“The National Bureau of Economic Research (NBER) Business Cycle Dating Committee has determined that a peak in business activity occurred in the U.S. economy in March 2001. The determination of a peak date in March is thus a determination that the expansion that began in March 1991 ended in March 2001 and a recession began..”
–From the NBER Web site
Ordinarily, a year-end article about the economic outlook for the state of Nevada would be a no-brainer. You couldn’t go wrong predicting growth – growth in population, in employment, in all sectors of the economy. The only problems on the horizon would be those caused by managing runaway expansion. But, in this December following the terrorist attacks on our country, and after the official declaration that the nation’s economy has entered a recession, who can predict what lies ahead for 2002? We asked experts from several different fields for their opinions. For the most part, they were optimistic that the Nevada economy, while not as bulletproof as previously advertised, would recover quickly. Many Nevada business leaders might agree with Sam Walton, founder of Wal-Mart, who declared in the 1960’s, “I was asked what I thought about the recession. I thought about it, and decided not to take part.”
How Did We Get Here?
Early in 2001, the national economy started to show signs of a slowdown – the unemployment rate begin a gradual climb, the rate of job growth declined, and Gross Domestic Product for the first two quarters grew more slowly than during any six-month period in the past decade. The Federal Reserve Board responded by lowering the interest rate not once, but several times, in an attempt to stimulate the economy. According to the NBER, “Before the attacks, it is possible that the decline in the economy would have been too mild to qualify as a recession. The attacks clearly deepened the contraction and may have been an important factor in turning the episode into a recession.”
Although Nevada was also reporting a deceleration in its record-breaking growth rate, many statewide figures through August showed a much rosier picture here than elsewhere in the country. The state Department of Employment, Training & Rehabilitation (DETR) reported the Silver State continued to lead the nation in the rate of job growth through August, and although visitor volume and gaming revenues showed relatively low growth rates, they remained at historically high levels. However, many of the state’s rural counties were suffering from falling taxable sales and declining population because of the ongoing slump in gold prices.
When the terrorist attacks paralyzed much of the country in September and completely shut down air travel for several days, the Nevada tourism and resort industry experienced a shock from which it still has not fully recovered. Like a deep-sea diver with a kink in his air hose, the state was suddenly cut off from its life-giving flow of tourist dollars. Occupancy rates, especially mid-week, plummeted. An estimated 15,000 workers lost their jobs almost overnight, and many more had their hours reduced as resorts sought to cut their losses. The jobless rate surged 1.5 percent in October to reach 6.3 percent, its highest level in six years. Unemployed workers, or those fearful of losing their jobs, stopped spending money for non-essential purchases, creating a ripple effect that spread to the retail sector. The state saw its income from sales tax and gaming revenue decrease, leading to concern about red ink in the state budget.
Tourism Industry Responds
Bruce Bommarito, executive director of the Nevada Commission on Tourism (NCOT), reported that, although the week after the attacks was “devastating,” recovery began quickly. In fact, the Reno/Tahoe area had returned to normal weekend occupancy rates as early as the following weekend. It took Southern Nevada longer to rebound because 46 percent of its tourists normally arrive by plane, and mid-week occupancy rates in the Las Vegas area continue to lag behind normal levels.
Reports that Las Vegas had lost 250 convention bookings made the national news, but, said the NCOT head, “The people most shocked by this figure probably lived in cities that wouldn’t see 250 conventions in a 10-year period. They don’t realize that Las Vegas hosts about 4,500 conventions every year, and many of the cancellations were for very small events.” Bommarito is upbeat about the outlook for the tourism industry. Efforts by convention and visitor authorities to attract more drive-in visitors from neighboring states seem to be producing positive results. He also praised private marketing efforts by the major resorts for helping to speed the state’s recovery.
On the international front, Bommarito recently traveled to Japan “to send the message that it is safer than ever to travel to the United States.” He predicted the volume of Asian visitors will be about 95 percent of normal during the first quarter of 2002, reaching 100 percent by mid-year. “The second half of 2002 may even be better than normal,” he said. “There’s a lot of pent-up demand in the Asian market.” NCOT officials also attended a recent London conference to promote Nevada tourism to Europeans.
Bommarito estimated tourism figures overall for the first half of 2002 will be off “2 percent or 3 percent at most” and said the second half of the year should be as good as or better than normal. “This is just a glitch,” he insisted. “We are maintaining our long-term plans and programs. We are very resilient. Assuming nothing else major happens, we should have a good year in 2002.”
Economic Development
“The events of September 11 were a wakeup call for Nevada to show how important our economic diversification efforts are,” said Lt. Gov. Lorraine Hunt. “In some instances, it actually created new opportunities, as companies from large cities, especially in the Bay area, started looking for alternative locations. It’s almost like a vacancy sign went up in Nevada.”
Hunt pointed out that Northern Nevada has been successful recently in attracting industrial projects, notably the Starbucks roasting plant, to the area. Meanwhile, “phones have been ringing off the hook” at the Reno Tahoe Tech Center, especially with inquiries from Northern California high-tech firms. In Southern Nevada, two huge construction projects are expected to boost the economy in the near future. Preliminary work has already begun on a $650 million monorail project to connect Strip resorts with the downtown corridor, and Hunt estimated resort properties will spend an additional $350 million in private money to construct their own monorail platform stations. The fiscal impact of the planned Ivanpah Airport south of Las Vegas will be “significant,” said Hunt. Construction is slated to begin in 2007-2008. “Such large projects generate jobs, even in the beginning stages,” said Hunt. “Architects, planners and engineers start work long before the public actually sees any ground broken.”
According to the lieutenant governor, Nevada exports increased 36 percent between 1999 and 2000, when the total figure reached $1.6 billion. “More than 600 Nevada companies are involved in exporting goods to other countries, and they provide more than 22,000 jobs statewide. Nevada is also in a wonderful position to be a major player in the international high-tech industry.” Passage of an intellectual property law in the last legislative session, said Hunt, “makes Nevada a safe haven for talented people” and should attract more high-tech business to the state.
Hunt sees a bright future for Nevada’s economy. “We have designed our plans, and the foundation has been poured,” she said. “We are already starting to see the results of our efforts over the last two years.”
Banking
“I don’t believe we’ve seen any dramatic change in delinquencies or problem loans due to the economic slowdown or the events of September 11,” said Edward Jamison, president and CEO of Community Bank of Nevada, and president of the Nevada Bankers Association. “Income for banks decreased during 2001 because of the Fed’s lowering of interest rates. Every time the interest rate spread narrows, it eats into banks’ profitability. In my 30 years in banking, I’ve never seen interest rates reduced so dramatically in such a short period of time. They are now at levels we haven’t experienced since the 1960s. Coupled with the economic slowdown, it certainly makes for management challenges.”
Nevada bankers don’t plan to make major policy changes in 2002, according to Jamison. “We will conduct business as we do in any other economic slowdown,” he said. Jamison was reluctant to predict when an economic turnaround would occur. “We don’t see anything changing in the short term,” he said. “However, I’m confident personally about the state of the banking industry in Nevada. I’d rather be here in Nevada than anywhere else because of our resilient economy.”
Healthcare
One effect of the massive layoffs this fall was an increase in the number of uninsured Nevadans, as people lost their health insurance coverage along with their jobs. Bill Welch, president of the Nevada Hospital Association, reported that “a greater uninsured population results in more uncompensated care for Nevada hospitals. We’re not closing our doors, but it does affect profits.” The hospital association is investigating ways “to assure that people get care at an appropriate time, before a crisis sets in and they need hospitalization,” said Welch. It is supporting efforts to convince the state to release a $200,000 surplus in tobacco settlement monies in order to fund premiums for the Nevada Check-Up program, which provides low-cost health insurance for uninsured children.
The major issue confronting Nevada hospitals in 2002 is not the economic situation, but rather the continuing shortage of skilled medical personnel. “We are in a crisis state,” said Welch, “and it will get worse in 2002.” Because of the state’s rapid growth rate over the past decade, hospitals have been suffering chronic personnel shortages, especially among licensed professionals such as nurses, pharmacists, laboratory technicians and respiratory therapists. Welch is hoping the 2003 Legislature will provide some relief by funding medical training programs, but these efforts would not produce results for several more years. “The only long-term solution is education,” said Welch. “There are no short-term solutions.”
Despite these concerns, Welch thinks the average Nevada hospital will do “fairly well” in 2002 because the state’s population growth rate has been offsetting any losses from uncompensated care. “As long as we have continued growth, and that growth is in the insured population, Nevada hospitals should continue at their current level in 2002, although they probably won’t do significantly better,” he said.
Manufacturing
Ray Bacon, head of the Nevada Manufacturers Association, said the outlook for his industry is mixed. “The effects of the economic slowdown vary widely from company to company, depending on who the customers for their products are. Some of our members are having record years, and others are experiencing plant closings,” said Bacon. To counteract the slowdown, hard-pressed manufacturers are laying off people, cutting overtime and travel budgets. “Some are increasing sales efforts, but the strong dollar is not helping export sales,” he said. Rising unemployment has actually helped the manufacturing sector, said Bacon, “because there are good people available, and that was not the case a year ago.” The outlook for 2002 is impossible to predict, said Bacon. “For most of our members, we hope that spring will be better than the last few months. Industrial customer confidence is the thing we need the most.”
Real Estate and Construction
Residential construction in Southern Nevada is expected to remain about the same in 2002 as it was this year, according to Dennis Smith, president of Home Builders Research, Inc. “Interest rates are the key to the success of home sales, and we are basing our assumptions on interest rates remaining stable for six months at least,” he said. Smith reported approximately 22,500 permits for new homes were issued in Southern Nevada in 2001 and 21,500 new homes were sold. He expects to see comparable figures in 2002. “Barring more unforeseen events like September 11, our demand will be just fine in 2002,” said Smith. In commercial real estate, “levels of growth have toned down to a slower pace,” said Rod Martin, vice president of Majestic Realty Co. and president-elect of the Southern Nevada chapter of the National Association for Industrial and Office Properties (NAIOP). Martin predicts continued positive growth, even for the market his company serves, which is based on the convention and resort industry. “Our tenant mix is not alarmed,” he said. “They’re viewing it as a normal slowdown.” Rick Smith of RDS/Insight Holdings estimates the market will improve by mid-2002, and will return to a position of strength in the third quarter. “Long-term,” said Martin, “we have very little concern. Our local economy has been barreling along, and even if we have a down year or a bit longer, we have a tremendous base to build on. We’ll be all right.”
Michael Schnabel, managing director of the Reno office of Colliers International, believes 2002 will see a “firming up” in the Northern Nevada commercial real estate market, which presently has higher-than-normal vacancy rates. Inquiries from clients, which dropped off after September 11, are picking up again. “The Reno market is staying pretty stable,” stated Schnabel. In the industrial market, Aaron Paris, chief operating officer of DP Partners (formerly Dermody Properties) said he expects vacancy rates to increase no more than one or two percentage points before the market swings back up again. “By May 2002 vacancy rates will be much better, and we’ll see some construction again in the third quarter,” he said. Residential construction in Northern Nevada is also expected to improve next year, according to Bob Jones, executive director of the Builders Association of Northern Nevada.
Uncharted Territory
“Financial people say the [national] downturn will be relatively short, based on theories that the economy has strengths, especially in the technical area. Naturally, everybody is hoping for it to be short,” said Dr. Keith Schwer, director of the Center for Business and Economic Research at UNLV. “Having said that, however, it looks like the downturn will last about a year from beginning to end, which would mean the recovery would start in the second half of 2002.”
The most important variable in determining the 2002 outlook may be the confidence level of the American traveling public. As the DETR report noted, “There is no formula to predict the effect of fear on economic behavior.” Until people, both in the U.S. and abroad, feel safe traveling by air and have enough confidence in the economy to risk spending money on vacations, our largest industry will continue to struggle. Bob Murdock of DETR predicts 3.3 percent job growth for 2002, compared to 2001, which he estimates will end up between 3.6 percent and 3.7 percent. He estimates unemployment for 2002 will average 5.6 percent.
Gov. Guinn reports the state “absolutely” has enough of a safety net to last until the economy recovers. “When consumer confidence rebounds, we’ll be fine, because we’ve got a great product. During this slowdown, we have yet to dip into the rainy day fund,” he said. “We know we’ve been hurt so far and we have taken necessary steps as events have unfolded. Our response will be to decrease spending to match revenues. We must strive to return to business as usual.”
