terms like “interest-free” and “no fees, ever” is sure to attract the price-sensitive Gen Zer that heavily desires the travel experience. As such, this summer is the most ideal window for BNPL providers to further their partnerships with airlines and vacation rental platforms in the name of expanding their reach. And this goes both ways; for airlines, they must not box themselves by shunning these alternative financing options, only to be seen as an inaccessible, premium travel partner by younger cohorts. Instead, they must also seek out these mutually-beneficial collaborations with BNPL providers to get their foot in the door when it comes to acquiring the business of younger, travel-eager consumers and building a foundation of loyalty moving ahead.
What we think
The US economy has continued to show remarkable resilience, providing sufficient cause for optimism on its path throughout the latter half of the year. With expectations of inflation continuing to cool, as well as solid job and income growth during Q3 and Q4, consumers’ travel appetite will remain intact throughout the fall before surging once more during the winter holidays – which is when inflation will likely be settling back to the Federal Reserve’s 2% target rate.
