As we prepare to close the book on 2009, we Nevadans find ourselves in a long, dark tunnel. Our unemployment rate is over 13 percent; only Michigan’s is worse. We have the highest deficits, and have experienced the greatest fall in personal income. Nevada’s foreclosure rates are the highest, and its homeowners the most under water. Moody’s Ratings calls Nevada’s recession the worst of any state.
Meanwhile, our government is the smallest, and our tax burden the lowest. While historically these have been competitive strengths in drawing and sustaining businesses, they also mean that our main sources of revenue are gaming and sales tax, which are running dry, with no immediate replacements on the horizon.
However, for all the problems Nevada has faced this year, there is a light at the end of the tunnel. Most experts agree that 2010 will show improvement over 2009. In today’s world, improvement is the best we can hope for.
Behind the Numbers
To understand just how dark the tunnel Nevada finds itself in is, we must look to the numbers. As Bill Anderson, chief economist of the Nevada Department of Employment, Training & Rehabilitation (DETR), explains, three primary driving forces were behind the Great Recession: 1) difficulties in the residential real estate and construction markets; 2) problems in the national and global credit markets, resulting in a very sluggish commercial development sector; and 3) weak consumer discretionary spending.
“When you think about it, construction, development and spending drive Nevada’s economy,” says Anderson. “So those forces have hit at the core of Nevada’s economy, and we’ve suffered more than other states.”
It’s certainly been devastating for the 76,500 people who lost jobs between September 2008 and September 2009, two-thirds of whom worked in the construction and leisure/hospitality industries. Those areas hardest hit, says Anderson, are the bedroom communities – Lyon and Nye Counties in particular. Those are followed, of course, by the Las Vegas and Reno metro areas. Thanks to the mainstay of rural Nevada, mining, those areas have maintained relative economic health.
The hit to gaming has severely wounded the metro areas – especially Las Vegas, where the average daily visitor volume and amount of money gambled in August 2009 were each down 10 percent from the March 2007 peak, and hotel occupancy rates were lower than they’ve been in any August since 1984.
“We expected that Nevada’s economy would continue to decline through calendar year 2009 and that improvement would not be evident until 2010. However, the current pace of decline is somewhat higher than we had anticipated,” says Janet Rogers, economist for the Division of Budget and Planning. “Indeed, year-to-date fiscal year 2010 collections for the state’s two largest General Fund revenue sources, gaming percentage fees and sales and use taxes, are not especially encouraging,” Rogers says of projections for next year.
There has been a modicum of good news, however. The White House Recovery Office reports that the economic recovery act funding has thus far resulted in more than 5,600 new or saved jobs in Nevada. More than $600 million in federal recovery dollars is yet to come to the state. And Elliott Parker, an international and comparative economist and professor of economics at the University of Nevada, Reno, says that it appears we’ve hit bottom.
“The U.S. Gross Domestic Product rose in the third quarter, signaling the official end to the recession. Most economists do not expect a double dip,” says Parker.
“Certainly there’s an increasing level of stability. We’re not sliding like we were in the first or second quarters of 2009,” says Jeremy Aguero, principal analyst for Applied Analysis, an economic fiscal policy research firm based in Las Vegas. “In some ways we’re encouraged by flat, which is hard for us.”
Bringing Back Tourists
Between 1997 and 2007, the leisure and hospitality industry in Nevada added 77,300 jobs, according to statistics from the DETR. But since then, 30,000 jobs have been eliminated. This month’s opening of the CityCenter project in Las Vegas, which is slated to bring 5,000 more rooms to The Strip, should help tourism, but perhaps not room tax revenues. And the negatives may outweigh the positives; August 2009 marked the 18th consecutive month of gaming decline.
“People are traveling less, and even those who are traveling are economizing,” says Ellen Oppenheim, president and CEO of the Reno-Sparks Convention and Visitors Authority. “The anecdotal information I have is that our visitors enjoyed [this summer’s free events], took advantage of core activities and spent a lot less on merchandise, meals and entertainment.”
Northern Nevada conventions have also been on the decline, with participating companies purchasing smaller booth spaces, and sending fewer representatives to man booths and fewer attendees to see them.
Rossi Ralenkotter, president and CEO of the Las Vegas Convention and Visitors Authority, says that visitor volume in Las Vegas was down 4.7 percent for the first nine months of 2009, as compared to the same time last year, and the number of convention visitors is off roughly 27 percent.
In 2009, Las Vegas became home to the first ever launch event for the Sports Illustrated swimsuit issue, and held the first non-Canadian NHL awards banquet, both of which helped bring visitors. Additionally, Las Vegas was host to the greatest number of Tradeshow Week 200’s largest conventions in North America for the 15th consecutive year in 2008, increasing its number of those shows from 45, in 2007, to 49.
“Room occupancy is nearly 83 percent, with more than 25 [percentage] points above the national average. We’re looking forward to closing the year strong with a number of events. December will bring the opening of the CityCenter, which we expect to provide a boost of between 2 and 5 percent to visitation in 2010,” Ralenkotter says.
The plan going forward, says Ralenkotter, is to continue building on the wildly successful “What Happens Here Stays Here” campaign, while working to attract more new special events.
Meanwhile, the RSCVA’s recent research into people’s perceptions of the Reno-Tahoe area has led to the decision to focus its marketing efforts on two groups: those who have never visited, and those who need reintroduction after being away for three or more years.
“Our research tells us that people find us exciting, a good value and easy to get to,” says Oppenheim. “They find us refreshing, off-beat, authentic, judgment-free and offering a wide range of engaging and interesting things to do. Our new marketing campaign is intended to update our image and motivate those people to come to the region, and we’ll begin rolling that out in early 2010.”
Winter also brings good news to Reno, with the Safari Club International Convention in January and the United States Bowling Congress Championships in February.
The Real Deal in Real Estate
According to numbers from the DETR, year-over-year home prices are leveling out, and month-over-month prices are actually growing in some areas. Resale activity is up by more than 50 percent over last year. But non-conventional mortgages will still be resetting well into 2010, which could mean further foreclosures and stressed household budgets.
“Housing prices may be dramatically lower than they used to be,” says Parker, “but with the price decline ending, some confidence will return to financial markets. Banks are likely to be willing to lend again, to those with good credit.”
The problem, though, is that lenders are still wary of housing prices falling further, which may stall things – especially in commercial real estate.
Borrowing start-up costs is difficult since there seems to be no end in sight to the recession. In fact, Thomas F. Cargill, professor of economics at the University of Nevada, Reno, sees the commercial real estate issue as toxic. At a recent international conference sponsored by Harvard Law, Cargill realized his fears are echoed by many delegates from around the country.
“Businesses aren’t receiving a lot more demand for their products, so bankruptcies are up. They can’t get credit, so a lot of mortgages will be defaulted on,” says Cargill. “You’re not talking to an optimist, here.”
Kevin Higgins, senior vice president with Voit Real Estate Services in Las Vegas , says that in some cases, commercial properties were devalued as much as 50-70 percent through 2009. “There was very little activity, because people were concerned if they purchased something, it would be further devalued tomorrow,” he says. “Once we were past the first quarter, people slowly came out to watch things happening. Now there seems to be a bit of a ‘feel good’ about the stock market. Now we just wait and see.” Higgins agrees that much hinges on lending. His hope is that the system is allowed to operate, and that banks are willing to foreclose and move on. This, he says, will open the door to buyers.
“Everyone’s waiting to see what they’ll do with those properties. If lenders can come to grips with that, and if there’s an effort to sell those properties off, I think there will be buyers out there for them,” says Higgins. “I think 2010 could be the year of the buy, where people look back and say, ‘Remember when I could have bought it for that in 2010?’ It could be a pivotal year.”
A Check on Consumer Spending
Nineteen percent of Nevada’s jobs and one-third of its General Fund budget are dependent on retail and its sales tax revenues. So all residents need a profitable holiday season. Unfortunately, projections aren’t favorable.
“There hasn’t been a point this year that we’ve shifted above 2008 numbers,” says Mary Lau, president of the Retail Association of Nevada (RAN).
In fact, 2008 holiday sales totaled just $3.9 billion, the lowest since December 2003. Although national Gallup poll conducted in October 2009 found that consumers expect to spend $740 per person this holiday season – up 16 percent over last year’s numbers – Jeremy Aguero says national numbers are likely to be elevated compared to Nevada, where an unemployment rate that’s 3.5 points higher than the national average will dampen spending.
“Certain areas are growing, but it’s not growing that supersedes last year,” says Lau. She explains that most growth is online and at discount venues. But discount stores, like Walmart, are double discounting, so while more sales may be generated, overall dollar figures will be less.
With spending down and new business taxes implemented this year, many retailers have cut jobs, and if they are doing any seasonal hiring, it’s for fewer people.
“Another thing that’s happening for the holidays is that retailers, especially small ones, can’t afford the inventory they once did,” adds Lau. “Lenders have had financial difficulties, so small retailers are using their personal credit cards to buy inventory. So say a consumer is looking for a new toy, and they wait to see if it goes on sale. Well, they risk not having it available.”
The new consumer mindset is realism, Lau says. “Before they might have bought the most expensive name brands, but now they’re shopping sales and discount stores.”
Gift cards are also changing shopping dynamics. While they used to be the go-to gift for the person who had everything, now they’re intended for recipients to shop after-Christmas sales. So retailers have more difficulty predicting what people will buy.
While RAN is hopeful of modest improvement in 2010, upheaval in Washington, such as the furor over health care and fear over impending new taxes, will keep consumers in cautious mode, hesitant to spend.
Keep on Truckin’
The transportation industry is feeling an interesting mix of growth and decline. Take, for example, the Regional Transportation Commission of Washoe County.
“On the challenging side is our public transportation system, which has to do with a reduction in sales tax from the past couple of years,” explains CFO Tom Taelour. In fact, sales taxes drive roughly three-quarters of RTC’s public transit, with fares comprising the remainder.
“In the last three years, [mass transit] went from being up 5.5 percent to flat in 2007, and then last year we were at negative 16 percent,” Taelour says. “This year we’ve projected a negative 10 percent, which is optimistic. We’ve also had to cut about 20 percent of our service.” He points to the failure of the 2008 ballot measure RTC-2, which would have brought additional funding.
Meanwhile, there’s good news. Voters passed RTC-5, which indexes Washoe County fuel taxes and will provide substantial funding to improve roads. “Over the course of three years, this community will have had about $250 million in new road projects, and an estimated 3,000 new jobs created,” says Taelour. Approximately $26 million in stimulus money will also help with the RTC’s new Meadowood interchange and various energy efficient capital projects, which together should generate approximately 1,700 new jobs.
In Clark County, mass transit is down 10 percent, says RTC of Southern Nevada General Manager Jacob Snow. Southern Nevada received $39 million in stimulus funding for highway projects, and $34 million for transit projects. The latter funded the Centennial Hills Transit Center and Park and Ride lot, the Central City Terminal and the Boulder Highway Rapid Transit Line.
Stimulus funds have been the RTC of Southern Nevada’s only new monies. The capital improvement program has been cut, bringing the roughly $180 million in planned projects closer to $80 million.
Yet Snow points to one bright spot. “We know that traffic is down by double digits coming into our airport, but our rapid transit on The Strip, The Deuce, is up. It’s counter-intuitive, but it’s up significantly, by about 3,000 riders per day. We think it’s because people are more value-conscious now and are simply making more trips by bus.”
As for air travel, Rosemary Vassiliadis, deputy director for McCarran International Airport, says that unlike other major airports, which serve locals and business customers, Las Vegas’ tourism and convention industries comprise more than 80 percent of their passenger counts. Yet while 2009 has had nowhere near the watermark 2007 numbers, passenger numbers have increased over 2008.
With so many events taking place in Las Vegas over the next few months, things keep looking up . Plus, British Airways has announced a daily direct flight from London, which may create buzz among other airlines looking to add routes. International bookings, Vassiliadis adds, have remained steady throughout this recession. “We’re actually attracting more Europeans than ever before,” she says.
What’s Growing?
Experts unilaterally agree that tourism and construction aren’t going to grow substantially in the near future, so the push to diversify Nevada’s economy is in high gear. But there are a few segments of the economy showing signs of life, and offering promise to prognosticators.
“The education and health services sectors are holding up,” says Anderson. “Unfortunately, in terms of numbers, they only account for less than 100,000 jobs, so it’s not big in terms of employment.” Mining, he adds, is another small point of stability.
A recent Moody’s report finds that states investing in high-tech industries and green energy will be in an enviable position, and economic development authorities in Nevada are already working on it. “With both abundant sunshine and geothermal resources, the state is well-positioned to take a lead in the development and production of renewable energy,” says Rogers, citing the governor’s interest in expanding recycling programs and using trash as a renewable energy source. Adding to the high-tech industry, the Whittemore Peterson Institute for Neuro-Immune Disease in Northern Nevada, and the Cleveland Clinic Lou Ruvo Center for Brain Health in Southern Nevada, may be magnets for a growing bio-research cluster.
Jeremy Aguero believes that Nevada needs to invest further in drawing baby boomers. “A lot of people underestimate the importance of the senior population. In a 2003 Census report, Northern Nevada was the number one destination for retiree migration. We need to maintain that positioning. At the end of the day, they’re perfect consumers; they consume goods and not jobs, which works out fairly well for us.”
Gazing Into The Crystal Ball
The consensus among the experts interviewed is that, while we won’t see a dramatic increase in our economy, we will see wiser spending and a return to a sustainable economy.
“I think it’s safe to assume that the deterioration in the economy will moderate in the months ahead, but we won’t be returning to the boom-like conditions we experienced earlier,” says Anderson. “Once we embark on recovery, our performance will be modest, but arguably more sustainable.”
“There are now fundamental changes in people’s spending behavior. Saving is going up, which doesn’t portend good news for Nevada,” says Cargill. “I don’t see the bottom falling out, but I see high unemployment. And I don’t hold out much hope for the stimulus.” He believes returns from the federal recovery act will be limited in terms of job growth, and that the concern over health care changes will affect small businesses, a primary driver of job growth.
Anderson suggests that unemployment will top out at 14.4 percent, explaining that even though Nevada had far more money in its unemployment insurance trust fund than most other states prior to the recession, we were also among the hardest hit, depleting the fund rapidly.
The state has also depleted its Rainy Day Fund, says Rogers. Nevada has established a credit line through the Local Government Pooled Investment Fund (A.B. 562) in order to meet the required 5 percent reserve in the governor’s recommended budget; as yet, no money has been drawn from it.
“Our ability to get federal funding is limited by the fact that we don’t spend the money making the match, and we often don’t meet their conditions,” said Parker. “While the Feds could bail out General Motors, they’re unlikely to find much political support for bailing out the Las Vegas Strip.” Parker also stresses the importance of good long-range choices in electing the next legislature and governor.
For the most part, most of the industries in Nevada remain in a dark tunnel. However, we are beginning to see that there is indeed a way out and a light at the end.
