This week on Nevada Week ... As interest rates rise, where does Nevada's economy stand, and where is it going?

♪♪♪ Support for Nevada Week is provided by Senator William H. Hernstadt.

-Welcome to Nevada Week.

I'm Amber Renee Dixon.

If you look at recent reports and headlines, you might find yourself confused about the state of Nevada's economy.

Nevada's unemployment rate in March was the highest in the country at 5.5%.

To tackle inflation, the Fed once again raised its key interest rate, and there's a lot of talk about a possible recession.

On the other hand, tourism is strong.

The Las Vegas Convention and Visitors Authority says total economic output related to visitor spending reached a record $79.3 billion last year, up nearly 25% from the previous record set in 2019.

So to help us make sense of all this, we've gathered a panel of experts.

Brian Gordon is a Principal with Applied Analysis; John Restrepo is a Principal with RCG Economics; Mike PeQueen is a Managing Director and Partner at High Tower Las Vegas; and Andrew Woods is the Director of UNLV's Center for Business and Economic Research.

Gentlemen, welcome back to Nevada Week .

Let's start with the Federal Reserve raising its key interest rate for the 10th time in over a year on Wednesday.

The purpose is to rein in inflation by curbing spending, but we know Southern Nevada relies heavily on tourist spending.

So what is the outlook for Southern Nevada if the Fed wants to rein in that spending?

(Brian Gordon) Well, look, the Federal Reserve Chair has been pretty vocal about trying to tamp down the economy in order to get inflation in check, and I think we've started to see some slowing in the overall rate of increase in inflation.

And so I think that's a positive in doing largely what it's expected to do.

We saw the latest increase, and we'll see how that sort of plays out going forward.

But our tourism-based economy is dependent on discretionary spending.

So the extent that we have consumers across the country that are slowing their spending overall and it starts takeing a little bit more hold, certainly we want to be mindful of that.

As of yet, you just said at the top of the show, we've seen some pretty significant spending from visitors coming here to Las Vegas, which is really important to our overall economy.

-Well, and the Fed started this a little over a year ago.

So have we seen-- How much slowing have we seen in spending, Andrew?

(Andrew Woods) Well, I think the American consumer continues to surprise us.

And in terms of spending, it continues to be pretty robust for an economy that after three years of the pandemic, and some of the worst effects, still continues to move forward.

So I think as much as we keep seeing, you know, I compare it to your car with the check engine light on.

The car keeps driving, even with all of these warnings out there that things are going to slow.

And the American consumer continues to spend.

We see that in spending numbers.

We see it in hiring.

Even this week, we had the jobs openings number came out.

9.6 million job openings is still a very strong economy in terms of the demand for jobs in both the country and in Southern Nevada.

You see that's still with leisure and hospitality.

So I do think we will, you know, things are supposed to slow, but they continue to surprise us.

-Why is Nevada's unemployment rate the highest in the country, Mike?

(Mike PeQueen) Well, we have an unusual economy, as these gentlemen around the table know, that when the economy turns bad like it did during the quarantine and the shutdown, we suffered more than the rest of the United States.

And so we lagged behind.

And as Brian pointed out, we are the ultimate discretionary choice when it comes to consumers spending their money.

So we have the most wildly unpredictable unemployment rate among the nation states.

And so that is what sets us in a different situation.

I think that what we need to remember is 5.5% is still not terribly high.

It's the highest in the nation, but it's still quite healthy.

And I think that there's this pent up demand for recreational travel, and Southern Nevada is benefitting from that.

And that momentum, along with a few other tailwinds that are very important, could help Southern Nevada weather whatever kind of downturn might be on the horizon.

-What else is out there that will help Southern Nevada?

-Well, think about it.

The question is whether or not we come into recession in the next 6 to 24 months.

That's what everybody is trying to figure out, and I don't have the answer.

But we have the Formula 1 race coming up, we have the opening of the MSG Sphere, we have the Super Bowl, and we have the ramping up still of two of our biggest segments in the tourist area, which is the international visitor and the convention business which are still not fully back to full strength.

Those are tailwinds that, if there is a recession in the nation, could help Southern Nevada feel it less than other parts of the country.

And that could be our revenge on the nation for how we suffered during the shutdown.

-John, are we going to face a recession?

(John Restrepo) All the discussions in the next 6 to 24 months or so-- You know, Chairman Powell yesterday, General Powell said he doesn't think there will be a recession.

He didn't-- -Federal Reserve chairman.

-Federal Reserve chair.

Didn't say not happen, but if so, maybe a mild recession.

It's been very surprising.

We are in a unique place in the economic history, if you want to call it that, where the Fed has raised rates 10 times in 14 months.

5.25% the rate has been increased.

Yes, the unemployment rate nationally is still 3%.

Nevada is only 5%, which is relatively low but considered high relative to other things.

And so they're going to tamp down demand.

They have.

So demand has stayed a lot stronger than everyone thought.

And so the question is: What is keeping demand up?

It's-- Obviously, consumer spending is a huge part of the economy.

So the question is: Are consumers taking more debt?

It looks like they are.

The savings rate dropped off again.

So a lot of this great spending we've seen recently, there's a cost to it.

The question is: How long will they continue spending if rates keep going up?

Now, the Fed has indicated, Chairman Powell, they're not going to increase rates again anytime soon.

Maybe probably not in June.

He doesn't think so.

But we're still going to have that elevated interest rate.

What does that do over time?

We don't know yet.

We've never been in this place before.

The big issue for us that saved us is we have a very constrained labor market.

You know, a lot of folks retired after the pandemic, so our labor force participation rate is relatively low.

So there's a shortage of workers.

And as long as there's a shortage of workers, things will keep going.

You know, there won't be any massive layoffs.

There may be a reduction in hiring, I think, which the Labor Turnover Survey is showing.

Maybe it's people hiring less, but we're not seeing that kind of traditional really slow down and creating a great-- another recession based on what we've seen today, because of excess demand in the system.

-Andrew?

-We have right now, nationwide, 1.6 job openings to essentially every job seeker.

And a lot of it's still being driven by leisure and hospitality.

1 in 4 jobs in Southern Nevada are dependent on leisure and hospitality in some shape or form, and it's taking a really long time for leisure and hospitality as an overall employment to get back to where it was prepandemic.

So if we were to see a slowdown, I think it's-- We wouldn't necessarily see layoffs as we're seeing in tech sector.

Areas that expanded during the pandemic, I think you'd see more of these hiring freezes or kind of slowdowns.

Also remember, going back to John's point on the interest rates and federal funds rate, the economic theory says it takes anywhere between 6 months and 18 months for those to really work their way through the economy.

It's only been over a year since we even started raising interest rates.

I mean, it is one of the fastest rate increases we've, I think, seen in modern history.

That's why you're seeing some of these concerns in the banking sector.

But it will take time for this to really feel the impact, which is why we all think it's coming around the corner.

And it may be coming, but it's also taking longer than maybe we anticipate.

-Anybody have an estimate on when we may see this?

Brian, you didn't comment on a recession yet.

-You're putting me on the spot there.

Look, I think we're gonna see some sort of adjustment.

I think that's just inevitable from where we're at.

I mean, the economy is white-hot.

We've seen all this elevated consumer spending.

The reality is we'll probably see some course correction over the next 12 months.

I think some thought it would happen before today that we would have seen some of those adjustments take place, but the economy is continuing to hum along.

We're continuing to see job growth.

We're continuing to see low unemployment rates, and consumer spending has remained relatively high.

Can it continue at that pace?

I think we'd inevitably expect some sort of slowdown.

And I'm not suggesting that we're in for a dire situation, but the reality is there may be some sort of correction that may be modest and relatively short-lived.

But I would expect that we'll see some correction as we move forward.

-Well, you mentioned-- I think you mentioned credit card debt.

Now, any tangible advice that we can provide around this table if we are facing perhaps a modest recession?

What should people be doing right now, Mike?

-First of all, they should not be adding to credit card debt.

So debt and consumers and debt among business people are key things that we watch.

And remember, right now, as Andrew talked about already, there are concerns in the banking sector.

So there have been three large bank failures across the nation so far this year.

And what that does is it makes the other bankers look around and they pull in their horns, and they're not as willing to lend to small businesses.

And small businesses are really the heart and soul of the American economy.

So we don't see it often and most people aren't aware of it, but businesses, restricting their lending standards is something that will become the case and it will further tighten this economy.

And as he said, it's-- there's a lag effect.

So we're early in this period.

That's why none of us really knows if there will be a recession.

Because all the things that normally cause recessions have been done, but we haven't seen the economy give in to that because there's just so much strength in the economy.

We don't know whether they're going to reach a tipping point yet or not, but the Fed seems to be doing all it can to bring about those kind of, those kind of conditions.

-Well, the Fed is going to control inflation, whatever it takes, right?

And you know the trend rate, or their target rate, is 2% a year.

We're at 5%.

It's down from 9%, which is good, but it's still more than double what they feel comfortable having.

Where the 2% came from?

The Fed just came up with it 50 years ago, and it's been the standard ever since.

-Should it be changed?

-It could be, I guess, if they wanted it changed, but-- -Should it be?

-Well-- -Well, they mildly did change it not that long ago.

Instead of saying that we want it to be at or below 2%, they said we're okay if it averages 2% over a period of time, which means it could be above 2% for a while.

-Yeah, it can.

-And that was considered quite a change when they announced that a year or so ago.

-Radical change.

-Wow!

Any-- -So they're gonna get control of inflation.

So if that requires a higher unemployment rate, so be it.

It so far hasn't caused that.

But getting inflation under control is the key.

That is the key to their strategy.

-I would just add on that.

What we're seeing in terms of some of the fallout in the market seems to be more of certain businesses not taking it seriously that the Fed was going to rein in inflation.

You have to remember, again, March of 2022, we were still at 0% on the federal funds rate, and then he went quarter-- 25 basis points the first time.

Only in the summer did we start getting 75 basis point hikes.

You're talking about, you know, how much have we've taken the Fed seriously, even though they've said time and time again, inflation is our number one goal to bring down.

-And remember, if you're a member of the Fed, if you're the chairman of the Fed, your legacy depends on one thing: You not letting inflation get hold.

The history will forgive you for causing recession.

History will not forgive you for letting inflation take hold.

-However, lawmakers are calling for the Fed to stop raising interest rates because they claim that part of the chairman's responsibility is to maintain unemployment at an okay rate.

So there's that.

-Which it is?

They could argue unemployment is at a fine rate nationwide for those purposes.

-3%.

-Okay.

All right.

Well, but lawmakers are saying, Hey, you're risking that it's gonna increase.

-It may be the campaign season, but I'm not sure.

[laughter] -I'm just guessing.

-Well, what does each of you think about the possibility of the Fed raising the interest rate again?

Do you think it's going to happen, Brian?

-I think in the near term, they're gonna take a pause and see how this plays out and, ultimately, what that means in terms of inflation in terms of the economic performance that you're referring to.

I think right now they take a little bit of a wait-and-see approach to it.

-Pause, you're saying?

-I agree.

They'll pause.

-Andrew?

-I think a pause.

I do want to caveat.

You asked earlier about chances of recession.

When I was on your show last year, I said look at what happens in the fourth quarter.

This past year in 2022, it surprised all of us that we had a really strong 2022, because we were having these same conversations like, There'll be a recession this year.

So I think in terms of, yes, a pause, but they're gonna watch what's happening in the third and fourth quarter and that data.

I don't, I may actually be cynical here.

I think they might do another 25 basis point increase before the new year, because I think inflation is really sticky, particularly where it is moving into now, in terms of education, health care services, that is really hard to slow down.

It's not like consumer spending, where it's just more stuff I'm buying on Amazon.

This is now baked into others-- the service sector.

And that takes-- It's much harder to bring down.

If you look at the economic theory behind that, you look at economists that win Nobel prizes, they talk that's why your number one job, even though you are supposed to also have full employment as Fed chair, is still bringing down inflation, because inflation is really bad over the long run for economies.

-The countervailing point to that, and Andrew is absolutely right, but the countervailing point is if you raise them too much and it pulls back on business investment and credit, if the credit markets get too tight or they don't-- Well, two things: There's increasing interest rates.

That slows demand for credit.

And there's also increased regulations.

If that happens to the business community, and they pull back, they're already getting a little nervous.

That's why these regional banks are having problems right now.

They start pulling back, Wait, we're not going to invest.

We can't get the loan anyway.

Or, We're not gonna invest because rates are high, and that slows the economy down and maybe caused the unemployment rate to go up.

And it may help with inflation, but you have these political issues that the Feds deal with, too.

It's a drop off in business investment.

-Mike, I did not get your prediction on whether the Fed will raise interest rates again.

-I think Andrew made an excellent point.

But I would say pause because I think what's gone on in the banking sector has been, in many people's opinion, the equivalent of one or two quarter point hikes in terms of restrictiveness in the economy.

The bank's restricting their lending will slow the economy roughly as much as one or two quarter point hikes.

So the bank's problems are doing the Feds work for it to some degree.

-And I agree with that, yes.

-Okay.

The bank closures, how are they now?

Well, not just bank closures, but the reaction to what's going on to the bank closure's impact in Nevada that you're following as of this morning, Thursday morning?

-You know, I think what we're finding out with, whether it's First Republican or Silicon Valley Bank, that there was a gap in regulations.

The regulators were somewhat asleep.

The management was also a bit aggressive in what they were doing and how they were investing their assets.

And then remember, during the Trump administration, some of these regulations that were passed through Dodd Frank were softened and loosened up for these regional banks.

So there's this understanding, Oh, my God, we have this issue with regional banks.

And the regional banks are the banks that small and medium businesses go to.

It's the banks that developers go to, to get loans.

And so we have this, this situation right now where we gotta get this under control.

As Brian said earlier, or Andrew, the contagion, it will spread.

And it's already spreading here in Southern Nevada to a couple of banks here.

And so it's a challenge.

And they're going to have to look at these very carefully again.

-But even more than that, even before the contagion, we saw people bringing us their bank deposits to put into treasury bills because of the interest rates.

The banks were paying low, treasury bills were paying more as a result of the Fed raising rates, and they wanted to earn those higher interest rates, and is really where the problem sort of started.

The flow out of banks into treasuries is what took some of the capital away from banks.

And now it's the flow out of banks to keep the deposits safe if they're in excess of the FDIC limits.

So we've got to deal with that interest rate differential because people will still go where their money is earning the most.

And remember, treasury bills are guaranteed by the government.

So there's not a-- You're not limited to $250,000 in treasury bills to have safety of principal.

-We could have this feedback loop.

If you have more of the banking sector concentrated on bigger banks, there's less pressure on them to raise savings rates, which means more money goes elsewhere.

Then we also have this whole other thing we've been talking about, the fight over the debt ceiling and how has that then affecting markets and treasuries, which then gets into this, again, feedback loop.

-Will you expand on that?

-Well, I think we saw, at least the last time there was a major fight over the debt ceiling, the U.S. credit rating went down.

And in doing that, right, it basically made-- what is it, treasuries cheaper, essentially?

-I think the interest rate they had to pay, meaning the price of bonds got cheaper.

-Yeah.

So again, if we're in this feedback loop now where people are chasing other higher rates of return, it means they're pulling their money now.

Even the banks and even treasuries now, they're finding other avenues.

Which then-- -Let's get back to what everybody's biggest fear is, and that is a recession.

Brian, are there any characteristics of the economy right now that remind you of what happened leading up to 2008?

Housing, for example.

-Yeah.

There's a lot of things we've touched on a little bit.

Savings rates are low.

Consumer spending is high.

The housing market is kind of working through some adjustments right now.

Prices are-- have reached these new levels over the past year.

Now, we've seen adjustments in the last 12 months as a result of the higher interest rates that we're talking about.

That's obviously flown into the overall mortgage pricing.

And so-- -What adjustments have we seen?

-Look, the mortgage interest rates are up pretty significantly from where we were just 12 months ago.

And so that has-- It's really dampened demand.

We've seen fewer sales.

You've seen fewer people in the market looking to purchase properties.

We saw supply side dynamics start to edge up, and now they've come back down.

We still have relatively little inventory, so folks that are in the market looking for homes aren't able really to find what they're looking for.

And so we're now back to this tight housing market, despite the fact that we've seen these adjustments.

And I think probably one of the overriding factors is that we've got, I don't know, about 3/4 of the folks that are in houses today that own them, their mortgage rate is less than 4%.

So the reality of them moving on to another housing alternative at a higher interest rate is pretty unlikely.

Unless they have a personal situation that mandates that they move into a different home, I think a lot of people have just hunkered down at this point.

And so we're not seeing as much mobility.

That's helping to stabilize the housing market despite some of these things that we're talking about.

And so I think the market is in a little bit of a unique position, but it looks nothing like what we saw during the 2006 and 2007 timeframe when we saw massive fallout during the Great Recession.

So I do not expect a repeat performance of that.

-You're nodding your head, Mike.

-Well, he's correct.

I mean, think back to 2006, 2007.

Here in Southern Nevada, we saw people camping out overnight at new home developments to try to get into a new phase before prices went up.

I go to work very early in the morning because of the stock market.

I would get on the freeway at quarter to six in the morning, and it was rush hour filled with construction vehicles going to construction sites.

We haven't reached that level of froth at all.

And all the points he made are correct.

What we have to remember is we've underbuilt the housing stock in America since that period, since the financial crisis.

And a whole new generation has come along that wants to have houses and have kids.

So that is why we are supply constrained.

We simply haven't built enough for the people that want houses.

And some of them will buy houses at 6 1/2% interest rates with the hope that they can refinance it in a couple of years, but right now many of them are sitting on their hands and waiting to see what's going to happen.

But we have pent up demand for the few houses we have.

-Where will housing prices be a year from now?

-Triple.

No.

[laughter] -John, you can't scare people like that.

-I know.

I think Brian nailed it.

I mean, there's-- There's a constraint in the market, right?

And so we've seen house closing, monthly closings drop dramatically.

So those are really closes.

And housing prices are starting to moderate a little bit.

So the question is, is that good or bad?

I guess if you're a seller, it's bad maybe because you want more money for your house.

You can't move out.

You're not going to transfer.

If you got a 4% mortgage, you're not going to buy a new house and get a 6% mortgage.

I think we're going into a period where the housing market is starting to stabilize.

Our biggest issue, I think, I guess if we want to talk about that, is the question of land availability in the valley in the urban core and then the water issue.

-Because so much land is owned by the federal government?

-That and then the whole issue of the drought, the mega drought, or whatever the term of art is these days.

So those are bigger longer-term issues than these ups and downs with the market and the inflation rate and what the Fed is doing, things that we need to really deal with in the longer term.

-Let me get back to that.

I do want to ask you, Andrew, you had mentioned some indicators of what is going to happen with housing prices.

-Yeah.

So the Center for Business and Economimc Research, we forecast housing prices.

We do think that they'll continue to fall.

Everyone's right, though, that supply is constrained here.

And that's what's buoying prices, as we can see right now.

We thought it would fall faster than it has with higher interest rates.

But if higher interest rates continue to hold through 2024, that makes houses, in general, just less affordable for everyone.

So do those people sitting on the sidelines just suck it up and buy a house with a higher mortgage rate or continue to sit on the sidelines, especially if the economy is slowing down and you're worried about your job?

-What was the 15% figure you gave me?

-So it was 15%.

We see a decrease this year in housing prices from the Center for Business and Economic Research.

And our-- We do a forecast every quarter.

-Let's get back to what you were talking about.

And I think it's a bigger question of how better prepared is Nevada for a recession than Nevada was back in 2008?

Who wants to start?

Do you want to continue?

-How better are we?

Um, marginally better.

-Because land factors into that.

-And we still have an economy, as Brian has said and Mike has said, that is generated by discretionary spending.

We do largely, in Southern Nevada, depend on the kindness of strangers and their, and their willingness to spend money here.

And so that's why it makes us so vulnerable all the time.

So the question is: What have we done over the last 10 or so years since the Great Recession to restructure our economy?

And we've made great progress in becoming more diversified and more economically developed.

We still have a long way to go.

-Southern Nevada or Northern Southern?

-Southern Nevada more than-- Northern Nevada is stronger economically.

Their structure is more resilient than what we are here.

And so we have a way to go, but we're going in the right direction.

The bigger challenge is these natural resource issues, whether it's land and water and, to a certain extent, the labor issues.

But they kind of straighten themselves out over time.

So we have some things we have to deal with.

The good news is most of the leaders in the community, business and public sector leaders, are talking in a way that, Hey, listen, we got to get serious.

These are things we need to do to change how we do business in Southern Nevada.

And we got to work with these other states.

So there's a lot going on, which is positive in terms of us understanding what our long-term future looks like.

-How much better prepared is Nevada?

-I can give you a grade.

So we-- There's a measure you call the Hackman Index.

I won't get into specifics, but essentially we went from an F to a D+ since the Great Recession to today.

-Nevada as a whole, or Southern Nevada?

-Southern Nevada, in terms of our economic diversification.

Reno is at a B+, 89 essentially.

So in terms of how much we're prepared, marginally, yes.

We have glimmers of hope, right?

We can see it in our model because we forecast the economy through 2080.

We see in our model, if we were to focus in on healthcare and manufacturing and still support our leisure and hospitality industry, we can get more like an Orlando or Nashville or San Diego.

There's tourism driven, but equally diversified.

The more economically diversified you are, the stronger you are to weather these peaks and valleys of the global economy.

-How do we do it?

-I think we're in a better spot than we were a decade and a half ago.

No doubt about it.

I think because we've come off this COVID-19 pandemic and the related response, we still haven't brought back those leisure and hospitality jobs that are probably most vulnerable during an economic downturn, particularly in the southern portion of the state.

And so the fact that we haven't brought all of those back gives us a little bit of a runway, if you will.

Resort operators have been very efficient about how they've done their business coming out of the pandemic.

And so I think they're much more efficient, much more stable, and probably provides more stability for the economy overall.

And some of the other areas outside of tourism, I think we have continued to make some great strides.

A long way to go but, again, all of that is going to provide stability over the long run.

-Last question-- Well, and, Mike, closing thoughts?

What are you telling clients?

-Well, I'll add on this point.

The state's finances are stronger now than they were before.

The Rainy Day Fund and the state's overall financial strength is a big positive we shouldn't, we shouldn't overlook.

With regard to what we're telling clients is that you have to look globally and not just nationally, and certainly not just locally.

There's going to be uncertainty in all these markets for decades to come.

So then Nevada has proven that over time it provides a good rate of return to many different types of investors, but with great volatility.

And you have to be very careful about how much you put into any basket.

-Right.

-Gentlemen, thank you all for your time.

And thank you for watching.

For any of the resources discussed on this show, go to vegaspbs.org/nevadaweek.

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