The year just ending wasn’t a great one but it was a better one, which is probably all Nevadans could ask of it. And the year ahead figures to be pretty much the same.
While the reasons for optimism reflect well on the state economy’s inherent resiliency and strength, many of the negatives have more to do with national and international factors over which we have no control. Thus, the fate of Nevada’s economy is only partly in its own hands.
“The word I use for the state’s economy is swampy,” says Brian Bonnenfant, Project Manager for the Center for Regional Studies at the University of Nevada, Reno. “You’ve got some real soft areas and some firm areas, but nothing’s really rocky-stable anywhere.”
The year ahead, Bonnenfant figures, may be a “real peculiar one. With the elections you’ve still got a good dose of uncertainty, plus this European debt hanging over everybody. It’s definitely going to ride through 2012, so who knows? We’re so inter-related that when anyone anywhere pops now – like Greece — everybody tanks. Until the world gets back up on its feet we don’t know when things are going to come back. We’re in uncharted territory.”
Budget numbers for fiscal 2012, which started July 1 — $2.9 billion for the general fund, excluding federal and other funding sources — are tracking ahead of the Economic Forum’s projections, reports Jeff Mohlenkamp, Director of the Department of Administration for the State of Nevada. That figure is down from the more than $3 billion budget for fiscal 2011 because several revenue sources have been discontinued.
“The budget itself, obviously, is a by product of the business community,” Mohlenkamp points out. “I don’t think it necessarily drives business; business drives the budget in many respects.” Revenue to date is running “a little bit above” the Economic Forum’s projection, he adds, and should continue that way.
Indeed, Mohlenkamp continues, sales tax revenue has been up on a year-over-year basis across the state for at least 14 consecutive months, and fiscal 2011 finished well ahead of budget. “What that tells us is that business has shown some moderate improvement in activity, and we think that’s a positive note.” Gaming tax revenue has been “a bit more volatile, a bit more up and down.”
Applied Analysis, the Las Vegas-based business advisory services firm, sees the state revenue coming in above expectations in terms of both sales and gaming taxes. “I think we will beat the Economic Forum’s expectation, which will leave them with what I think is going to be a relatively healthy overage,” says Principal Analyst Jeremy Aguero. “However, the state will still have a deficit when going into 2013.”
“People are consuming,” Bonnenfant confirms. “You’re seeing visitation numbers popping in Vegas and that’s real good, although that’s not really reflecting in the gaming side, which shows there are still some limitations on how much they’re willing to spend.”
The assumption, Bonnenfant continues, was that the nation would recover before Nevada, the stampede through McCarran would resume and gaming would come charging back. “But as you’re seeing, the country really hasn’t recovered, and now they’re talking about a double recession in Europe, and that is going to have effects over here. I’m not saying we’re going to go into a double recession, but the uncertainty is going to keep you on the sidelines.”
Baby boomers, Bonnenfant adds, are “retiring in masses, and they have a ton of capital behind them. That is a positive on the consumption side.” Automobile sales recovered nicely over the last few months of 2011, “so there are signs that some big-ticket things are being bought.”
While spending on gaming has remained more or less flat, says Bryan Wachter, Director of Government Affairs for the Retail Association of Nevada (RAN), Nevadans are spending “significantly” more on non-gaming consumables. “I’m sure the Strip is going to love to hear that: they’re spending more on eating, on drinking, on shopping, on entertainment.”
People continue to arrive, as well. “What we’re seeing,” says Wachter, “is the population increasing here in Nevada — not to where it was, certainly, before. But we’re seeing more out-of-state drivers license surrenders at local DMVs. We’re seeing more housing units that are connected to the power grid. And we’re starting to see a little bit of a rise in school enrollment, which is something that in the last two years we had seen a dramatic decrease. Those numbers are starting to come back.”
The state is also seeing more retirees moving here, something Wachter calls “one of the strongest strengths that the retail sector has. Retirees, primarily Baby Boomers, are healthier, wealthier and more active than their counterparts were from the World War II era. They’re becoming a constant for the retail market.”
RAN executives say they believe that the strengthening of the consumer base for retail is something to be optimistic about. “We’re also seeing visitor spending rise,” confirms Wachter. “Not only are we seeing more people coming to Nevada, but the amount of money they’re willing to spend has increased from last year.” The restaurant sector – Nevada’s second-largest in terms of taxable retail sales volume — are doing fairly well despite the sluggish economy.
Overall, Applied Analysis looks for modest single-digit retail growth throughout most of 2012. Danger lurks, however, in the form of growing internet-based retail activity. In Nevada, online sales activity is expected to grow two to two-and-a-half times more than traditional retail. Bricks-and-mortar retailers may be seeing an improving market, cautions Applied Analysis’ Aguero, “but will likely be capturing a smaller share of that pie.”
Reason for Optimism
The outlook for a variety of business sectors is mostly optimistic. For example:
When it comes to tourism, Aguero sees continued increases in hotel occupancy rates and average daily room rates. Gross gaming revenues should stabilize and grow at a relatively modest pace going into 2012, he adds. The convention calendar should continue to favor Southern Nevada, while gas prices will remain a crucial variable.
With international travel comprising 18% of total visitation in Southern Nevada and only slightly lower than that statewide, the political tremors and economic uncertainty in the Eurozone have Nevada officials justifiably concerned. Domestic travel continues to improve, and tourism from Mexico, Canada and Brazil remains strong.
Joe Kelley, interim President and CEO of the Reno-Sparks Convention and Visitors Authority (RSCVA), says that the group side of business will almost certainly be weak for the first four or five months of 2012, due in part to a couple of large groups that have dropped out. Coming to town will be the Women’s Bowling Championships but not the Open Championships, which is about double the size. ”It’s still a great piece of business, but not as large as the Open.” From June the picture gets stronger, with groups like the bowling proprietors and Veterans of Foreign Wars due to arrive.
On the tourist side, Kelley says he remains just as optimistic. “As the economy continues to improve, as gradual as it is, people are wanting to take those short trips that they don’t plan out for a year. We’ve got five-million people in the Bay Area, we have good (marketing) presence in that market and we’re seeing some good things.”
Indeed, tourism figures in Washoe County, primarily Reno, Sparks and North Lake Tahoe, have been up for the first several months of the year over 2010. “Of course, I don’t know if that’s because last year was just so bad,” Kelley adds, “but we’re pretty optimistic.”
Getting Back to Work
Statewide, job growth is expected, but nowhere near the scale everyone is hoping for. Employment “may be slightly better, but overall it’s going to be generally flat,” projects Jered McDonald, Economist for the Research and Analysis Bureau of the Nevada Department of Employment, Training and Rehabilitation (DETR). “We have seen some general trends showing improvement in leisure and hospitality and some of our tourism industries. They’ve kind of picked us up over the last year, and we would expect to see that trend continue into 2012.”
To do better than that, McDonald says, “We would have to see a pretty good pick-up in the growth at the national level, and it would have to trickle down to Nevada.” The state would also need to see its housing market turn around, which isn’t expected any time soon. “Our commercial development is pretty much at a standstill, as well. We have high vacancy rates and really no need to do a lot of building in the near future. It’s just going to take some time to get out of this sideways trajectory.”
Aguero says he is looking for core employment (total employment less construction and government) to be up in excess of 1% in 2012. “Over the past four months you’ve also had rises in construction-related employment in Southern Nevada, which we think is very material when combined with the fact that the tourism industry is adding jobs per hotel room again.”
The employment scene will continue to experience fits and starts, according to Bonnenfant. “There is really no silver bullet out there. This renewable game is being grossly fed by federal stimulus money and other types of outside money, rebates and abatements. But they’re looking at cutting a lot of these support systems.”
The real estate picture is, well, what it is.
Housing, says the Center for Regional Studies’ Bonnenfant, is “still such a mess with all the distressed properties. We’ve got years of inventory still to go through.” Stringent new laws about how banks handle distressed properties, he adds, will slow the process down considerably.
“We have about 100,000 people in the state of Nevada that we would classify as near foreclosure,” notes Aguero. “That ranks among the nation’s highest in terms of delinquency and ‘serious’ delinquency.” Clearly, the housing market isn’t finished struggling. “We don’t see anything in terms of significant upward mobility in prices.”
House prices will likely remain stable throughout 2012. Strategic default on homes brought about by, among other things, payment fatigue will continue, with many deciding they are better off walking away than continuing to pay on a severely upside down real estate asset. As for commercial real estate, the industrial vacancy rate stands at about 18%, says Aguero, with retail standing at 11% to 17%. Both figures, he adds, are at or near all-time highs, “and prices continue to fall.”
The march toward eventual full recovery continues.
At the state level, budget funds will continue to come from the usual suspects, gaming and sales taxes. Sales taxes are growing at a relatively health 5%-plus clip, and should continue to do so. Gaming tax is the second-largest general fund source of revenue for the state, and it has likewise seen improvements.
“Those two items, gaming and sales, make up about 50% of the state’s general fund budget,” Aguero points out, “so if those are moving in the right direction the state is probably not doing too badly.” Also expected are improvements in the modified business tax, which is the state’s payroll tax. Applied Analysis is looking for continued increases in both hours worked and average weekly wages.
“The Economic Forum was very conservative in 2011 when they made their projections on state revenue,” Wachter suggests. “It would be very disheartening to see the revenue not increase from what they projected. The way the indicators are looking, it appears as if the revenues are going to exceed the projections from the Economic Forum.”
“Nevada has still got a long way to go to get back to anywhere near where we were,” Mohlenkamp suggests, “but I think we’re off the bottom now and on an upward trajectory. How steep that upward trajectory is is something that is a little hard to tell.” There remain, he adds, a host of national and even international factors playing themselves out that will have significant impacts on the state’s overall financial health.
“The comparisons are favorable because 2010 was such a difficult period,” Aguero concedes. “The first half of 2011 was also a pretty difficult period, to say nothing of the fact that in 2011 you had a tsunami with nuclear implications, gas prices spiked, and there were domestic and international debt challenges, tornadoes, hurricanes and incredible snow storms all in a single year.”
The state is adding jobs, people are going back to work and consumers are consuming again, says Aguero, “but that doesn’t mean that we can sugarcoat what’s going on with our economy. We are going to remain at or near the nation’s highest in terms of bankruptcy, foreclosure and unemployment. That will be a drag. This recovery is going to be measured in years, not months.”
Nevada should, on the whole, fare better than neighboring California – admittedly, though, a more or less apples-to-oranges comparison. “California is a state that is ten times our size and provides services that are in some ways different than what the state of Nevada provide,” Aguero says. “California is going to have challenges whether the economy is growing or collapsing.”
Aguero warns rightly against painting the entire economy with a single brush. There will, of course, be sectors that will continue to struggle, construction among them. “Construction has lost 70,000 jobs over the past three and a half years. It’s only added back about 3,000 jobs from the trough to where we are today. I would temper any of my comments by noting that some of the favorable nature is due specifically to the fact that when we’re as low as we are, the bar for growth is relatively modest.”
Bottom line: it could be worse and projections are that it will get better.