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September 22, 2014

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Worst of recession may be over, but Las Vegas still has to hold on

In the way of recovery, Brookings report finds, are our tourism-dependent economy, unskilled workers

The worst of it finally appears to have passed.

After two years of economic decline, the gross metropolitan product of Las Vegas, which measures Southern Nevada’s total output of goods and services, grew slightly in the fourth quarter of 2009, according to a new report from the Brookings Institution.

The quarter also brought a substantial reduction in the foreclosure rate, although Nevada still leads the nation.

“When news has been bad for so long, things not getting worse is good news,” said Elliott Parker, a UNR economist.

Nothing is certain and a double-dip recession isn’t out of the question, but the report from Brookings — a Washington, D.C.-based think tank that collaborates with UNLV — indicates we may be on the cusp of economic improvement.

Still, the report and other recent data include reams of sobering conclusions for the Las Vegas economy:

The employment picture has not improved, as firms are not adding new workers; the recovery looks to be slower and weaker than those of any of the past three decades; and finally, Southern Nevada is ill-suited for this recovery because of the continued dearth of commercial and residential construction and a relatively uneducated workforce.

Among 100 major American metropolitan regions, Las Vegas has experienced a worse recession than nearly all the rest: Southern Nevada had the 10th highest job loss, with nearly 10 percent of our jobs lost to the recession. We also had the 15th highest rate of economic contraction and the steepest drop in home prices.

Reno’s numbers aren’t much better. In fact, this recession has pummeled the Intermountain West, with Boise and Phoenix also suffering in ways not seen in past recessions and still struggling to recover.

There are a few striking conclusions to draw, said Mark Muro, one of the report’s authors.

“For the first time in 30 years, the Intermountain West has not snapped back and snapped back faster than the nation as a whole,” he said. “This is troubling.”

“This should be cause for some reflection about how you achieve economic growth, and some deep thought about the future.”

In the past, the steady migration of Americans to the West from the Rust Belt, and the immigration of Latin Americans to places such as Phoenix and Las Vegas, created a virtuous cycle of growth and attendant economic prosperity.

Las Vegas also benefited from the rising popularity of gambling and from the region’s highly effective marketing, which transformed it into an upscale, international destination.

But there were weaknesses in the economic model.

Cities with the fastest growth have experienced the steepest declines, a phenomenon unique to this recession, Parker noted. That’s because much of the growth was due to the bubble in the real estate market, as opposed to real, sustainable economic expansion.

As John Restrepo, the local economic consultant and vice chairman of Nevada’s Economic Forum, put it, “We were too dependent on discretionary spending, and consumers with heavy debt loads.”

Tourists are paying down debt and making hard choices about priorities, with Las Vegas well down the list of required spending.

Convention spending is recovering, however, and will almost certainly be an important part of recovery as Southern Nevada has become a relatively affordable destination for gatherings that require lots of convention space and hotel rooms.

Local economic consultant Jeremy Aguero said the region must work to continue to provide adequate infrastructure, including water. He also made a subtle point about the relationship between the region’s strengths and weaknesses: “Right now, our biggest strength (low cost) is also our biggest weakness (because we underfund education).”

Las Vegas, relative to other cities, has low taxes and is filled with cheap buildings and cheap labor. The problem is that cheap, uneducated labor does not appear to be very useful at the moment or in the near future.

“The main policy implication is the human capital issue,” Parker said. “The extent to which Intermountain West cities are in recovery is highly correlated with education and skills. And we’re an outlier: We’re heavily dependent on industries that don’t require education.”

Indeed, the unemployment rate for those with a college degree is roughly 10 percentage points lower nationwide than those without a high school diploma, which probably understates the true picture because the undereducated are also more likely to be underemployed — they’ve dropped out of the labor force and thus aren’t counted in the official statistics.

Muro said this gap between those with college educations and those without simply confirms what’s been known for some time: “Education is a mainstay of success at the family, company, community and national level. There are few insights better documented than the benefits of education.”

The Intermountain West cities that have staved off the worst of the recession are those with lots of educated workers, such as Denver and Boulder, Colo.

Even as this has been true during the recession, it will continue to be true during recovery, Parker noted. That’s because for the first time in recent memory, the continued glut of buildings of all types will mean construction will not be the sector to lead the economy out of recession.

Instead, it would seem exports and technology will drive expansion, sectors that often require educated, skilled workers, whom Nevada lacks, Parker said.

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