Business Indicators - August 2006

Nevada Business Conditions

by R. Keith Schwer

The first half of 2006 brought a sharp up-tick in U.S. prices. Moreover, the price increase appeared across a broad array of items, leaving the first measurable signs of a possible inflation problem. The core consumer price index (CPI) rate of inflation stood at a level sufficient to warrant concern. The CPI reached a 2.4 percent growth level with the likelihood of greater increases ahead. With concern for inflation approaching a critical level, stock prices dropped in anticipation of further interest rate hikes. In short, price conditions foretell a marked shift in the Fed policy stance to “tight” money.

Looking further, however, one sees mixed signals from a host of national economic indicators. Housing starts and auto and truck sales – two large-ticket items for consumers – dropped in excess of 3 percent for April compared to one year ago. The trade balance shows an annual 11.3 percent drop.

However, some indicators remain positive – for example, retail sales, the unemployment rate and spending (real GDP). Though these mixed signals and the recent increase in the core inflation rate have spooked investors, the big question remains: Will the Fed, transitioning from a long period of “easy” money, fail to heed caution signs and overshoot on monetary contraction, thereby leading to a recession?

Meanwhile, Nevada indicators show no sign of departing from the robust expansion of the past few years. Indeed, all key Nevada sectors (travel and tourism, construction and mining) have reached undeniably favorable conditions and every expectation is for continuation of current conditions. Still, economic paths have a way of wandering off course. But it is hard to see that anything except “unexpected and irregular events of great weight” will keep Nevada from having another great year.