Business Indicators - February 2009

Business Indicators

by R. Keith Schwer

Economic conditions were mixed a year ago. There were very few signs in early 2008 that hinted at severe economic turbulence was on the horizon. Financial conditions weakened by spring, however. The Federal Reserve and the U.S. Treasury came to the rescue, believing that firms were caught in illiquid positions, that is, they had too much long-term investments and too little cash and short-term assets. Balance sheet rebalancing brought about the credit scarcity resulted in Nevada losing many high-profile construction jobs, and it was clear that the state was in a recession by midyear 2008.

By last September it became clear that we faced more trouble. Lehman Brothers had a solvency problem, where it owed more than the value of its assets. Their failure sent others scrambling to unload risky assets and find secure assets. The national and Silver State economies have weakened ever since as uncertainties remain about the credit worthiness of many assets.

It became official in December 2008 that the U.S. economy had entered a recession in January 2007 and things had worsened since that time. The U.S. job level for November is 1.4 percent below its year ago level; the unemployment rate stands at 6.7 percent. Job loss announcements foretell further contraction. Conditions in the Silver State remain equally bad. The most recent unemployment rates are 7.9, 7.9 and 7.8 percent respectively for Nevada, Clark County (Las Vegas), and Washoe County (Reno). We see few signs of a near-term recovery, suggesting 2009 difficulties will be like those of the 1970s and 1980s.

Record fuel prices, rising home foreclosures, meager credit availability and a lot of bad news has caused consumers to shift their behavior. They thought it better to spend less, pay off debt and put more into savings. This mentality is clear when one looks that the percentage decreases in big ticket items--U.S. auto and truck sales (down 36.7 percent) and U.S. housing starts (down 47 percent). Additionally, fewer tourists came to Nevada. Las Vegas and Reno reported visitor volume declines of more than 10 and 8 percent, respectively.

Nevada’s near-term future depends on national factors— solving the housing mess, increasing credit availability and business investment. Timely, targeted and temporary U.S. stimulus can help, but there remain many moving parts that must be in place before things get better. The recent experience, however, leaves little doubt about Nevada’s fiscal vulnerability. The state faces two separate challenges, immediate revenue declines and restructuring for long-term fiscal sustainability.

R. Keith Schwer
R. Keith Schwer - UNLV Center for Business and Economic Research