“It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of light, it was the season of darkness, it was the spring of hope, it was the winter of despair.”
A Tale of Two Cities
In 1858, but he may have been gazing into a crystal ball and looking ahead to today. Is there anything in them we do not see now?
Today’s headlines scream out, “Claims for unemployment rise faster than expected”; “Casino stocks fall on rising anxiety”; “Small business staffs shrinking across the state”; “Bailout no quick fix for the Valley”; “Retail faces empty spaces”; “Las Vegas real estate ‘is in the toilet’”; “Did airport grow too far, too fast?”; “Are the Las Vegas Strip casinos facing bankruptcy?”; “Las Vegas begins belt tightening”; “Nevada’s economy dead last.”
So, are things really that bad? The short answer is yes. The more complete answer is yes – and they may get even worse before they get better. However, there is also a bit of good news. Getting 2009 projections has been difficult; many forecasters say they require October and November data before they can forecast 2009. Others declined outright to consult their crystal balls. “Mine shattered earlier this year,” said one.
So, as we gingerly tiptoe through the broken glass of shattered crystal balls, let us look at some individual segments of Nevada’s economy that impact us all.
In August, Nevada’s Research and Analysis Bureau had to adjust previous employment projections to reflect the new economic environment. During the two months since August, the economy has worsened more than anyone anticipated.
In September, Nevada’s unemployment rate increased to 7.3 percent, the highest it has been since November 1985. Current projections suggest it will average around 8.6 percent for 2009, peaking at 8.7 percent by the end of the 3rd Quarter, which equates to approximately 120,000 people out of work.
State economist Jered McDonald expects the construction industry to continue shedding jobs in 2009 because the bottom of the residential market has not yet been reached and commercial activity will slow due to the credit freeze and declining demand. A number of large casino resorts will wrap up construction late next year – their openings will add thousands of jobs, yet the construction industry will find itself without replacement projects, resulting in more construction workers struggling to find work.
McDonald also sees employment in the finance, insurance, administrative and support service industries suffering in 2009. On the other hand, he expects mining will continue to improve, given high gold prices and healthcare and social services are also expected to grow.
There is some good news from the Department of Employment Training and Rehabilitation (DETR). Despite the increase in unemployment claims, Nevada’s Unemployment Insurance Trust Fund remains healthy enough to continue paying unemployment benefits, unlike some states which have begun running out of funds.
On the gaming/tourism front, passenger counts at the Las Vegas and Reno airports continue to fall. In Las Vegas, traffic was down 4.8 percent for the year and nearly 10 percent in September. Reno reported a 13 percent decline during August and a year-to-date drop of 9.1 percent. At press time, September figures has not been released for Reno. While no one from McCarran International Airport would comment, Krys Bart, president and CEO of the Reno Tahoe Airport Authority admits she has no clairvoyant tools, but expects passenger counts to level off in 2009 with no increase coming until 2010. She noted that with fuel prices leveling off, the airlines are starting to make money again. “I don’t see the drop in flights and passengers continuing thanks to the improvement in fuel prices. By December of this year, we should have seen the worst of it.”
Average daily auto traffic into the state is also down significantly due to the failing economy and record high gasoline prices. The impact of falling gas prices in October is yet to be determined.
The drop-off in visitors, however, is not manifested in hotel occupancy rates, especially at major Las Vegas Strip hotels. “The good news is, we’re able to see that city-wide occupancy is holding up well,” said Alan Feldman, MGM-Mirage senior vice president of public affairs. “We are clearly having to lower room rates to do that.”
Feldman tempered his optimism, however, by pointing out that visitor numbers from the Las Vegas Convention and Visitors Authority only extend through August. “We won’t see an appropriate forecast until we see the September and October numbers,” he said, noting that the financial markets did not really get hit hard until September.
The problem of lower visitor counts is exacerbated by the hard fact that those visitors who do come are spending less. “Now that gaming is readily available throughout the world, we [Las Vegas attractions] are much more likely to be a discretionary spending item,” said Dr. Keith Schwer, director of UNLV’s The Center for Business and Economic Research. “The income of households is going down, so spending in grocery stores and on other necessary goods will also be affected and it will certainly show up in the spending for travel and tourism.”
Brian Gordon, principal at Applied Analysis, which provides business advisories on real estate, economics and gaming, predicts 2009 will be the bottom for gaming. He also pointed to modest declines in visitation and noted that consumers are spending less, resulting in lower gaming revenues. “We expect to see continued softness over the next six months, but as we move into the latter part of 2009, the comparisons to the prior year will be much easier to achieve, with some upward movement possible by the end of 2009.”
Unwilling to speculate about potential gaming bankruptcies, Gordon pointed out that gaming is very capital intensive, which can be very challenging when capital markets are tight, adding that some local gaming companies may be required to raise capital. “I don’t think anyone forecasted the price devaluation of companies’ stock that we’ve seen so far, so it’s difficult to forecast where they will be in the future.”
As for future projects, or those already underway, Gordon believes it will be extremely difficult during 2009 to reignite those that have not started construction or have shifted timing, again pointing to limited access to capital. His comments came just one day before Boyd Gaming Corp. announced that its $4.8 billion Echelon project on the Strip would not be restarted in 2009 as intended. “We’ll see very little activity moving forward or commencing during 2009, with the next wave of construction activity being post 2009,” forecasted Gordon.
One bright spot is rapidly rising home sales. In Southern Nevada, single-family home sales in September rose 9.4 percent over August and were up 181.1 percent from September 2007. Sales of condos and townhomes were up 81.2 percent over September of last year. Most of the increases are attributable to the drop in the median price of a single-family home from $210,000 in August to $195,000 in September, a 7.1 percent decline for the month and a 31.8 percent decrease from September 2007. Unprecedented foreclosures continue to drive home prices, resulting in two out of three home sales in Las Vegas over the past few months being bank-owned properties, according to Patsy Kelley, president of the Greater Las Vegas Association of Realtors.
New home building permits are at their lowest levels in decades, Dennis Smith, president of Home Builders Research, Inc., said it will be roughly the same in 2009. There has been an exodus of homebuilders from Nevada over the past 18 months and Smith expects more to leave or shut down operations next year due to the tight credit situation.
Smith hopes the federal bailout will have a positive impact in 2009. “It will have to,” he said. “It can’t be allowed to get much worse.” With homebuilders leaving and home sales up, future foreclosures notwithstanding, Smith thinks it will be 2010 before the inventory of existing homes for sale is reduced to where homebuilding will have to resume to stave off a potential housing shortage.
Commercial real estate is also declining, according to Gordon, who points to significant construction activity during 2008, but expects it to slow in 2009. “We’ve seen vacancy rates climb in the office market. We’ve also seen vacancies in the retail sector nearly double from where they were a year ago and industrial products have seen escalations in overall vacancy rates,” said Gordon, explaining that financial markets will probably limit the amount of space constructed over the next year.
He anticipates demand in commercial markets to remain soft as business owners become more cautious with expansion plans and relocations. He also sees an increase in commercial foreclosures over the next six to 12 months, and predicts it will be sometime beyond 2011 before vacancies of commercial properties return to the levels of recent years.
On a positive note, Gordon believes there may be a resetting of land values which will create opportunities for development projects that were previously unfeasible from a financial standpoint due to land prices. “Devaluation in raw land prices creates challenges, but will also likely create opportunities for some more viable projects.”
In an effort to pull the nation from its economic crisis, the federal government is pumping $700 billion back into the economy, mostly going to banks. It is supposed to stem the bleeding of banks – though some banks have already been forced into closure – and help ease the credit crisis. But will the bailout help Nevada’s homebuyers, developers and other businesses during 2009?
“Yes,” claimed Richard Weiss, executive vice president and chief investment officer of City National Bank, who believes that “All the medicine the government has been administering is starting to take effect. We’re seeing ever so lightly some of the positive effects already,” he pointed out, while acknowledging they have not trickled down to individual homeowners or mortgagees yet, but no doubt will do so in 2009.
He concedes that during 2009 there is likely to be further restructuring – notably mergers, takeovers and additional failures – of some Nevada banking institutions, “The Treasury and the government, generally speaking, are doing everything they can to make sure that the stronger banks survive and are in a position to help out or take over the weaker players.”
Weiss sees several positive indicators for 2009, including signs that the credit liquidity crisis will loosen up. Acknowledging declining corporate profits and the rising unemployment that goes with them, he forecasts a bottoming out and a reversal of that trend. He also points to the cyclical nature of economic ups and downs. “As nasty as this downturn is likely to get in the coming weeks and months, it’s likely to do just as well coming back up the other side,” he believes. “2009 is potentially going to be a terrific year for tremendous rebounds globally. It may not happen in the 1st Quarter, but it’s very likely to happen in the calendar year.”
Politics and Government
Many wonder whether or not the recent presidential election will have an impact on the nation’s– and the state’s – ability to pull out of this crisis. Most likely it will, but it is still unknown if the election – both for the presidency and for Congress – will have a positive or a negative influence. In addition, the consequences may not be known for months or even years. Statewide, Democrats gained even more control of the Assembly and the Senate, thus giving the Legislature a decidedly more liberal bent with an inclination to use the powers of government in an attempt to solve both real and perceived problems.
According to the state’s Department of Taxation, taxable sales for July 2008 were down 5.2 percent from July 2007. Eight of Nevada’s 17 counties recorded a decrease in taxable sales – Carson City, Clark, Douglas, Elko, Eureka, Humboldt, Storey and Washoe. “Unemployment is spiking and the state coffers are emptying, so figuring out a way to deal with that in a manner that lets the state maintain its essential services is going to be the main challenge of the legislative session,” said Governor Jim Gibbons.
Acknowledging there is not a lot the state can do to fix national problems, the governor said his office and the Legislature need to continue to provide state services in an effective way. Ben Kieckhefer, his communications director, said the first step is to create a balanced budget proposal to submit to the Legislature in 2009.
“We all share the responsibility of a balanced budget,” said Kieckhefer. “One of the things the governor is prioritizing for 2009 is a focus on some kind of a savings requirement that revises the state’s spending cap,” adding that, “During good times, when money is rolling into the state’s coffers, the state needs to be frugal and save some of the revenue in order to carry us through the downturns we know will come.” He emphasized that the state needs good fiscal management and the governor, “Hopes to work with lawmakers as we go forward.”
Assembly Speaker Barbara Buckley of Las Vegas agreed with the governor that the biggest challenge facing the state is the economy. She believes there are innovative revenue ideas that should be developed to try to stimulate the economy and cites that as the reason she has been meeting with prominent Nevadans and hosting a series of town hall meetings throughout the state.
Buckley said she plans to introduce legislation to overhaul the way the state structures its finances. One idea is to create spending priorities. Another is to create a new rainy day fund that would be structured as a forced savings account that would put away one or two cents of every new dollar into an account, “So that we end the boom or bust cycles that are causing us to waste taxpayer money.”
Since you can rarely separate partisan politics from government, the Buckley forums are seen by Republicans as an opening salvo in the run they expect her to make for governor. Kieckhefer has been quoted as branding Buckley’s talk of restructuring the state’s fiscal house as, “Code for tax increase ideas,” and indicated the same terminology was used six years ago when the last tax increase was enacted.
Forecasting 2009 is problematic for several reasons. Few people living have seen economic turmoil like we are experiencing today and many of those supposedly “in the know” are reluctant to go out on a limb and make a forecast. It is likely that the constant releasing of bad news could lead to a self-fulfilling prophecy. On the other hand, sugar coating the news to mislead the public will inevitably lead to an even greater lack of consumer confidence.
Perhaps that is why in the Review-Journal’s comic strip, Prickly City, a character said “We have nothing to fear but fear itself.” “No,” responds another, “I fear we have nothing.”