This paper examines the relationship between Expedia's financial performance and four macroeconomic variables: GDP growth, unemployment rate, personal savings rate, and the Federal Reserve discount rate. Because travel is largely a discretionary consumer expenditure, the firm's revenues are expected to move in step with broad economic conditions. Using data from the BEA, BLS, St. Louis Fed, and Federal Reserve, the paper constructs four correlations and interprets each in turn. Results show a moderate correlation with GDP growth, a stronger inverse relationship with unemployment, a general inverse relationship with the savings rate, and a surprisingly weak link between the discount rate and Expedia's research and development spending.
Expedia operates in the travel industry. The company's core site functions as a travel consolidator, and the company also operates a range of complementary sites within the same sector. Several key macroeconomic variables affect the travel industry broadly. The most important is the overall state of the economy (WTO, 2010), which can be measured as a combination of GDP growth and the unemployment rate. These two variables matter because travel is largely a discretionary expenditure for consumers. During difficult economic times, consumers are more likely to save than to spend on non-essential items. As a result, the personal savings rate is another variable that correlates with travel industry demand, and changes in that demand are ultimately reflected in firm revenues.
In addition, because firms like Expedia operate in an environment characterized by rapidly changing technology, they must constantly invest in research and development to keep their platforms current and competitive. This investment often requires debt financing, making prevailing interest rates — specifically the Federal Reserve discount rate — a relevant factor in the company's economic performance. This paper analyzes four sets of variable pairs to determine the degree of correlation between macroeconomic conditions and Expedia's financial results.
All financial data on Expedia are sourced from MSN Moneycentral (2010). GDP growth figures were derived from the BEA. Personal savings rate figures came from the St. Louis Fed. Unemployment figures come from the BLS, and discount rate figures come from the Federal Reserve.
The first correlation examined is the rate of GDP growth alongside the rate of revenue growth at Expedia. The results show only a moderate correlation between the firm's revenue growth and broader economic growth. The most notable observation involves the year 2007, when Expedia's revenue growth spiked despite a slowdown in GDP growth. However, after that point the two variables move more closely together: as GDP continued to decline, revenues at Expedia also fell, suggesting that the relationship strengthens during periods of economic contraction.
The second correlation compares the unemployment rate with Expedia's revenue growth rate. The expected relationship here is an inverse one — as unemployment rises, consumer spending on discretionary travel should fall, reducing revenue growth. During the earlier portion of the data series, this inverse relationship is not clearly evident. However, it becomes pronounced in the final years of the study, when the unemployment rate rises sharply and Expedia's revenue growth collapses. The persistently high unemployment rate in 2010 is not an encouraging sign for Expedia, as the company's business model depends on American consumers having the financial ability to afford vacations.
"General inverse trend with some distortions"
"Weak link between cheap capital and R&D spending"
"Slow-growth environment limits near-term opportunity"
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