Disney and the Economy: Downside Concerns

by Ray Keating

News/Analysis

DisneyBizJournal.com

January 31, 2020

The Walt Disney Company cuts across industries, covering retail, travel, theme parks, movies, television, online streaming, and more, not to mention being a global enterprise. So, this diversified company can seize on assorted opportunities and benefits when U.S. and global growth are strong. And while Disney also has considerable exposure to economic woes and uncertainties, industry and regional diversification can aid the firm in weathering economic storms.

Right now, the risks for a company like Disney tilt to the downside. Consider some key issues, facts and trends.

• U.S. Growth. Contrary to claims from a variety of talking heads on television and in politics, the U.S. economy remains a mixed bag. For example, while the U.S. labor market is tight, economic growth has slowed. Fourth quarter 2019 real GDP (just reported on January 30) grew by 2.1 percent (annualized rate). That replicated the 2.1 percent growth in the third quarter, and wasn’t substantively different from the 2.0 percent rate in the second quarter. Consider that the post-World-War-II U.S. growth rate averaged 3.2 percent (and better than 4 percent during non-recession periods). Particularly troubling for the U.S. is that business investment has declined for three straight quarters now, which not only negatively affects current growth, but future growth as well.

• Trade Troubles. The anti-free-trade policies of the Trump administration have been a key negative for the U.S. economy. U.S. real export growth was non-existent (0 percent) in 2019, while imports barely edged forward (1.0 percent). As I noted in another analysis on trade policymaking, “The result has been that trade has shaved a significant 0.5-to-0.7 percentage points off of average overall real U.S. economic growth – if not more when you factor in the reach of trade across sectors, including the role that the trade war has played in the recent decline in business investment.”

• Consumer Slowing. Given the ills on the business investment and trade fronts, the consumer has been the key source for growth in the U.S. recently. However, real personal consumption expenditures growth slowed in the fourth quarter, from 4.6 percent in the second quarter 2019 to 3.2 percent in the third quarter and 1.8 percent in the fourth. 

Also, after a lengthy stretch of strong growth, real per capita disposable income moved down slightly during the last three months of 2019. Real per capita disposable income – which is personal income minus personal current taxes, adjusted for population and inflation – is important to watch because this measures the dollars that individuals have for investing, saving and consuming.

• China. China’s troubles continue to mount regarding the outbreak of the coronavirus, with deaths now reportedly topping 200 and those sick nearing 10,000 (as of early afternoon EST on Friday, January 31). 

• Europe. The Wall Street Journal noted on January 31 that growth slowed notably in the eurozone, with growth the slowest since 2013. Also, it was reported that economists aren’t expecting a pick-up in eurozone growth in 2020.

• Politics. Political risk and uncertainty promise to mount as a volatile U.S. presidential race, along with House and Senate contests, roll along during 2020.

So, economic concerns cut across the U.S., Europe and China, which are the major markets for Disney.

Against these concerns, it also must be noted that the only portion of the economy’s investment numbers showing consistent, strong growth has been in intellectual property products, that is, investment in software, research and development, and entertainment, literary, and artistic originals. That’s obviously a big area for Disney. 

And all indicators regarding Disney itself continue to point to investment growth in parks, cruise ships, streaming content, movies, and so on. Of course, though, short-term economic changes affect immediate investment and operational decisions, but Disney is a company poised to stay focused on long-term investments, opportunities and profitability.

Ray Keating is the editor, publisher and economist for DisneyBizJournal.com, and author of The Disney Planner 2020: The TO DO List Solution and the Pastor Stephen Grant novels. He can be contacted at  raykeating@keatingreports.com.

Disney Theme Park Attendance and the Economy

by Ray Keating

Analysis

DisneyBizJournal.com

August 12, 2019

Since the Walt Disney Company reported its latest quarterly earnings last week, there’s been a great deal of speculation as to the reason behind a drop in attendance – widely reported to be a 3 percent decline – at Disney’s domestic theme parks. Most of the possibilities being tossed around likely played a part. But another possible factor – which has not garnered any attention but at least warrants some degree of consideration – is the economy. Specifically, has the recent slowdown in economic growth played a part?

In its third quarter earnings report, Disney explained:

The decrease in operating income at our domestic parks and resorts was due to higher costs and lower volume, partially offset by increased average per capita guest spending. Higher costs were driven by labor and other cost inflation and expenses associated with Star Wars: Galaxy’s Edge, which opened at Disneyland Resort on May 31. The decrease in volume was due to lower attendance, partially offset by higher occupied room nights. Guest spending growth was primarily due to higher average ticket prices and increased food, beverage and merchandise spending.

The basic message here is that there was a decline in park attendance in the third quarter, but spending on average was up among those in attendance. That’s not necessarily a bad thing from Disney’s perspective in terms of increasing revenues while providing an improved experience for the guests in attendance. However, that only goes so far. 

Among the explanations for the attendance drop being noted are Disney managing attendance given the opening of Star Wars: Galaxy’s Edge in Disneyland; guests deferring visits until Galaxy’s Edge opens in Walt Disney World late this month; guests being scared off by the assumption of large crowds tied to Galaxy’s Edge; and guests deferring their visits until Galaxy’s Edge Rise of the Resistance joins Millennium Falcon: Smugglers Run in Walt Disney World on December 5, 2019 and in Disneyland in January 17, 2020. Plus, there’s been a good number of articles and podcasts talking about Disney pushing the prices for theme park admissions too high.

Again, any and all of these factors could be at work. But what about the economy? Obviously, an economic slowdown or recession does not bode well for theme park attendance or Disney’s overall business.

It must be noted that while the current economic recovery/expansion has been lengthy (the recession officially ended in mid-2009), the average rate of growth has substantially under-performed the historical norm. For example, the economy normally grows at 3.3 percent annually in real terms (4.3 percent during recovery/expansion periods), but it has expanded at only 2.3 percent during this recovery/expansion. More recently, from mid-2015 to mid-2017, growth slowed (averaging only 1.8 percent), and it subsequently picked up over the next five quarters (average growth of 3.1 percent) from mid-2017 through the third quarter 2018. 

But growth slowed in two of the last three quarters. Growth in the fourth quarter 2018 was only 1.1 percent, followed by a solid 3.1 percent in first quarter 2019, and then slowing to 2.1 percent in the second quarter 2019.

The first question is: Are we trending lower, or were two of the last three quarters mere breathers in terms of economic growth? Given that anti-growth, protectionist trade policies have taken a chunk out of U.S. economic growth (see my analysis here) recently, and there’s little reason to expect President Trump to reverse course and point trade policy in a more pro-growth direction, this stands out as the biggest threat to economic growth moving forward. For good measure, political uncertainty will increasingly come into play as the 2020 election gets closer.

The second question is: Given that the labor market remains relatively strong, how much have consumers taken notice of any slowdown and potential problems developing? Consumers tend to be followers, that is, they take their cues from what business is doing. That is, if business is investing, expanding and hiring, then consumers tend to be happy and spending. In the second quarter of 2019, the two biggest drags on the economy were declines in private investment and in trade. If those developments persist, recession becomes increasingly likely. 

But there are a lot of “ifs” in play here – more than typical – and the economy could go in either direction – up or down.

So, with one quarter showing a drop in Disney theme park attendance, we’re left to speculate and watch for further developments. In terms of what we’re watching, though, the state of the economy shouldn’t be ignored.

Ray Keating is the editor, publisher and economist for DisneyBizJournal.com, and author of the Pastor Stephen Grant novels. He can be contacted at  raykeating@keatingreports.com.

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