Amid some pessimism, we see a good U.S. unemployment rate below 5 percent, but inflation topping out at the upper end of the comfort range. The core consumer price index (CPI) is growing at an annual rate of 2.8 percent.
With inflation posing a concern, the Federal Reserve has moved the Federal Funds rate from 1 percent to 5.25 percent in a series of steps. However, with the prospect of weaker housing, auto and other consumer durable markets, the Fed has seen reason to take a pause.
As inflation has picked up, the long-awaited housing market slowdown got underway. The indicators show recent U.S. housing sales declined 13.3 percent, and auto and truck sales declined 4.8 percent. With slowing housing and auto markets and a recent sharp retreat of oil prices, the outlook calls for less inflation and slower spending ahead.
The U.S. economic picture, though still comfortable, gives reason to watch for danger signs. The most notable concern is for deflating housing asset values, which could cascade into a recession.
Las Vegas and Reno have experienced rapid housing price appreciation and could be vulnerable to market corrections. Abundant anecdotal evidence, such as price concessions by sellers, shows slowdowns occurring. Residential permits are down 37.4 percent in Las Vegas for August 2006 compared to the same month a year ago, and permits are up moderately (by 3.8 percent) in Reno.
With good investment prospects for the Silver State, however, one might expect more rapid market corrections than in slower-growing areas. Indeed, the trend of job growth in Las Vegas is at 5.9 percent and 4.4 percent in Reno – rates well above the national level of 1.3 percent. Therefore, though there may be a greater housing market overhang in Nevada, strong growth makes adjustments quicker, other things being equal. All in all, we foresee weaker housing markets, but things will hold up in the Silver State.