The COVID Recession: Where Does Nevada Stand?
While many people have compared the pandemic-caused economic downturn to the Great Recession of 2007, Christopher Thornberg, Ph.D., founder of Beacon Economics, is not one of them. The noted economist and economic forecaster believes the "COVID Recession" is very different from a typical recession. Because of that difference, Thornberg says the recovery should not be nearly as difficult as many politicians, cable news hosts, and social media prognosticators would have you believe.
The COVID recession came on suddenly as the result of a virus. Businesses quickly shut down, and layoffs ensued almost immediately. That's a much different beginning than how the 2007 recession began. Thornberg says there were signs of trouble in 2006 - that too much home production, too much consumer borrowing, and the overall price of homes were hitting unattainable levels, growing by 30 percent in some cases. It was a bubble bound to burst and fueled by Wall Street's sub-prime lending activities. Like all collapsing bubbles, Thornberg says, this led to a recession. However, the COVID recession is much different. Before the pandemic hit the United States, the country experienced one of the healthiest economies in 30 years. There's no financial bubble to blame or burst, which is why Thornberg says the current downturn is different from 2007, and our recovery will likely be different as well.
Thornberg believes Nevada is well positioned to recover from the COVID Recession based on a number of factors, including:
An economy's ability to bounce back from a downturn has a lot to do with how healthy it was initially. On that front, Thornberg says, Nevada had several positive factors in its favor. Since 2014, Nevada has had the second-fastest growing economy in the nation in terms of employment growth. From an earnings perspective, only Delaware outshines Nevada for earnings growth since 2014. Nevada has a steady stream of people moving to the state, helping Nevada grow faster than most and fueling a 35 percent jump in the state's labor force between 2003 and 2019.
Nevada's unemployment rate hit a high of 30 percent in April of 2020. Although that is a historic number, within two months, when casinos reopened, the unemployment rate dropped to 15 percent – that doesn't discount the fact that this is still an incredibly difficult time for those out of work. Still, Thornberg sees the relatively quick reduction in unemployment as a signal that the Las Vegas economy is slowly bouncing back. More than half the jobs lost in Nevada were in the Hospitality sector, Southern Nevada's stronghold. In Reno, job loss has been less severe due to the technology sector's growing influence.
"In typical recessions, unemployment peaks after recessions are over. That's because there are costs to laying people off, including severance pay, lost human capital, loss of trained employees, and a morale hit to existing employees. Businesses don't want to lay people off until they have to, which is why it peaks after recessions are over. This time it's completely different because unemployment is leading the recession. That difference may seem small, but trust me, it's profound. It means you cannot use something like the Great Recession as a model for what's happening today," said Thornberg.
At the beginning of the COVID-19 outbreak, some economists predicted as many as 15 million homeowners would face foreclosure due to the economic fallout - Thornberg doesn't see that happening. He explained that the Great Recession's housing cycle - compared to our current situation - are two different stories entirely.
"Homeowners were not foreclosed upon by the Great Recession, but instead because they bought homes, they couldn't afford using money they shouldn't have been allowed to borrow in the first place. Also, the real estate bubble collapsed. Those fundamentals are an entirely different conversation from what is occurring in our economy right now. There is no major problem in real estate; it's not going to get hit," said Thornberg.
Thornberg says Nevada's home prices have been relatively stable, with some possible exceptions in the Reno area. With average home prices in Southern Nevada at about $300,000, the growth in pricing has been moderate. Before 2017, home prices grew by an astounding 30 percent.
Thornberg also believes the majority of workers experiencing temporary layoffs tend to be lower-skilled employees who are often renters.
A "V" Recovery
Thornberg sees a "V" economic recovery underway. The collapse in consumer and business spending in March, Thornberg says, was driven by fear of the unknown and how long the pandemic could last. But he sees plenty of data which shows spending started to come back by mid-April and by mid-July spending was off by about nine percent — a significant turnaround compared to March.
"So the V is already here, and we can see that by how much the economy is bouncing back. You can see it in manufacturing, services, and housing. The spending decline that happened in April got better in May and better in June. We can see the resilience in the economy," said Thornberg.
Thornberg says the upward slope of the V -meaning the recovery- will be dictated by how quickly we can gain control over the virus which at this point will be determined not by government mandates, but by the personal behavior of each of us in keeping the virus from spreading.
Thornberg provided his opinions and insight during an online presentation on July 21, 2020, to clients of Bank of Nevada and First Independent Bank, both divisions of Western Alliance Bank.
To access the recording of Dr. Christopher Thornberg's entire video presentation, click here.