Las Vegas gambled on three very cyclical industries – gambling, tourism and conventions – which all have the same business cycle timing. Each of them is very sensitive to the changes in income and the level of confidence. Most people will cut spending for gambling, vacations and conventions before they will cut back on regular monthly expenses. Together, the three industries are all doing great or terrible.  All were at the top of the cycle from early 2004 into 2007 but are all now declining. The decline will be deep and long compared to economic trends in the rest of the country because it is aggravated by high travel costs.

The size of the gamble on cyclical industries is illustrated by the huge share of retail and hotel in the Nevada construction mix.  Last year 18% of all construction starts in Nevada were for hotels, far more than the 2.6% share for the entire country. Similarly, retail construction accounted for 23% of Nevada starts last year, about triple the 6.5% share for the US.

Reed Construction Data projects that spring 2008 starts will be more than 50% below the overheated total last spring and as much as 25% below the late 2007/early 2008 trend.  Starts will be improving by the end of 2008 but will not get back to the late 2007/early 2008 level until into 2010.

The collapse of the Las Vegas single family housing market - permits are off 42% from a year ago vs. 30% for the US – weakened the local economy which was then shoved into recession by the slowdown in gambling, tourist and convention attendance. State gambling taxes were off 4% in the fiscal year just ended. Convention attendance is off slightly more.  Tourism has also weakened which is now reducing the still high hotel occupancy rate and cutting state sales tax collections. The recession has spread to all parts of the local economy.

Note that other convention, tourism and gambling centers are now having similar economic slowdowns, including Connecticut and Atlantic City. Las Vegas did nothing wrong. Now is simply the bottom of the business cycle for their key industries

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Casinos are cutting room rates and meal prices to attract more visitors. This will increase volume but may or may not increase profits.  This is a rational short term response.  Longer term, a more diversified economy is needed but it will be hard to draw new industries to what has become an expensive, union dominated city with a reputation that is repugnant to many people.

Compared to a year ago, Nevada employment is down 0.4% while it is up 0.5% for the whole country. Construction employment has dipped 8.8%, more than double the drop at the US level. Nevada hourly wages are up0.1% from a year ago compared to 2.5% for the whole country. This underestimates the income loss in Nevada where a large share of employees rely on tips which diminish before wages are cut.

Only Michigan and Rhode Island have deeper recessions according to the Philadelphia Federal Reserve Bank state economic activity indexes.

So far only single family housing and, in the last few months, hotel and retail construction have noticeable weakened.  Expect the weakness to spread to public construction very soon as declining tax collections and slim budget reserves have forced the state legislature into a special session to make further budget cuts, almost certainty including public construction.

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06/30/2008 - posted by GT

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