Nevada’s Economic Forum is charged with looking two years into the economic future to determine how much revenue will be available for the state government’s biennial budget cycle. The panel of five economic and taxation experts convened in a nine-hour online meeting yesterday to hear from key sectors of the economy, state fiscal analysts, and Moody’s Analytics before they make their projection in December, ahead of the 2021 biennial Legislative Session.
Forum members heard presentations from the Nevada Association of Realtors, the Retail Association of Nevada, and the Nevada Resort Association regarding the health and prospects of those sectors. For a broader, independent 3rd party evaluation of the state’s economic potential, the Forum turned to Moody’s Analytics.
Moody’s Analytics is a subsidiary of Moody’s Corporation. Established in 2007, the company focuses on non-rating activities, separate from Moody’s Investors Service. It provides economic research regarding risk, performance and financial modeling, as well as consulting, training and software services.
Dan White is the director of public policy research for Moody’s Analytics. He told Forum members the coronavirus business cycle is unprecedented in its nature and scope. He offered a broad assessment of a hobbled national economy and Nevada’s place in it.
“The pandemic is really kind of an interesting thing if you’re an economist, because it’s basically giving us the shape of a business cycle that is like nothing we’ve ever seen before. So you probably remember for the last couple years, we’ve been talking about some kind of downturn that was going to occur, probably in the middle of 2020. And I wish we could take credit for being super-prescient and realizing that a pandemic was coming. But this is well beyond any type of downturn or economic recession that we have seen, certainly in our lifetimes, and maybe ever in the history of the United States.
“In terms of a 30,000-foot view, this is what the economic roadmap kind of looks like … there’s four really distinct phases in this business cycle. And it’s really kind of thrown a lot of us for a loop. Mostly if you’re reading your business news on Bloomberg or Wall Street Journal, whatever you’re reading, you’re hearing all these discussions about, ‘Is it going to be a U-shaped recession? Is it going to be a V-shaped recession, a W-shaped recession?’ I even heard of a Nike swoosh recession. So we’re kind of running out of letters to describe the business cycle.
“And really the answer is, it’s none of those things,” White said.
“So the first phase of the recession was really what we would call the deep recession, the real recession part of this business cycle,” White continued. “It happened, obviously, in February, March of this year – significant decline in economic activity in the United States, not only because people didn’t feel safe going out of their houses, but because in most instances, because of business restrictions or closures, they weren’t physically able to take part in a lot of the economic activities that they normally do. Nowhere was that more relevant than there in Nevada.
“You can see we’ve lost about a third of the economy. It just kind of fell off a cliff, went offline in that second quarter of this year. Now, the good thing was, even though this was not a normal recession, it’s not like the economy ran out of gas. It’s more like somebody pulled the plug on the economy.
“The good thing about that is, it’s relatively easy to get a lot of that economic activity back. So when a lot of those restrictions and business closures were pulled out of place by most governors, it’s almost like we plugged back in part of the economy and a lot of the economy came back very quickly. The reopening phase of the pandemic recession was really kind of the mid to latter half of the summer. I think it gave a lot of folks some hope and some confidence that we were going to see a much quicker economic recovery than we otherwise would have seen.
“We are now entering the really boring and kind of scary portion of the recession, which is the Pre-vaccine Recovery. So we’ve kind of had that initial burst of energy, the initial burst of recovery, as business activity came back online, we have found ways, and we see this a lot in Las Vegas and Reno, to operate under the pandemic. We found ways to do some of the economic activity that we’ve done in the past. But we’ve kind of hit a wall and that anything that could come back online has come back online. And now, we’re in this waiting period of people waiting for this to be over, right?
“It’s not going to be over unfortunately, until we have a vaccine. And not only do we have a vaccine, but we have an accepted vaccine that people are taking, that people have the ability to take. And you can see that under the baseline forecast.
“The assumption is that we have this relatively slow Pre-vaccine Recovery where we’re more or less moving sideways for at least the next four or five months. We expect in the forecast that you’re seeing in front of you that we see the full kind of Post-vaccine Recovery, the pace of recovery that we would expect to see in a normal economic recovery. Probably not until this time next year or early summer.”
Moody’s offered Forum members a look at their United States exposure score map for COVID-19. The map is not a representation of how hard areas have been hit by the pandemic but how bad economic conditions could become in that area.
“The unfortunate story here for Nevada, especially with Las Vegas, and also to some extent the Reno/Sparks metro area, is obviously you are incredibly exposed and vulnerable to the type of business slowdowns that we’re seeing as a result of the pandemic,” White said.
“What that means from a forecast point of view, at least what we’ve seen so far, is that obviously your core industries are really bearing the brunt of the pandemic,” White continued. “When we look at the top-line Nevada numbers, we’re seeing that Nevada has seen much larger increases in its unemployment rate. It’s seen much larger decreases in overall employment than most of the rest of the country. And that owes obviously to the point that there are a lot of core industries in Nevada that are designed around bringing large groups of people from all kinds of different parts of the world into one place at one time. And that’s a very difficult thing to do in the current business environment, in the current climate.
“So obviously, we’ve seen massive declines in hospitality employment, tourism-related employment in Nevada. The good news, if there is any for Nevada, is that the tourism industry in Nevada has held up and recovered much more than other parts of the country. So other tourism hubs around the country have not done as good of a job at maintaining levels of economic activity, as have the areas in Nevada.
“Now, that’s a blessing that owes to some of the resiliency that we see in the the gaming industry, obviously, but also the more diversified kind of tourism climate that we’ve seen in Nevada take hold over the last 15 years or so. What it also means is that the area should be relatively well positioned to resume more quickly than some other tourism parts of the country once we can get to the other side of this.”
According to the Bureau of Transportation Statistics, U.S. airlines carried 19 percent more cargo by weight in September of this year than in September 2019. A 22 percent jump in domestic cargo and a 10 percent increase in international cargo fueled the increase, but passenger numbers are way off. Moody’s Dan White said that’s a big deal for Nevada.
“And once the pandemic kind of kind of goes away, the offset to that, obviously, is it’s going to take quite a bit of time for us to return to normal. And nowhere is that more important than in terms of the airline industry and bringing air passengers back into Nevada.
“As I’m sure you know from our past discussions, no one spends more money on a visitor basis in Nevada than people who are coming on an airplane. If you look at the driving visitors versus air visitors, it’s night-and-day different. They’re spending a lot more money when they come in an airplane. And that is especially true when we talk about international visitors. They spend a lot of money, especially in terms of gaming.
“It’s going to be a while before that comes back online. And I think one of the differences that you’ll see with our forecast versus some of the forecasts that have come out is that we assume a very gradual recovery in overall tourism activity. As a result of that, Nevada does have a much more sluggish overall recovery than the rest of the United States, when we look at coming back to pre-recession levels of activity.”
Dan White said there are two paths forward in Moody’s calculation, one with more federal stimulus and one with none.
“Our baseline forecast assumes that we do have additional federal fiscal stimulus that comes online in the first quarter of next year. Up until just maybe a month and a half ago, we have assumed that federal fiscal stimulus would actually come in calendar year 2020, but the election and some of the political dynamics within the Senate obviously prevented that from happening.
“If for some reason, we do not get any additional federal fiscal stimulus in the first quarter of calendar year 2021, it represents an enormous downside risk to the forecast.
“So just as an example, you can see the graph that I’ve got here in the upper right hand corner of your screen (see below), the blue line, there is our baseline forecast, which assumes that we have federal fiscal stimulus. The green line there, the S3 forecast, is our severe recession scenario, or more severe, I guess, in this particular instance. And that assumes that we don’t get any federal fiscal stimulus.
“And so you can see the offset from the strong spending, strong impact we got in terms of enhanced unemployment insurance, in terms of the PPP program, in terms of the direct checks, the stimulus checks that went out to taxpayers, the impact that that had on disposable personal income, which is one of the most important drivers when we look at a lot of the industries that underlay the Nevada economy.
“So if we do not have that stimulus in the first quarter of any kind, the knock on effects from that, in terms of lower consumer spending would prolong the recession well beyond the current forecast and make that already gradual recovery in Nevada even more gradual. So that’s a really important assumption to be aware of as you make decisions around this.”
Along with federal aid, White said the development and deployment of a safe and effective vaccine is critical for a faster Nevada recovery.
“The second and arguably the most important assumption that goes into a forecast is vaccine rollout and acceptance. I want to emphasize the word acceptance … when we’ll have at least 25 million Americans actually be inoculated, be vaccinated against COVID-19.
“And you can see that the betting markets are looking very strongly at next summer, early fall for when that is possibly going happen. But even a growing number of folks are actually looking at beyond next October when that happens.
“We got some good news on this this week. Just yesterday, the Pfizer group came out and said that they had some very good success with their initial trials. That’s great news. The bad news that kind of goes with that is that they’re still probably at least three or four months away from getting FDA approval.
“Once they get FDA approval, it’s going to take some time for them to actually produce enough of the vaccine and distribute it out to all the states so that people who need it, the most vulnerable among us can take those vaccines. And then it’s probably going to be another three or four months before you actually get people convinced that the vaccine is safe and they actually want to go out and take it.
“So there’s a big lag between when we have a vaccine and when the vaccine has been rolled out and taken by enough people. It really makes a difference in terms of the economic forecasts. And so it’s very important to be aware of that as we go forward. There are some upside and some downside risks there.
“If for whatever reason, the FDA is able to push approval of any vaccine, whether it’s the Pfizer vaccine or another vaccine out earlier than April and May of this year, that is a very upside risk to the forecast. It’s possible that we see economic activity come back and people feel more comfortable much more quickly than we’ve modeled in our baseline.
“On the other side of that, if for whatever reason there’s a significant delay in when that vaccine comes out, there’s downside risk to the forecast. So all in all, with both of these assumptions, I think that we have a pretty balanced … risk perspective baseline forecast. And that’s the forecast that kind of underlies the revenue forecasts.”
Sarah Crane is an economist at Moody’s Analytics and spoke about the revenue side of the equation. She said Nevadans saved money at an unprecedented rate in 2020 and consumer spending and associated sales tax have taken a nosedive.
“The reality of the lost income and increased uncertainty around the coronavirus and public safety and limits on in-person activity will continue to keep activity below pre crisis levels for some time. So we do expect the full year revenues will come in 1.9 percent lower in fiscal 2021. The pace of collections growth after that is projected to pick up considerably as the economy gets back on its feet. Given the severity of the initial drop, however, collections in fiscal 2023 are projected to be just slightly higher than those in fiscal 2019.
“And moving on to gaming, the composition of consumer spending during the economic downturn has shifted just as the relationship between income and spending has shifted. And so far, the biggest hit has been to service spending, which has previously been very stable. And one of the biggest hits has been to the driver of gaming percentage fee collections, which is recreational services spending. So the sharp decline in U.S. recreational services spending has wiped out the momentum that we have seen in gaming percentage fee collections in fiscal 2020.
“The relaxation of restrictions on casinos and other places of recreational services will allow gaming percentage fee collections to move in the right direction, but they’ll be coming off a severely depressed base. And as Dan explained earlier, we do expect that that rebound will be quite slow and gradual over the next several years.
“Annual collections in fiscal 2021 will be down about 17.8 percent from the previous year. And because of persistent restrictions on international visitors and new realities and business travel, we expect the collections in fiscal 2023 will still be about 17 percent below those in fiscal 2019.”
Brian Bahouth is the editor of the Sierra Nevada Ally. Support his work.