Stronger Headwinds in 2016

The general prognosis for the U.S. economy is for stronger headwinds to economic growth in 2016, but only a slight chance of recession, with the odds of a recession stronger in 2017. What this future recession might look like is anybody’s guess. Recessions like the one that hit in 2008 are relatively rare. Most recessions are a result of an economy overheating – producers produce too much for consumers to consume, everybody takes a little bath and then the economy gets back to growth one or two quarters later. The odds would suggest that a correction of this sort is all we’re in store for in the next few years, though global events and the lack of reform in Washington, D.C. keep the possibility of something more severe a possibility, albeit unlikely.

The two questions we should be asking are, first, what are these headwinds that might blow the economy off course, and second, how likely are they to impact Southern Nevada.

We’ll tackle the second question first. While Southern Nevada once had a reputation for being recession proof, the Great Recession put that myth to rest once and for all. In truth, Southern Nevada had never been recession proof, but tended to enter recessions late, and recover early. In the case of relatively minor recessions, the impact often went unnoticed. Southern Nevada had population growth to thank for this. Even when the locals were feeling the pinch of recession, more locals with additional incomes were moving into the Valley and offsetting the local weakness.

Southern Nevada can no longer depend on that kind of growth to keep recessions light. Population growth in Southern Nevada is lighter than a decade ago, though any growth in a region can help ameliorate a recession somewhat. Of course, each recession has its own particular character, and the character of a recession is a major factor in which regions and localities suffer the worst.

This brings us to the question of those headwinds. On a global scale, there is economic difficulty in Japan, China and Europe, and trouble in the natural resources sector has impact Canada, one of America’s most important trading partners. On the off chance that these troubles triggered a major global recession, Southern Nevada would of course feel the effects. More likely, these troubles will have a small impact on Southern Nevada’s tourist industry, and otherwise leave the Valley unscathed.

The more serious problem for Southern Nevada is the transportation sector. Globally, there is an over-abundance of transportation resources, and this is impacting transportation companies. In the BLS’s most recent numbers, there are two components of transportation employment that could impact Southern Nevada’s industrial real estate sector – truck transportation and warehousing and storage.

The warehousing and storage sector saw jobs decrease by 0.4 percent from December 2015 to January 2016, while truck transportation increased by 1.5 percent. A mixed bag, but on the whole probably positive for Southern Nevada and its warehouse/distribution sector, which have been surging over the past year. The most recent numbers we have for Southern Nevada show the growth in transportation and warehousing employment slowing slightly at the end of 2015 after strong growth through most of the year. The sector added 200 jobs month-over-month in December 2015, and 1,500 jobs on a year-over-year basis.

The prognosis for Southern Nevada remains positive in 2016. There could be a small disruption in the warehouse/distribution sector if transportation suffers nationally, and developers who do not have pre-leasing in place in planned projects may want to be cautious about beginning construction on those projects. Tourism saw weak gaming revenue numbers in the latter half of 2015, which could point to overall spending by tourists softening, but this softening is probably not strong enough to throw the industry off the tracks in 2016. Retail employment on a year-over-year basis has been weak in Southern Nevada (losing 4,900 jobs between December 2014 and 2015), but that weakness has not been evident in taxable sales numbers (which, admittedly, lag a couple months behind). Again, this might point to caution rather than worry. The construction sector, which languished during the recession and most of the recovery, is now showing strong growth, suggesting that the local economy is expanding, rather than just recovering. Cautious optimism is probably the phrase that pays for Southern Nevada’s real estate market in 2016.

One last graph before I go. This tracks year-over-year job growth in three sectors, Alpha Employment, Beta Employment and Gamma Employment.

Alpha employment are jobs that drive an economy and bring money into the economy. For Southern Nevada, it includes natural resources, construction, leisure and hospitality and a portion of food and drinking places jobs. In the graph, you can see that alpha employment growth has been on the slide for the past few months.

Beta employment supports alpha employment. Theoretically, it consists of jobs that were created as a result of alpha jobs. It has also been sliding.

Gamma employment is government jobs, which are not designed to make money, and to some extent draws money out of the private sector. Gamma growth has jumped around a bit, but has been positive for the past four months.

This is a scheme I've only just started to explore, so no big revelations yet, but I think an interesting thing to watch.