According to Christopher Thornberg, Ph.D., founder of Beacon Economics, a range of economic data suggests most Nevadans and Americans across the nation have never been in a better financial position. Despite the data showing positive wealth gains, consumer sentiment is nearing levels last seen during the recessions of the 1980s and 2008.
Dr Thornberg provided his insights during the First Independent Bank Economic Forum held in May 2022.
The Big Picture
Household Net Worth (HNW) is up 30 percent in the past two years, which is its highest level in years. These increases are not limited to individuals at the top. Dr. Thornberg noted significant gains were made in the HNW of the bottom 50 percent of households, which went up by 90 percent in the past two years. On the jobs front, the national unemployment rate is less than 4 percent and worker wages have gone up by about 6 percent. Another positive indicator of financial health is the Federal Reserve’s Financial Obligations Ratio, or the ratio of household debt payment to total disposable income. Debt obligation is the lowest in years; however, Thornberg says consumer sentiment is low. Why? Thornberg believes the anger is related to the political and economic reactions to the pandemic as opposed to the pandemic itself.
As Thornberg predicted, the COVID-19 pandemic affected our economy much like a natural disaster, which follows a proper “V” recovery. There was minimal long-term economic impact, and a quicker-than-normal recovery was inevitable; however, Thornberg believes that false narratives and monetary policy reactions have been and continue to be excessive. The trillions in economic stimulus have overheated the economy so much that Thornberg believes painful economic readjustments are in the works and driving fears of a recession. Thornberg says that the longer policymakers fail to act, the more painful the landing will be.
Leading Economic Indicators:
As the data shows, Nevada has bounced back from the challenges of the pandemic’s effect on the state’s leading industry: Entertainment and Hospitality. Hundreds of thousands of jobs have been added since Nevada hit bottom in April of 2020, which means the state has regained about 95 percent of the jobs lost during the pandemic. Visitation to Nevada is up. Las Vegas saw 32.2 million visitors in 2021, a nearly 70 percent increase compared to 2020. Gaming revenues have never been higher.
Nevada’s labor market has shown steady increases as it builds back to pre-COVID-19 levels. Three hundred eighteen thousand (318,000) jobs were added since the state’s economy hit bottom in April 2020. That puts employment at 95 percent of the jobs lost between February 2020 and April 2020. Unemployment rates have also improved but are still higher than the national average. Nevada’s unemployment rate was about 28 percent in April 2020 making the current rate of 5.5 percent (February 2022) an astounding improvement. However, Nevada’s unemployment rate remains higher than the national average of 3.8 percent.
Nevada’s most significant job gains occurred in the Transportation, Warehouse and Utility sector, up 26 percent since February 2020. During that same time, Manufacturing increased 6.7 percent; Financial Activities, up 5.1 percent; Information Technology, up 3.3 percent; and Retail Trade, up 2.6 percent.
Prior to the pandemic, members of the baby boom generation were starting to think about retirement. However, according to Thornberg, one year into the pandemic the dynamic suddenly changed and more than three million people decided to leave the workforce. The mass retirements helped to create a seller’s market in the labor market at all levels. With an excess of available jobs, and not enough people to fill them, workers can choose when and where they want to work. They may also demand a higher wage making lower paying jobs difficult to fill.
The most significant job losses are concentrated in sectors most affected by government health mandates and consumer apprehensions about COVID-19. The Leisure and Hospitality sector has 34,000 fewer workers today than February of 2020, which is a 9.4 percent decline. Other industries continuing to be affected by job losses include Other Services, down 8.8 percent or 3,800 jobs; Administrative Support, down 6.2 percent or 6,900 jobs; Government, down 3.7 percent or 6,200 jobs; and Professional, Scientific and Technical Services down 2.1 percent or 4,200 jobs.
Hospitality and Tourism
With increased visitor volume, occupancy rates improved to 60.5 percent in Las Vegas, up from 2020’s 37.4 percent but still below 2019’s 86.3 percent rate. Despite the lower visitor volume, the gaming industry in Las Vegas had a record year in 2021 with gross gaming revenue of $11.5 billion, a 75 percent increase over 2020 and the highest on record for Las Vegas.
Residential Real Estate
Thornberg says the housing market was the strongest spot of Nevada’s economy in 2021 thanks to a perfect storm of advantageous conditions. The reason? Typical homebuyers have been less affected by the labor market downturn and have pursued home buying when mortgage rates were at historic lows. Combined with a low inventory of available homes, those two factors pushed offers far over the asking price. Despite higher prices, demand for housing remains strong. Comparing the fourth quarters of 2020 and 2021, the median price of a home in Las Vegas is up 21.7 percent, reaching $409,673. The year-over-year increase is 17.9 percent in Reno with a median price of $530,641. Dr. Thornberg believes higher interest rates will weigh on price appreciation in 2022.
Commercial Real Estate
As more employees worked from home during the pandemic, office vacancy rates increased in Nevada and across the country. Thornberg believes trend is changing, and demand is on the rise. The office vacancy rate of 22.6 percent in Las Vegas in the fourth quarter of 2021 is down 1.3 percent compared to one year earlier. During the same period, office vacancies in Reno declined to 21.3 percent, down 1.7 percent. Average asking rents are up slightly, 1.1 percent in Las Vegas and 0.5 percent in Reno. With an increase in demand for online shopping and home delivery, warehouse space in Nevada is in short supply. Las Vegas warehouse vacancy rate of 3.6 percent in the fourth quarter of 2021 decreased by 4.2 percentage points from one year earlier. Reno had a 7.6 percent warehouse vacancy rate in the fourth quarter of 2021, down 3.1 percentage points from the year before. Accordingly, average asking rents grew 7.0 percent in Las Vegas and 5.8 percent in Reno - outpacing the 4.7 percent increase in the U.S.
It is a good time to be a worker for the first time in years, according to Thornberg. Wages are up, and, due to the lack of workers and a plethora of job openings, many managers have thrown incentives to keep good employees in their jobs. Average weekly wages in Las Vegas have gone from $650 in 2010 to well over $950 in 2022. Statewide, the most significant one-year wage gains are found in the Professional Business sector, up 23.2 percent. Other Services are up 20.5 percent; Leisure and Hospitality, up 17 percent; Finance, up 10.4 percent; Logistics, up 10 percent and Administrative, up 7.8 percent.
The Near Future
Rising interest rates and rising prices will continue for the foreseeable future, according to Thornberg. The over-stimulation of the economy through trillions in pandemic government assistance has overheated the economy so much that a “soft landing” now appears almost impossible. Thornberg believes a lack of political will from D.C. policymakers and from the Federal Reserve is preventing the quantitative tightening that would begin to address the country’s overheated economic issues.
Aside from those national issues, the fundamentals of Nevada’s economy are strong. Thornberg believes business owners should focus on the long-term view and continue to grow their businesses in the coming year, while also tucking away funds for a rainy day. That will help prepare for an expected “cooling off” period once quantitative tightening - combined with inflation - kicks in. Thornberg expects a moderately painful adjustment as long as tightening happens sooner than later. However, he says, the longer the Federal Reserve fails to act, the more painful the correction will be.
If you would like to read the Regional Intelligence Report prepared by Dr. Christopher Thornberg, please click here.
If you would like to watch Dr. Thornberg’s virtual presentation, please click here.