Business Indicators - August 2008

Business Indicators

by R. Keith Schwer

Housing, credit, and energy – three problems facing the Silver State and the nation – are exacting a toll. Following the high-tech stock bubble burst in 2000, funds became available for spending in the housing market. This resulted in rapid price increases untethered to economic fundamentals. We ended up with more housing units than households to occupy them, in short, a glut of housing in Nevada. Once people could no longer find buyers at inflated prices, the tide turned.

Beginning in 2006, more people wanted to sell than buy. Moreover, people expected substantial future price depreciation. Housing construction slowed to a trickle – spending and jobs in the residential construction sector contracted, affecting construction suppliers and real estate-related activities. The Las Vegas and Reno housing markets took a hit and their economies slowed. We know from past national housing downturns that they may take years rather than months to correct. Two years later, we see some signs that corrections are under way, but we still experience weakness.

Difficulties in credit markets began midyear 2007 – a year after housing became a problem. New, sophisticated financial instruments proved difficult to value. Many were overvalued on firms’ balance sheets, leaving them with assets to write-off. The Fed stepped in, offering new borrowing mechanisms for commercial and investment banking. Today, we find assets waiting on the sidelines for the storm to pass. In the meantime, we find less funds available and credit standards increasing – further dampening business and consumer spending.

Oil prices have recently been as high as $140 a barrel, up 14 times from prices a decade earlier. Airline travel, a complement to Nevada tourism, reels from escalating costs. The cost of travel to Nevada has jumped sharply and schedules have contracted, resulting in fewer visitors and less spending of those who come.

Nevada conditions have weakened in light of housing, credit, and energy problems. Nevada gaming revenue has declined each month in 2008, but May collections dropped precipitously, more than 15 percent. The Las Vegas Strip, accounting for more than half the state’s gaming revenue, posted a decline of more than 16 percent from the same month a year ago. No doubt, double-digit declines in this key indicator will have further ramifications, especially if gasoline prices remain above $4. All in all, housing, credit, and energy problems have pushed the Silver State into a recession.