A monthly report produced for CommerCe reAl estAte solutions by stephen P. A. Brown, PhD, Center for Business & economic research university of nevada, las Vegas

Is stagflatIon at the Door?

Issue 5 may 2011

the u.s. economy seems to be facing a troubling mix of rising prices and weakening growth. the consumer price index (CPi) has risen considerably over the past six months, showing an annualized gain of 5.2 percent from november through may. much of the gains have been the result of rising food and energy prices. nonetheless, Core CPi (which excludes the volatile food and energy components) is also showing signs of rising, with an annualized gain of 2.1 percent from november through may.

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At the same time, the growth of GDP downshifted to 1.8 percent at annual rate in first quarter 2011, and industrial production did poorly in the first two months of second quarter 2011. Rising prices and the appearance of slowing economic activity have some observers raising the possibility that stagflation is at the door. Stagflation is a situation in which the inflation rate is high and economic growth is slow. Stagflation raises a dilemma for policymakers because actions designed to lower inflation may worsen economic growth and vice versa.

Stagflation was a problem for the U.S. economy in the 1970s when rising oil prices led to both increased inflation and weak economic activity. Are we at the beginnings of a new era of stagflation? In part, the answer is no, and in part, the answer depends on the conduct of U.S. monetary policy.

Differences in Productivity growth

In the 1970s, U.S. business productivity dropped when relatively inflexible business operations were confronted with sharply higher oil prices. As a consequence, U.S. economic activity fell. Attempts by the Federal

Reserve System to keep the economy growing through expansionary monetary policy resulted in high rates inflation.

Today, oil price shocks have much less of an impact on business productivity. U.S. businesses are much less dependent on oil use and have considerably more experience with oil price shocks. Consumption spending has remained sensitive to oil prices, and the Federal Reserve System has responded to weak economic activity with decidedly expansionary monetary policy.

Domestic Demand and economic growth

Unlike the 1970s, the weakness in economic activity is attributable to falling demand rather than productivity shocks—even though the pace of industrial production

nevada economic Conditions

signs of weakness could dissipate after second quarter

neVADA’s EConomy may 2011

CommERCE REal ESTaTE SoluTionS | Comre.Com

is slow. In fourth quarter 2010, the resurgence of domestic demand and improved net exports were the keys to the growth of real GDP. In first quarter 2011, their decline was also responsible for the weakness.

Given the sharp increase in inventories that occurred in first quarter, second quarter could show further weakness. Businesses are likely

to reduce inventories. Early readings of consumer spending in second quarter—such as real personal consumption spending and retail sales—suggest continued weakness.

Signs of weakness could dissipate after second quarter. Some weakness in U.S. industrial production is owed to disrupted supply chains from Japan, which are expected to resolved in the next few months. Rising food and energy prices, falling house prices and weak economic growth do discourage discretionary spending, but domestic spending seems likely to improve in the second half of the year. Consumption spending and business fixed investment are particularly likely to strengthen. Government spending is declining as federal stimulus spending comes to an end, and states move to close their budget deficits. As the result of a weaker dollar, exports should grow faster than imports. Domestic firms will shift from reducing inventories to increasing them. Those developments should lead to an improving economy.

monetary Policy and Inflation

There is no doubt that the Federal Reserve System has conducted an easy-money policy in response to the

recent recession and weak recovery. It has held short-term interest rates well below expected inflation and substantially boosted monetary liquidity. Even as the economy has stumbled, monetary ease has contributed to high gold prices and the rising inflationary pressure that we have seen in the past six months.

Over the coming months, the Federal Reserve System will need to begin to reverse its financial ease if it is to prevent accelerating inflation. The Federal Reserve System’s decision not to undertake a third round of quantitative easing is at best a baby step in that direction. The first two rounds of quantitative easing had relatively little effect on the economy, as is demonstrated by the fact that the maturities of the outstanding government debt and the private holdings of that debt remained basically the same as each other after the easing. In addition, the Federal Reserve System is not withdrawing the first or second rounds of its previous quantitative easing. It is just not undertaking a third round.

If the Federal Reserve System wants to head off incipient inflation, it will need to start raising short-term interest rates from their historical lows in the near future. Such increases will have little effect on the pace of economic activity because investment and consumption spending are much more sensitive to economic expectations than to short-term interest rates. If the Federal Reserve System does not take such steps, we will certainly see the inflation part of stagflation.

With the U.S. economy showing definite signs of slowing in the first half of 2011, the Nevada economy continues to grow but at a somewhat slower pace than was established in the first three months of 2011. The state’s economic recovery remains concentrated in the sectors on which the Nevada economy is most heavily

reliant—gaming, hospitality and tourism. Mining and some business services are also making contributions. Nevada’s real estate markets continue to see an overhang of vacant properties, and a recovery in those sectors is still waiting for strong growth of the Silver State’s economic base to be reestablished.

With u.s. consumption spending slowing, the nevada economy shows mixed signs.

nevaDa eConomIC ConDItIons

Issue 5 | ©Copyright 2011 - All Rights Reserved

u.s. economic growth showing signs of slowing

The pace of U.S. economic growth slowed noticeably in first quarter 2011, with real GDP growth dropping to 1.8 percent at an annualized rate—considerably weaker than the 3.1 percent figure posted for fourth quarter 2010. Providing evidence of continued economic weakness, industrial production fell in April and rose

by only 1.3 percent at an annualized rate in May. U.S. nonfarm employment rose by a meager 54,000 jobs (seasonally adjusted) in May. As a result of poor

job growth, the U.S. unemployment rate ticked up to 9.1 percent. With weaker job growth, falling house prices and higher food and energy costs, consumer confidence slipped in May. Real personal consumption spending rose only slightly in April, and retail sales fell in May. Sales of new homes rose in April, while sales of existing homes slipped. The Kansas City Financial Stress Index edged downward in May and remained below its long-run average, suggesting that the financial headwinds to U.S. economic growth remain low. In contrast, small businesses reported somewhat increased difficulty obtaining loans, Table 1.

nevada economy showing mixed signs

With U.S. consumption spending slowing, the Nevada economy shows mixed signs. Although visitor volume was up in April, compared to a year earlier, gaming revenues were down. Taxable sales were up by 9.6 percent. From March to April, Nevada employment rose by 3,600 jobs (0.3 percent), and the unemployment rate fell from 13.2 to 11.9 percent—the latter mostly the result of declining labor-force participation, Table 2.

Pace of economic growth slowing in Clark County

The pace of economic growth in Clark County seems to have slowed a bit in April. Compared to a year earlier, April visitor volume was up by 4.5 percent, and gaming was down by 1.0 percent. In April, taxable sales were 9.6 percent above those for the same month a year earlier. Residential construction permits slipped in April. Las Vegas employment rose by 1,100 jobs (0.1 percent) in April, and the unemployment rate fell from 13.3 percent to 12.1 percent, as labor-force participation declined, Table 3.

Washoe County economic activity remains mixed

Washoe County’s economic indicators remain mixed. Compared to a year earlier, April visitor volume was up by 1.1 percent and gaming was down by 0.6 percent. Residential construction permits slipped in April. Reno-Sparks employment rose by 300 jobs (0.2 percent) in April, and the unemployment rate fell from 13.1 percent in March to 11.7 percent, as labor-force participation dropped, Table 4.

nevada economic outlook

Despite concerns that higher food, energy prices and lower housing prices are slowing the national economy and reducing discretionary spending, the Nevada economy is still showing signs of recovery—albeit at a bit slower pace than during the first three months of 2011. With the U.S. economy downshifting, the continued growth of Nevada’s tourism, hospitality and gaming depends more heavily on a continued economic recovery in the West. Nevada’s real estate and construction sectors still show signs of weakness.

neVADA’s EConomy may 2011

CommERCE REal ESTaTE SoluTionS | Comre.Com

*Change in percentage rate**Reflects the Reno-Sparks MSA which includes Washoe and Storey Counties***Recent growth is an annualized rateSources: Nevada Department of Taxation; Nevada Department of Employment, Training, and Rehabilitation; UNR Bureau of Business and Economic Research; UNLV Center for Business and Economic Research; McCarran International Airport; Reno/Tahoe International Airport; Las Vegas Convention and Visitors Authority; Reno-Sparks Convention and Visitors Authority; U.S. Department of Commerce; U.S. Bureau of Labor Statistics; U.S. Census Bureau; U.S. Federal Reserve Bank.Note: NSA = Not Seasonally Adjusted, SA = Seasonally Adjusted

tabl

e 1 u.s. Date units Current Previous Change year ago Change

employment 2011M5 million, sA 131.043 130.989 0.0% 130.173 0.7%unemployment rate 2011M5 %, SA 9.1 9.0 0.1% 9.6 -0.5%Consumer Price index 2011M5 82-84=100, NSA 224.8 224.4 0.2% 217.3 3.4%Core CPi 2011M5 82-84=100, NSA 224.4 223.7 0.3% 221.0 1.5%employment Cost index 2011Q1 89.06=100, SA 113.2 112.8 0.4% 111.4 1.6%Productivity index 2011Q1 2005=100, SA 112.6 112.4 0.2% 111.4 1.1%retail sales 2011M5 $billion, sA 387.117 388.049 -0.2% 359.345 7.7%Auto and truck sales 2011M5 million, sA 11.75 13.13 -10.5% 11.62 1.1%Housing starts 2011M4 million, sA 0.523 0.585 -10.6% 0.687 -23.9%real GDP*** 2011Q1 2000$billion, SA 13,441.9 13,380.7 1.8% 13,138.8 2.3%u.s. Dollar 2011M5 97.01=100 95.500 95.543 0.0% 104.668 -8.8%trade Balance 2011M4 $billion, sA -43.680 -46.824 -6.7% -41.466 5.3%S and P 500 2011M5 monthly close 1,345.20 1,363.61 -1.4% 1,089.41 23.5%Real Short-term Rates* 2011M5 %, NSA -0.13 -0.36 0.2% 0.30 -0.7%treasury Yield spread 2011M5 %, NSA 3.13 3.40 -7.9% 3.26 -4.0%

tabl

e 2 nevada Date units Current Previous Change year ago Change

employment 2011M4 000 employees 1,118.5 1,114.9 0.3% 1,119.5 -0.1%unemployment rate* 2011M4 %, NSA 11.9 13.2 -1.3% 14.9 -3.0%taxable sales 2011M3 $billion 3.649 2.924 24.8% 3.329 9.6%Gaming revenue 2011M4 $million 806.05 958.73 -15.9% 810.74 -0.6%Passengers 2011M4 passengers 3.824 3.989 -4.1% 3.759 1.7%Gasoline sales 2011M3 million gallons 91.47 79.63 14.9% 91.69 -0.2%Visitor Volume 2011M4 million visitors 4.212 4.278 -1.5% 4.051 4.0%

tabl

e 3 Clark County Date units Current Previous Change year ago Change

employment 2011M4 000 employees 804.6 803.5 0.1% 807.1 -0.3%unemployment rate* 2011M4 %, NSA 12.1 13.3 -1.2% 15.1 -3.0%taxable sales 2011M3 $billion 2.738 2.174 26.0% 2.499 9.6%Gaming revenue 2011M4 $million 682.95 835.68 -18.3% 690.19 -1.0%residential Permits 2011M4 units permitted 377 454 -17.0% 537 -29.8%Commercial Permits 2011M4 permits 9 31 -71.0% 19 -52.6%Passengers 2011M4 million persons 3.524 3.634 -3.0% 3.446 2.3%Gasoline sales 2011M3 million gallons 63.14 55.28 14.2% 63.34 -0.3%Visitor Volume 2011M4 million visitors 3.654 3.722 -1.8% 3.497 4.5%

tabl

e 4 Washoe County Date units Current Previous Change year ago Change

employment** 2011M4 000 employees 187.9 187.6 0.2% 190.0 -1.1%unemployment rate* 2011M4 %, NSA 11.7 13.1 -1.4% 14.4 -2.7%taxable sales 2011M3 $billion 0.452 0.359 25.8% 0.443 2.1%Gaming revenue 2011M4 $million 64.11 61.15 4.8% 64.50 -0.6%residential Permits 2011M4 units permitted 38 57 -33.3% 109 -65.1%Commercial Permits 2011M4 permits 12 5 140.0% 7 71.4%Passengers 2011M4 million persons 0.296 0.349 -15.2% 0.310 -4.5%Gasoline sales 2011M3 million gallons 13.44 12.41 8.2% 14.27 -5.8%Visitor Volume 2011M4 million visitors 0.357 0.352 1.6% 0.361 -1.1%

This information is provided compliments of

Michael M. Lawson President and CeO Of COmmerCe real estate sOlutiOns

Mike Hillis, CCIM, SIOR managing Partner Of COmmerCe real estate sOlutiOns, las Vegas

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