Business Indicators - February 2001

Business Indicators

by R. Keith Schwer

The October and November data now available bring some clear signs that the economy’s robust growth has slowed. Throughout 2000, the Fed repeatedly hiked the federal funds rate — the rate that banks charge each other — and the discount rate — the rate that the Fed charges member banks. These Fed activities have tugged at the market forces driving interest rates and asset values. After some lag, economic activity has slowed, particularly in those sectors where spending is sensitive to borrowing.

The current set of indicators points to slower growth rates in the early months of 2001. Indeed, the newly elected president, likely to inherit a slower-growing economy in the early months of his administration, has used the opportunity to propose changes in the tax system. Specifically, President Bush wants to lower taxes to stimulate growth. A period of slow growth is a more opportune time for success in such political endeavors than when the economy is booming, as has been the case during past years. Still, any anticipated benefits will most likely come long after the passage of legislation. And in the meantime, widespread discussion of a possible recession may spook the economy into a self-fulfilling prophecy.

Gross domestic product (GDP), the final value of goods and services that pass through the economy, was a robust 7.48 percent higher at the end of the third quarter of 2000, as measured year-over-year in nominal terms. Even though this rate of increase has not been adjusted for inflation, it is more important to compare the increase for the third quarter over the second quarter, which fell sharply over the trend, standing at only 2.2 percent at an annual inflation-adjusted rate. A significant factor in the retreat was a 10.6 percent decline in residential investment. Nationally, housing activity should generally remain weak as long as interest rates remain high, or are expected to remain high.

The Nevada economy shows signs of leveling off, at least in its important tourism sector. Gaming revenue collections were up only 1.98 percent in October. Collections in Washoe County were down 4.48 percent and up 3.93 percent in Clark County. Since these growth rates are not adjusted for inflation, one might reasonably say that there was a slight drop, as inflation rates on consumption expenditures have stayed in the 3 percent range for 2000. Still, month-to-month changes do not reveal fundamentals.

Other key indicators show similar slowing. Taxable sales were up only marginally with respect to overall price increases in October. Taxable sales collections were up 3.82 percent in Nevada, 4.72 percent in Clark County and 4.17 percent in Washoe County.

All in all, overall economic conditions in Nevada remain strong, with unemployment rates at or near record low levels. Still, more adversity than usual has appeared, suggesting that some economic trouble may lie ahead. Whether the longest U.S. economic expansion on record — which seemed immune to adversity only a few months earlier — continues throughout 2001 is unknown. But, one can clearly note that the economic expansions Nevada has experienced since the 1980s have lengthened. As a result, economic well-being has improved over the last two decades.