Key Takeaways
- With most of the U.S. under COVID-19 containment guidelines, tourism--both domestic and international--is one of the hardest-hit economic sectors.
- States most dependent on tourism are likely see credit pressures due to loss of revenue, spikes in unemployment, and reduced economic activity and may face a significant lag during the recovery.
- We consider Nevada and Hawaii to be the most severely affected states based on tourism's share of their economies.
The abrupt halt of the U.S. economy due to the COVID-19-induced recession is uniquely configured to stress the tourism sector (including leisure, hospitality, and travel-related activities), more so than in past recessions. The measures states have implemented to contain the pandemic (including social distancing, closing of nonessential businesses, limiting gatherings, and restricting hotel use), while prudent, have shut down the tourism sector in the U.S. for now. It is not just in the U.S; the international response to the pandemic has also curtailed travel and tourism globally, reducing it to historically low levels. For states with significant portions of the economy dependent on tourism, S&P Global Ratings expects COVID-19 and containment measures to translate into pressure on their creditworthiness.
Nevada And Hawaii Are Expected To Be Most Affected Based On Their Significant Tourism Concentration
Nevada (AA+/Negative) and Hawaii (AA+/Negative) are the states most severely affected by the tourism sector shutdown. Both states have the highest concentration in employment related to tourism and GDP in sectors associated with tourism.
Nevada's employment base reflects the highest concentration in leisure and hospitality across all states, accounting for 25% of total employment, which is more than twice the national average. Gaming revenue, accounting for about 18% of the state's general fund revenue, has also experienced heightened exposure in the current recession with the casinos on the Las Vegas Strip closed. Furthermore, we believe the travel and tourism-centered structure of Nevada's economy ties its growth prospects to those of the nation, characterized by stronger growth during expansions and more severe contractions in a downturn. The state's commitment to financial management has positioned the state more favorably than in past recessions with historically high reserves, but it is our opinion that it could face budgetary pressures. Nevada started the current year with a combined balance of $498 million (including $236 million in the stabilization reserve), equivalent to about 15% of budgeted expenditures.
As an island-economy state, Hawaii is inherently vulnerable to the negative effects of certain types of exogenous shock events. The Bureau of Labor Statistics reports that leisure and hospitality accounts for a significant 19% of the state's 2019 employment. Hawaii's financial management, however, has reflected an alignment with its economic realities with a commitment to growing its balances and reducing its long-term liabilities to prepare for an economic slowdown. However, the state's ability to navigate potential budgetary pressures in the next year will weigh heavily on its rating. Hawaii started the current fiscal year with combined operating reserves of $1.1 billion or, 14.3% of budgetary general fund expenditures.
Other States With Tourism Sectors Are Also Facing Pressure
The role of tourism in Florida (AAA/Stable), while significant at 14% of total state employment, has benefited from broad and diverse economic development in recent years, supported by strong population growth. Employment sectors such as trade, education, and health services could moderate losses somewhat from tourism statewide within the short term, in our view. The state and its local communities nevertheless rely on the tourism sector to help support economic activity.
For Montana (AA/Stable), leisure and hospitality employment represents 13.8% of total jobs and reflects its wealth of outdoor recreation and national and state parks. However, tourism-related activities only represents 5% of state GDP.
Table 1
What Is At Risk For The States | ||||||||||
---|---|---|---|---|---|---|---|---|---|---|
State | Rating | Outlook | State employment from leisure and hospitality (2019) (%) | GDP from tourism (2018) (%) | ||||||
Nevada | AA+ | Negative | 25.1 | 16.5 | ||||||
Hawaii | AA+ | Negative | 19.3 | 10.2 | ||||||
Florida | AAA | Stable | 14.0 | 6.1 | ||||||
Montana | AA | Stable | 13.8 | 5.1 | ||||||
Wyoming |
AA+ | Stable | 12.6 | 4.5 | ||||||
South Carolina |
AA+ | Stable | 12.4 | 4.8 | ||||||
Colorado |
AA | Stable | 12.4 | 5.1 | ||||||
Louisiana |
AA- | Stable | 12.0 | 4.6 | ||||||
Rhode Island |
AA | Stable | 11.9 | 4.9 | ||||||
Vermont |
AA+ | Stable | 11.8 | 6.5 | ||||||
Mississippi |
AA | Stable | 11.8 | 4.6 | ||||||
California |
AA- | Stable | 11.7 | 4.3 | ||||||
New Mexico |
AA | Stable | 11.5 | 4.1 | ||||||
Delaware |
AAA | Stable | 11.4 | 2.8 | ||||||
North Carolina |
AAA | Stable | 11.3 | 3.8 | ||||||
Arizona |
AA | Stable | 11.3 | 4.8 | ||||||
Tennessee |
AAA | Stable | 11.2 | 5.7 | ||||||
Oregon |
AA+ | Stable | 11.0 | 4.4 | ||||||
Alaska |
AA- | Negative | 11.0 | 3.5 | ||||||
Idaho |
AA+ | Stable | 10.9 | 4.1 | ||||||
Texas |
AAA | Stable | 10.9 | 3.6 | ||||||
Maine |
AA | Stable | 10.9 | 5.5 | ||||||
Georgia |
AAA | Stable | 10.9 | 3.3 | ||||||
South Dakota |
AAA | Stable | 10.7 | 3.8 | ||||||
New Hampshire |
AA | Stable | 10.7 | 5.2 | ||||||
Missouri |
AAA | Stable | 10.6 | 4.1 | ||||||
West Virginia |
AA- | Stable | 10.4 | 3.8 | ||||||
Kentucky |
A | Stable | 10.4 | 3.8 | ||||||
Oklahoma |
AA | Stable | 10.3 | 3.5 | ||||||
Massachusetts |
AA | Stable | 10.2 | 4.1 | ||||||
Ohio |
AA+ | Stable | 10.2 | 3.7 | ||||||
Maryland |
AAA | Stable | 10.2 | 3.9 | ||||||
Illinois |
BBB- | Negative | 10.2 | 4.2 | ||||||
Virginia |
AAA | Stable | 10.1 | 3.4 | ||||||
Alabama |
AA | Stable | 10.1 | 3.3 | ||||||
Washington |
AA+ | Stable | 10.0 | 3.8 | ||||||
Indiana |
AAA | Stable | 9.9 | 3.7 | ||||||
Utah |
AAA | Stable | 9.9 | 3.4 | ||||||
New York |
AA+ | Stable | 9.8 | 4.4 | ||||||
Michigan |
AA | Stable | 9.8 | 3.6 | ||||||
Wisconsin |
AA | Stable | 9.5 | 3.2 | ||||||
Pennsylvania |
A+ | Stable | 9.5 | 3.5 | ||||||
New Jersey |
A- | Stable | 9.4 | 3.5 | ||||||
Arkansas |
AA | Stable | 9.4 | 3.3 | ||||||
Connecticut |
A | Stable | 9.3 | 3.4 | ||||||
Minnesota |
AAA | Stable | 9.3 | 3.5 | ||||||
North Dakota |
AA+ | Stable | 9.2 | 2.6 | ||||||
Kansas |
AA- | Stable | 9.2 | 3.0 | ||||||
Nebraska |
AAA | Stable | 9.2 | 2.8 | ||||||
Iowa |
AAA | Stable | 9.1 | 2.9 | ||||||
Sources: Bureau of Labor Statistics, Bureau of Economic Analysis. |
The Already Projected Significant Economic Contraction In The U.S. Is Magnified In The Tourism Sector
Restricted economic activities resulting from the COVID-19 pandemic, including those related to tourism, will translate directly into contracted economic output and general revenue declines for all states. S&P Global Economics forecasts (See "An Already Historic U.S. Downturn Now Looks Even Worse," published April 16, 2020, on RatingsDirect) expects the current recession has likely reduced economic activity by 11.8% peak to trough, which is roughly 3x the decline seen during the Great Recession in one-third of the time. The baseline scenario for annual change in U.S. GDP for 2020 is now projected to contract by 5.2%, with some recovery beginning in 2021. Specifically, we believe national consumer spending, which is a key factor in state revenue, will contract by 33.5% in the second quarter of 2020.
Our macroeconomic assumptions, however, do not specifically address acute sector-specific pressures related to tourism. We believe that tourism will be particularly affected as will, by extension, state economies disproportionately reliant on the sector. Shelter-in-place and quarantine measures have led to wholesale cancellations of domestic and international flights and year-to-date enplanement numbers are down significantly. While some states are likely to relax containment restrictions and start opening economies and businesses soon, we expect that an extended aversion to leisure activities, non-essential gatherings, and traveling while the risk of COVID-19 infection lingers is likely to result in a much slower recovery for tourism than for the rest of the economy.
The Effects On State Ratings Will Depend On Concentration And Financial Management In Tough Times
In our view, states dependent on the tourism sector could face significant headwinds well after a national recovery and the next few years will represent a test for some of them. Effects on a state could include liquidity and budgetary pressures from temporary or permanent loss of tax revenue, increases in unemployment, and shifts in real estate demand. To the extent that a state is significantly dependent on tourism, its ability to navigate a dampened revenue environment for the next few years while using sustainable budget measures will be key to maintaining the credit rating.
Most states receive revenue information such as sales tax collection data on a lagged basis, which currently clouds the magnitude of loss in March and April. However, we expect the effects to be evident, particularly in the second quarter of 2020, and affect budget management for many years. As tourism-related revenue begins to decline, a state's relative revenue decline and responsiveness to maintain structural balance could be an indicator of future credit direction.
Sector Size Matters, But Proportion Relative To The State Matters More
We expect that states with significant tourism activities will see more subdued effects if tourism constitutes a smaller proportion of the overall economy. However, given the recession and the expected severity of economic contraction in the short term, even slight declines from tourism could add up to create a "perfect storm" for otherwise resilient economies. Since tourism is also a labor-intensive sector, there would potentially be a decline in employment levels, even in states with relatively low tourism-related job concentration.
While California (AA-/Stable) has the highest tourism GDP of all states, that fact mainly reflects its large size. Its economy is diversified with hospitality and leisure employment accounting for only 11.6% of total state employment, similar to the 11.0% share for the nation as a whole.
Table 2
Tourism GDP By State | ||||||
---|---|---|---|---|---|---|
State | 2018 tourism GDP* (Mil. $) | Share of national tourism GDP (%) | ||||
California | 130,031 | 15.2 | ||||
New York | 73,922 | 8.7 | ||||
Texas | 64,834 | 7.6 | ||||
Florida | 63,729 | 7.5 | ||||
Illinois | 35,984 | 4.2 | ||||
Nevada | 27,863 | 3.3 | ||||
Pennsylvania | 27,228 | 3.2 | ||||
Ohio | 24,825 | 2.9 | ||||
Massachusetts | 23,388 | 2.7 | ||||
New Jersey | 21,564 | 2.5 | ||||
Washington | 21,324 | 2.5 | ||||
North Carolina | 21,259 | 2.5 | ||||
Tennessee | 20,686 | 2.4 | ||||
Georgia | 19,578 | 2.3 | ||||
Colorado | 19,090 | 2.2 | ||||
Michigan | 19,087 | 2.2 | ||||
Virginia | 17,989 | 2.1 | ||||
Arizona | 16,629 | 1.9 | ||||
Maryland | 16,084 | 1.9 | ||||
Indiana | 13,539 | 1.6 | ||||
Missouri | 13,037 | 1.5 | ||||
Minnesota | 12,835 | 1.5 | ||||
Louisiana | 11,761 | 1.4 | ||||
South Carolina | 11,155 | 1.3 | ||||
Wisconsin | 10,723 | 1.3 | ||||
Oregon | 10,587 | 1.2 | ||||
Hawaii | 9,603 | 1.1 | ||||
Connecticut | 9,387 | 1.1 | ||||
Kentucky | 7,855 | 0.9 | ||||
Alabama | 7,232 | 0.8 | ||||
Oklahoma | 6,999 | 0.8 | ||||
Utah | 6,031 | 0.7 | ||||
Iowa | 5,560 | 0.7 | ||||
Mississippi | 5,240 | 0.6 | ||||
Kansas | 5,129 | 0.6 | ||||
New Hampshire | 4,364 | 0.5 | ||||
Arkansas | 4,211 | 0.5 | ||||
New Mexico | 4,085 | 0.5 | ||||
Maine | 3,589 | 0.4 | ||||
Nebraska | 3,440 | 0.4 | ||||
Idaho | 3,140 | 0.4 | ||||
Rhode Island | 2,998 | 0.4 | ||||
West Virginia | 2,923 | 0.3 | ||||
Montana | 2,569 | 0.3 | ||||
Vermont | 2,159 | 0.3 | ||||
Delaware | 2,067 | 0.2 | ||||
South Dakota | 1,998 | 0.2 | ||||
Alaska | 1,889 | 0.2 | ||||
Wyoming | 1,745 | 0.2 | ||||
North Dakota | 1,437 | 0.2 | ||||
*Gross output from arts, entertainment, recreation, accommodation, and food services. Source: Bureau of Economic Analysis. |
This report does not constitute a rating action.
Primary Credit Analyst: | Ladunni M Okolo, New York (1) 212-438-1208; ladunni.okolo@spglobal.com |
Secondary Contacts: | Geoffrey E Buswick, Boston (1) 617-530-8311; geoffrey.buswick@spglobal.com |
Sussan S Corson, New York (1) 212-438-2014; sussan.corson@spglobal.com | |
David G Hitchcock, New York (1) 212-438-2022; david.hitchcock@spglobal.com | |
Oscar Padilla, Farmers Branch (1) 214-871-1405; oscar.padilla@spglobal.com |
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