Terrorist strikes cast pall over Las Vegas economy

David Strow

Thursday, Sept. 13, 2001 | 9:53 a.m.

The Las Vegas economy -- and the gaming industry at its core -- has a rocky path ahead in the wake of terrorist strikes against New York and Washington, experts say.

The problem is, no one knows how long the effects will linger, or how severe the impact will be.

"(A Las Vegas recession) is a possibility, yes," said Mary Riddel, associate director for the Center for Business and Economic Research at University of Nevada, Las Vegas. "What we've seen in Las Vegas in the past few months is a pretty dramatic slowdown from a city that was growing very fast. We're already slowing down, this could add more on top of that and accelerate the slowdown."

Las Vegas' gaming and tourism industry is, without question, the heart of the local economy. Leading into this heart are two main arteries -- McCarran International Airport and Interstate 15, the roadway link between Las Vegas and Los Angeles; and Las Vegas and points north and east.

"Las Vegas is an island," said Dave Ehlers, chairman of Las Vegas Investment Advisors. "If anything restricts those arteries, we're going to feel it. How much we feel it is a function of the extent to which the arteries are restricted."

One of those arteries has been severed for the last 48 hours, and it still isn't known when flights will resume from McCarran.

"Quite clearly, there will be some impact, but we're not able to determine what that will be yet," said Alan Feldman, spokesman for MGM MIRAGE. "Obviously there is going to be some impact, not only in our industry but the entire (U.S.) economy.

"This is not a time when people have tourism high on their list of priorities," he added.

Business over the past several days, Feldman said, has been down.

"None of us would have expected (business) to be at normal levels (on Tuesday). That would have been naive," Feldman said. "People are spending time trying to reach loved ones, on the phone, spending time watching this on TV. Having said that, we do have some activity, but again, it's too early to determine what the longer-term impact of this will be."

The issue of air travel is critical for Las Vegas, said Andrew Zarnett, gaming analyst with Deutsche Banc Alex. Brown. Zarnett noted that a majority of Las Vegas visitors come through McCarran.

"When air traffic resumes, people will make a decision on whether they want to fly," Zarnett said. "That could lead to a reduction in air traffic. That will negatively impact the volumes and margins of Las Vegas properties.

"Also, I believe there will be an economic impact from this tragedy on the overall economy. That will impact tourist destinations, such as Las Vegas."

The key question is, how many travelers will now refuse to fly? Dave Ehlers, chairman of Las Vegas Investment Advisors, pointed to a USA Today-CNN-Gallup poll released late Tuesday. Forty-eight percent of respondents to that survey said they would be less willing to fly in the future.

"I don't think there's any question we're going to have considerably weaker demand," Ehlers said. "I know of no single factor that tells me it (airline business) will be greater. (Las Vegas) is critically dependent on airline activity.

"Short-term, there's no question you'll have less people coming to Las Vegas. The question is, will be it 90 days? A hundred twenty days? Six months?"

Ehlers said a survey his firm conducted late Tuesday points toward trouble. Three weeks ago, LVIA surveyed 10 Strip hotels for their rates this weekend. When they called back Tuesday, those rates were down an average of 35 percent, Ehlers said.

"By next week, we'll have enough time to see what (the trends) look like, how they (hotels) are changing their plans for the future," Ehlers said.

These effects are expected to linger as long as Americans are afraid to board airplanes. How long that will take is anyone's guess.

"Clearly today, there's great uncertainty about safety in this city (New York), and also about traveling by air," Zarnett said. "With little mroe than just assurances from our leaders (about) how this happened ... individuals will be reluctant to fly. How long that lasts is uncertain. It's probably shorter vs. longer.

"People will get on planes and resume normal traffic patterns, but there's no way to know for sure (when)."

But concerns spread beyond gaming. Another industry that could take a heavy blow in Las Vegas is the construction industry, particularly the residential construction industry, Riddel said.

"Construction has been propping up the Las Vegas economy, buoyed by (low) interest rates," Riddel said. "That sector could take a hit. I think many people will rethink plans about (buying) a new home until they see what will happen."

Gaming and construction "is pretty much our economy," Riddel said.

Demand for residential construction is directly linked to consumer confidence. Strong consumer confidence has helped keep the economy out of recession through 2001, Riddel said.

"I don't think consumer expectations will be able to keep us going over the next two quarters ... given the shock to the American public," Riddel said. "Retail sales are really sensitive to consumer confidence, and that's another very important sector in the Las Vegas economy that could take a hit."

Still, not all is negative for Las Vegas going forward. Migration into the Las Vegas Valley remains strong; currently, the center is estimating in excess of 8,000 people are moving into the valley each month. That should help prop up demand, Riddel said.

"Las Vegas is doing incredibly well," Riddel said. "It is still the destination resort for the United States. But this is definitely a time when we'd expect things to slow down even more than they have."

So far, the effects of the New York attack have not been seen on the U.S. stock market. That's because the New York Stock Exchange and Nasdaq have been closed for the last two days, and will remain closed through at least today.

"The primary underlying concern in the market is uncertainty," said John Futrell, a Las Vegas investment advisor. "Any time there's uncertainty in the world, whether it's politics, war or the economy, it has an adverse effect (on stocks). As long as we don't know who the culprit is, and as long as there isn't a game plan, we're going to have that uncertainty, and it will have an adverse effect on the market."

Though European and Asian stock markets plunged after news of the bombings, they did bounce back slightly Wednesday. That creates some optimism, Futrell said.

"If that can be any indication, it (the effect on the U.S. markets) may not be as severe as some were projecting it to be," Futrell said. "In the Middle East war of 1990, with the onset of war, we saw a dramatic drop in the market. The very next day, it spiked back up. Although it was a dramatic event, the adverse effect on the market was minimal."

Bonds, real estate and commodities, such as gold and oil, have served in the past as havens for weathering financial storms.

"We might expect to see those sectors spike in the next several days," Futrell said. "I would not be surprised to see money going into bonds, as we've seen for the last year and a half."

Still, Futrell is urging his clients against yanking money out of the market in favor of investments like gold.

"I wouldn't invest clients into those sectors because of sheer speculation," Futrell said. "The bottom like is, hold onto the original strategy you had prior to this traumatic event, and wait for the market to get back on its feet."

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