Economist says region in recession

Throwing his usual cautious optimism to the wind, UNLV economist Keith Schwer boldly declared Wednesday that Southern Nevada’s economy has indeed entered a recession.

For months, Schwer, director of the Center for Business and Economic Research at University of Nevada, Las Vegas, had stubbornly stood by the technical definition of a recession, which is two consecutive quarters of negative growth as measured by the gross domestic product.

There’s no denying now that soaring oil prices, tight credit and the continued downturn in housing have sent the Las Vegas economy into the tank.

"This is the story line. Yes, there is a recession," Schwer told about 250 business executives at his Midyear Economic Outlook, held on the 16th floor of the World Market Center. "Three things come together to account for our outlook of a recession — oil, credit and housing."

The numbers would bear him out.

The Southern Nevada Index of Leading Economic Indicators, compiled by the UNLV research center, dropped in May for the third consecutive month, to 130.80. All of the series used in the index fell below levels from the same month a year ago.

Schwer showed graphs of the local economic index tracking generally along the same lines as the U.S. index, contradicting the local consensus that Las Vegas is somewhat insulated from the national economy.

"No regional economy is recession-proof. We just had a different set of economic parameters. We’re not immune to recession," he said.

Schwer seemed most concerned about the price of crude oil and the effects it will have on the Las Vegas economic engine: gaming and hospitality.

Gaming revenue, visitor volume and McCarran International Airport passengers have all shown declining numbers.

"If you had to pick one indicator, follow gaming revenue and it’s slowing down," Schwer said.

Some airlines have remained profitable because of their ability to hedge on fuel prices or purchase the fuel in advance. They’re flying on $50 a barrel, but that’s going to end, he said.

Airlines have reduced capacity as oil prices have risen, taking down 18 percent of their seats when crude oil reached $130 a barrel. Capacity would be reduced 28 percent at $170 a barrel and 35 percent at $200 a barrel, Schwer calculated.

"If you look at $170 and $180 a barrel, we have a disaster on our hands," he said. "If it costs almost $1,000 to fly from Detroit to Las Vegas, how many people will say, ‘I’ll pass this by.’ "

As gasoline prices rise, people adjust, he said. They keep their Hummer in the garage.

"I must apologize. I drive an old (Chevrolet) Suburban," Schwer said. "If there are any bankers in the room, I may need a loan to fill up my tank. Maybe a second loan."

Nevada’s unemployment rate, which is now above the national average at 5.9 percent, will continue to rise and interest rates will stay low, the economist said.

Population growth has slowed because of fewer job opportunities and less affordable housing in Las Vegas, Schwer said. It will remain positive, probably under 3 percent for the next year.

Schwer forecasts a 3.6 percent decline in gaming revenue for 2008, a 4.3 percent drop in visitor volume and a 41.9 percent drop in new housing permits.

"Housing is correcting itself," he said. "Credit remains a problem and I would argue that oil is the trump card that will really give us trouble. Some analysts say prices cannot be sustained, that they will come back down and that bodes well for us."

In the meantime, Schwer said, he’s giving students in his economic classes a success formula from J. Paul Getty: "Get up early, work hard, strike oil."

Contact reporter Hubble Smith at hsmith@reviewjournal.com or 702-383-0491.

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