Business Indicators - February 2008

Business Indicators

by R. Keith Schwer

The indicators have revealed a mixed picture for both the Nevada and U.S. economies. Increasingly, however, the data point to increased chances for both a national and silver state recession. Nevada has been in an imbalance position ever since the housing markets in Las Vegas and Reno peaked. Nevada has seen marked decline in prices and sales. Recovery from an excess supply of housing units has taken time, and more time is needed to burn off the excess. In the meantime, the subprime housing finance problem has turned into a credit crunch. Great uncertainty prevails about the value of new sophisticated financial instruments.

The Federal Reserve has reduced the federal funds rate, the discount rate, and created a new auction facility to address the liquidity needs of the financial system. Further efforts on both monetary and fiscal fronts may yet be needed. Future efforts, however, face limitations. The current inflation levels are at or near the top end of the Fed’s comfort zone. An economic stimulation package runs the risk of touching off a round of destructive inflation.

Most economic indicators become available after some time. So, recession identification is after the fact. We are struggling with proxy measures to ascertain the current state of affairs. A recession occurs with observable general decline in overall spending, income, and jobs. A national recession appears in the monthly income, spending, industrial production, and jobs. In the Silver State, useful monthly indicators are taxable sales, gaming revenue, visitor volume, and jobs. So far these series do not show recessions for the U.S., Nevada, or Southern Nevada.

A number of proxy measures of recession, that is, indicators which have historically been correlated with recessions, have softened of late, leaving many to believe that a recession is either already at hand or is highly likely. It bears noting that many indicators continue on the positive side, however. In addition, the credit crunch and the increasingly international basis of finance have some believing that not all of the positive indicators should be valued as in the same way as in the past. Job indicators offer some of the best information at this time. The unemployment rates have jumped of late, currently at 5.0, 5.2, 5.3, and 4.8, respectively for the U.S., Nevada, Las Vegas, and Reno. Holiday sales offer further corroborating evidence of weakness. This evidence gives a hint at further decline and increased probability of a recession.