Feature Stories - July 2000

NEVADA'S ECONOMY

Still Growing After All These Years

by Cindie Geddes

No man is an island. Neither is a state, though sometimes it might feel that way for Nevadans. We are a population that has grown used to high times. Economic growth defines our economy as well as our challenges. Dire warnings and predictions don't faze us, moderation is anathema, we are a state of excess in a state of grace. At least for now.

Lately Nevada's economy has begun to slow. Of course, by "slow" we mean it is not growing as fast as we have come to expect. Two primary reasons seem to account for this.

First, the Federal Reserve has raised interest rates six times in the last year or so in hopes of slowing the national economy and thus preventing a recession. The fed looks for a growth rate of two to three percent, figuring that that rate is sustainable for long periods of time. Nevada has doubled that rate more than once. According to Bob Kasner, Senior Vice President and Portfolio Manager for Paragon Asset Management Company, retail sales have been negative for two months in a row compared to last year. Yet unemployment remains remarkably low. The increase in taxable sales or gaming revenues compared with the rate of inflation show the state growing less rapidly, according to Tom Cargill, Professor of Economics at the University of Nevada, Reno.

The second factor leading to the slowdown is a decrease in overall construction activity. Over the last few years, the building trades were kept busy with the construction of several new hotel-casinos in southern Nevada. Now that these projects are completed and no new large-scale building is planned, the dollar volume of construction is expected to decrease. "Basically, we are not in as good a shape as we were last year, but then last year was a really good year," Kasner says. "We have simply slowed down a little from a very high rate."

Yes, things are still good, but Nevada has never been recession-proof, despite that term's local popularity. "I've been here 23 years," says Kasner, "and I've seen tough times in the early 1980s and the 1990 area. Both times, the national economy slowed down and it definitely affected us." Cargill says what is happening right now in Nevada is a mirror image of what is happening nationwide, and what is happening nationwide is a teetering. "The nation is on the cusp of a slowdown or recession," he says, and Nevada teeters with it. Dr. Keith Schwer, Director of the Center for Business and Economic Research and a Professor of

Economics at the University of Nevada, Las Vegas, warns that the major short-term categories to be followed, and followed closely, will be the national economy and the fed's efforts to slow down the rate of expansion.

There is concern in some quarters about the long-term competitive position of Nevada's major industries. Indian gaming remains a threat, though it will likely affect Northern Nevada more strongly than Southern Nevada. As Stan Thomas, Director of Business Planning and Growth for Nevada Power Company, points out, Indian gaming is more likely to attract the weekend gambler looking for convenience. "Las Vegas is so big," he says, "and it's kind of the granddaddy of resort destinations." It's hard for any new kids on the block to compete with such a legacy.

Another possible threat to the local economy is the federal government's interest in the things that make us money. Indian gaming has been allowed to spread, while a proposal to ban betting on college sports has found favor in some quarters. That is a slippery slope that worries many Nevadans. Though college sports are not a big part of the sports book, there is a worry that a ban will grow into a prohibition on sports gaming. A national group (like a government task force) has been set up to study the impact of gaming on society. This sort of federal intervention could be quite negative for the state. "It's not a good trend for the federal government to go after things that are good for Nevada and its economy," says Kasner. "We had prohibition in the 1930s and it was such an overwhelming success they seem to want to repeat it."

At least the international scene is no longer threatening. With Asia coming out of its slump and Europe moving toward a common currency, the international economy looks rosy, with the exception of ever-present concerns about oil prices. But since we are selling our goods and services to the world, the world's economy is always important to Nevada. While things look good now, the future is far from certain.

The unemployment rate, which, according to Kasner, is nearly at a 30 year low, also affects consumer debt. Right now, most people are able to handle their individual debt levels.

But fewer people working might mean a crisis for millions of people. Consumer debt affects the entire country, but it affects tourism-based industries especially hard. And that means Nevada. As long as we remain dependent on tourism, we are sensitive to the almighty credit card.

But is that changing -- that reliance on tourism? Should it change? Economic diversity has been debated in Nevada for decades. Schwer says Nevada is the least diversified of all the 50 states, yet he sees it as a long term issue. "So long as we have a very healthy gaming economy," he says, "diversification is not nearly that important. But as gaming continues to spread, its importance goes up significantly." Kasner agrees, saying we should diversify, but the fact is we haven't had a diversified economy and yet the economy has remained strong.

Cargill hopes the spread of gaming will force Nevada into diversification. "Gaming has limited economic diversification and no interest in a diversified economy. Yet it dominates our political scene," he says, "I think Nevada would be better off with a little bit more competition." Thomas thinks a lack of diversification could seriously hurt the North, but not so much the South. "It's important to have other layers and other industries in the region," he says. "It's a huge burden of responsibility to have gaming supplying all the jobs in the state."

However, an educated workforce is necessary for the diversification. Education is critical, especially when it comes to recruiting. We need to build the skill level. "When we recruit companies," says Thomas, "what we hear the most about is educating the labor force."

So where does that leave Nevada in the coming years? No one knows for sure. Cargill is not terribly optimistic about the state's next few years, but that does not necessarily mean a recession. And any slowdown will not blindside us. "These things happen very slowly," he says. What might take us by surprise is the speed in which gaming spreads in California. "I don't think people realize how fast it's going to happen. But I have full faith and confidence that Nevada will survive, and, in the long run, be better for it because it will reduce the role of gaming in the state."

Schwer is guarded, but hopeful. "In the five or ten year window," he says," I suspect it would be reasonable to believe there might be a recession and that could have some measured impact. But overall, if the economy continues over that period to have the fairly robust activity it has for the last five or ten years, we'll still be doing pretty well. There still remains a very bright outlook." Part of that reason may lie in the unique draw of gaming. As Thomas says,

"When things are good, people come and spend money. When things are bad, they need an outlet. Either way we seem to benefit."

Kasner knows the state and figures it will continue as it has been. "We have had slow growth and faster growth, not no growth or contraction like the rest of the country. We're going to continue to grow," though double digit growth may be a thing of the past.

Thomas, as well as Tony Dazzio, Executive Manager for Business Planning and Growth for Nevada Power, lives with cautious optimism. "My whole life I remember hearing 'how long can it go on?' but it's still going on," he says. "People want to prepare themselves for the other shoe to drop." That's not a bad thing. Keeping the economy going strong takes work. We need to work toward diversification and increase efforts to educate our workforce two things Dazzio feels are being done. With any luck (and a lot of work) Nevada will remain a state of amazing grace.