Economic Review Q2

Posted by jstater on July 08, 2009

Since last quarter, the recession has deepened in Southern Nevada. The Las Vegas-Paradise MSA lost 58,600 jobs between May 2008 and May 2009, sending the unemployment rate to 11.1 percent. The largest loss of jobs occurred in construction (-17.3 percent), information (-10.9 percent) and professional & businesses services (-9.3 percent). Gaming revenues and visitor volume are down compared to April 2008, and only the deep discounts offered by local hotels have improved room occupancy. The Hooters Hotel is now in default and Riviera Holdings Corp is delisting its stock from the Amex by the end of June. Several projects, including the Fontainebleu Resort, Boyd Gaming Group’s Echelon project, the Las Vegas Sands Corporation’s condominium towers, Harrah Entertainment Inc.’s expansion of Caesar’s Palace, General Growth’s Shoppes at Summerlin and the Great Mall of Vegas have seen their construction plans shelved or have had their construction delayed. Condo projects in Southern Nevada have seen their prices fall approximately 30 percent from their peak. Vantage Lofts, only partially completed, is in bankruptcy, while the Allure Condo Tower is in the process of auctioning units after original purchase contracts were cancelled. Home foreclosures remain high throughout the Valley, and apartment occupancy is at its lowest level in 10 years.

There is reason to be optimistic, however, as the United States economy might be on the verge of recovery. The rate of job losses has decelerated since its peak in February 2009 and might even level off sometime in the fourth quarter of this year. The New York Fed’s Treasury Spread model, a prediction based on the slope of the yield curve, suggests that the recovery has already begun. The spread between 10-year and 3-month Treasury rates has been above 2 percent for the last 15 months, a pattern consistent with recoveries following the past six recessions. The Conference Board’s consumer confidence index posted large gains in April and May, and is now up to September 2008 levels. The CBOE Volatility Index (also called the “Fear Index”) has dropped to its lowest closing since September 2008. Finally, UNLV’s Center for Business and Economic Research’s Southern Nevada Index of Leading Economic Indicators trended up in May 2009 compared to April 2009, though it remains 3.19 percent below the value for May 2008.

Metrics for Recovery

The keys to Southern Nevada’s economic recovery are the leisure/hospitality and construction industries. The openings of CityCenter, the Hard Rock Hotel and Cosmopolitan Hotel should add over 13,000 jobs to the leisure/hospitality sector of the economy. Unfortunately, those jobs could be short lived if those properties fail to turn a profit. Unless visitor volume rebounds, the new properties will simply spread tourists and their dollars more thinly among the existing “Strip” properties.

The construction industry needs new home inventory and commercial real estate inventory to drop before it can recover. Currently, there is a seven month supply of homes (new and resale) in Southern Nevada. Single-family home sales increased between May 2008 and May 2009 by 60.7 percent, and the median price dropped by 40.9% over the same period.

Looking Ahead

The United States might be standing at the threshold of economic recovery. While there are many signs that recovery is imminent, there is no clear evidence that recovery has started or is even guaranteed to start by the end of the year. Moreover, there are many potential pitfalls ahead, not the least of which is the potential for 30-year mortgage rates to increase as a result of massive borrowing by the federal government. Economic recovery in Southern Nevada will probably lag behind the rest of the country. We think employment and wages will have to rebound nationally before visitor volume and gaming revenue can rebound locally. Since commercial real estate occupancy tends to lag six to nine months behind employment gains, the local real estate market may not see sustained recovery begin until 2011.

– John Matt Stater

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