Sunny days continue to dominate Nevada’s economic forecast, but into each life some rain must fall. Even in the desert, even in Nevada. Though economic downturns and recessions are inevitable, it doesn’t mean individual businesses must suffer. The key to weathering such financial storms is preparation, and you don’t have to be a Boy Scout to realize the ideal time for planning is while the sun is still shining.
“One of the reasons we have recessions,” says Thomas Cargill, professor of economics at the University of Nevada, Reno, “is expansions.” Even in the 1860s, he explains, economists spoke of expansions causing recessions. These cycles — and the economy is cyclical despite Nevada’s long-standing good fortune — are nothing new.
Local & regional forecasts at 11
For decades, economists have been trying to find surefire precursors of recession. But predicting the future of the economy is no more accurate than predicting the weather. It’s not too hard to forecast rain when the flood is washing cars down your street. “Like they say, ‘Hindsight is 20/20,” says Cargill, “Foresight a little less. Sometimes we don’t know until we’re six or nine months in.” But that doesn’t mean there aren’t signs. Increased unemployment, declining interest rates, increased bankruptcies and lower prices are all signs we are in a recession. Before the slump, however, look for opposite signs — high interest rates, low unemployment, fast economic growth. Nevada is ripe for an economic downturn, but Cargill says we’re heading for a soft landing, a slowdown, not a full-out recession.
Keith Schwer, director of the Center for Business and Economic Research and a professor of economics at the University of Nevada, Las Vegas, points out more specific signs. The National Bureau of Economic Research, a think tank out of New York, is the home of those who declare a national recession. But how do you beat them to the punch? Monitor the same things they do. There are four general categories to look at if you’re trying to forecast the economy, according the Schwer. The first is the use of indices, especially leading indicators — those that show a downturn before the rest of the economy. Some use weighted averages, others use the individual indicators. For example, one of the indicators that tends to feel that ever-downward pull of gravity before the rest is the stock market, which leads economic ups and downs by six to nine months. If a stock market dropped by 15 percent and stayed down for as much as a year, it would be a worrisome sign, according to Dr. Sung Won Sohn, senior vice president and chief economist for Wells Fargo.
The second method is to monitor survey results. The two primary examples are performed by the University of Michigan and the National Conference Board, both of which look at consumer sentiments.
A third method is to monitor interest rates, in particular the spread of those rates (long-term interest rates less short-term rates). When the spread is consistently negative, it is an indicator of recession. Sohn adds that when a recession is approaching, the short-term rates equal or exceed long term rates. Tod Little, chairman and CEO of Silver State Bank in Henderson, says we are still in a favorable interest rate environment. “If the prime went up another 200 base points, to over 10 percent or 11 percent, and mortgage rates were over 10 percent, that would have an effect on the economy.” Right now, those rates are at about 8.5 percent.
The fourth method is to check monetary aggregates (definitions of money the Federal Reserve publishes reports on), which tend to turn down with the business cycle.
At a local level, Schwer looks at leading indicators (or other economic series) and surveys, none of which indicate a downturn in the next six months. Little, of Silver State Bank, tracks such categories as new home sales, how many want ads are in the paper, commercial real estate vacancy rates and hotel occupancy rates — all the things that factor into our local economies. “There are no longer 20 cranes in the sky on Las Vegas Boulevard,” says Little, but the economy still looks good.
A slight chance of snow?
Most businesses feel the cold when the economy goes south for the winter, but not all tank with the economy. Some companies, such as pawn shops, financial institutions managing bond prices, bankruptcy law firms, businesses dealing with divestitures, sellers of gold and collection agencies all tend to be counter-cyclical and therefore do well during economic downturns.
Cargill warns the state should keep an eye on construction activity. “It’s such a huge part of our economy,” he says, “that any slowdown in construction will have an adverse affect on the state. Construction is one of the most cyclically sensitive industries.” Sohn says that sometimes recession can be good for homebuilding due to the lower interest rates. “[The home-building industry] tends to slump, just before a recession,” he says, “making it a good indicator. When the economy heats up, interest rates go up, which traditionally hurts the housing market.”
According to Little, sometimes it is not a particular type of industry that is hurt by recession, but rather a particular type of thinking. “A lot of construction companies don’t cut back on expenses quickly enough to be able to survive,” he says. “Real estate agents or builders who are caught with a lot of inventory going into a recession will have problems because the sales will go down. It’s all a timing issue.”
Got your umbrella?
Saving for a rainy day is seldom bad advice. Foresight and careful plan-fling go a long way in the business community, and even farther when plan-fling for recession. “The longer the expansion,” says Cargill, “the sloppier businesses get in managing their resources. They grow more overconfident during expansion, start to believe their own press releases, and think they can’t make a mistake. The more businesses think this way, the more will make mistakes. Each individual business thinks they can get away with it, but collectively they all can’t.” Companies need to be watching their budgets and make sure that the market is there and will continue to be there when hiring new employees or expanding operations.
Little points out that one of the mistakes many companies make is not watching their accounts receivables. ‘They don’t make sure receivables are collectible and current,” he says. “They continue to be sales driven instead of making sure the sales they make are collectible.” A lot of businesses let accounts receivable get away from them, then the economy heads downward, and suddenly they can’t pay their own payables. “If you perceive the economy slowing down,” says Little, “make sure your receivables are in good shape and you don’t have too much inventory or debt.”
“Diversify, diversify, diversify,” says Cargill. He says the whole state should be reducing dependence on gaming. While we cannot necessarily cut back on our dependence on tourism as a whole, it is important to keep in mind that travel is one of the places people cut back on during a slowdown. The more the state focuses on service activities, the more vulnerable it is to a national slowdown.
Sohn points to diversity as well. “If you’re only selling in Nevada, try other states,” he says. “If you’re only selling in the U.S., try overseas. The market in your backyard might suffer in a recession, but other places might not.” Product diversification is important, too. A more limited line is more sensitive to economic ups and downs.
However, if you wait until a recession to reduce inventory, tighten up on receivables, diversify or reduce debt, it’s probably too late. “Monitor the economy in order to make good decisions,” says Schwer. “You don’t want to take a risky position in a soft economy.” Some businesses will feel the temptation to make long-term decisions based on short-term gains. “There’s nothing we can do to stop economic fluctuations,” says Cargill. “All individuals can do is insulate themselves.” By being vigilant and realizing today’s success can be tomorrow’s failure, a company can weather the storm. It is important to remember that success is ephemeral.
Sunny with a chance of clouds
For now, Nevada is looking good economically. But isn’t that a sign of a downturn to come? Of course. That’s what “cyclical” means. But Little says there are enough projects on the books to keep the momentum going for at least another two years. Sohn says we’re okay for at least six to nine months. “The last five or six years have been unusual,” says Cargill. “It’s hard to imagine the economy continuing at this rate.” Of course, not all picnics are rained out, and not every ski season comes when predicted. Plan ahead, buy your umbrella while you still need sun screen, and wait. In the end, your guess might be as good as anyone else’s, so you’d better be prepared.
