Since June of 2009, the U.S. has experienced 111 months of continuous, uninterrupted, economic growth. The only longer period of growth happened from March 1991 to March 2001 equaling 120 months.
The reasons for America’s recovery are simple. Interest rates were cut quickly and aggressively by the country’s central bank, the Federal Reserve, and kept at rock-bottom levels for seven years. The Fed also pumped trillions of dollars into the economy through the process known as quantitative easing – buying bonds to expand the money supply.
Swift action was taken to clean up the financial system so that the banks could start lending again. Obama announced a modest package of tax cuts and spending increases. Lessons were learned from the mistakes of the Great Depression in the 1930s when demand was sucked out of an already weak economy, and banks were allowed to fail. Taken together, the measures got the US slowly moving again.
However, because of the long period of growth, many economists are predicting a market correction in the coming months. But, according to numbers from the UNLV Lee School of Business Center for Business and Economic Research (CBER) and Marcus & Millichap, Nevada is predicted to have a strong finish to 2018.
Starting with Marcus & Millichap, their third-quarter headline reads, “Booming Late-Recovery Las Vegas Firing on All Cylinders.” In their Multifamily 2018 Outlook, construction completions are rising moderately, reaching new cyclical high as builders focus on locations in Southwest Las Vegas. They are predicting that 3,700 units will be completed with a vacancy of only 5 percent, 60 basis points lower than the previous yearlong period. Also, effective rent rates have increased 7.1 percent to $1,010 per month. It is no surprise that buyers from California continue to be drawn to the Las Vegas market.
Over the past four quarters, Las Vegas firms have added 26,000 positions, a 2.7 percent increase year over year, and boosted payrolls by 2.7 percent. The 2nd quarter of 2018 reported a median household income of $57,547 against a U.S. median of $61,179.
The percent of Las Vegas metro population, age 25 and older, with a Bachelor’s degree or above, is 22 percent compared to a U.S. average of 29 percent.
According to William E. Hughes, Senior VP, Marcus & Millichap, “The Federal Reserve appears committed to normalizing the fed funds rate, but further action could be restrained this year as headwinds could weigh on the economy. Economic growth and inflation have had a dramatic effect on the 10-year Treasury rate, which has more than doubled over the past two years to 2.85 percent. However, capital inflows as investors seek alternative investment options are holding the rate below 3 percent.”
“The Lending market remains competitive as interest rates rise. Government agencies continue to consume the largest share, just slightly over 50 percent, of the apartment lending market. National and regional banks control approximately a quarter of the market. Multifamily interest rates currently reside in the mid-4 percent to mid-5 percent realm with a maximum leverage of 75 percent. Portfolio lenders will typically require loan-to-value ratios closer to 70 percent with interest rates in the low-4 percent to low-5 percent span,” reported Hughes.
Turning to the Nevada Indexes from UNLV’s CBER report, Stephen M. Miller, Ph.D., Director reports that the year to year Coincident Index for May was up 3.1 percent with Taxable Sales up 5.0 percent, Gross Gaming Revenue up 5.6 percent, and Nonfarm Employment up 2.8 percent.
The Nevada year to year Leading Index for May was also up 2.4 percent with Initial Claims up 3.7 percent, 10-Year Treasury up 0.2 percent, Housing Permits up 26.6 percent, Commercial Permits up 15.1 percent, Airline Passengers up 4.1 percent, and the S & P 500 up 12.7 percent.
The Southern Nevada Indexes looked even better with the year to year Coincident Index for May up at 3.9 percent showing Taxable Sales up 7.5 percent, Gross Gaming Revenue up 7.2 percent, and Nonfarm Employment up 3.5 percent.
The Southern Nevada year to year Leading Index for May was also up 1.5 percent with Initial Claims up 3.7 percent, 10-Year Treasury up 0.2 percent, Housing Permits up 52.6 percent, Commercial Permits up 3.9 percent, McCarran Passengers up 3.7 percent, and the S & P 500 up 12.7 percent. Also in Southern Nevada, Construction Employment is up 8.7 percent and the Las Vegas Hotel/Motel Occupancy Rate is up 0.4 percent.
Note: The CBRE Nevada Coincident Index measures the ups and downs of the Nevada economy based on Nevada taxable sales, gross gaming revenue, and nonfarm employment. The CBRE Nevada Leading Index provides an indication for the future direction of the coincident index based on Nevada Initial Claims for Unemployment (inverted), Real 10-year Treasury Rate (inverted), Nevada Housing Permits, Nevada Commercial Permits, Nevada Airline Passengers, and the Standard & Poor’s stock market index.
On a broader basis, Dario Perkins, managing director of global macroeconomics at the research company TS Lombard, says “All [economic] upturns come to an end sooner or later and the fact that it is now almost nine years since the US emerged from recession has inevitably led to speculation about when and how the next downturn will arrive.”
Perkins says that there are only scattered signs of the trends that normally develop in the late stages of an economic cycle – firms running up against capacity constraints, rising inflation, and excessive investment. More likely, he thinks, the end will come – as it did in both 2001 and 2007 – with the popping of an asset-price bubble. “Recent history suggests any problems are more likely to start in the financial sector and with central banks tightening policy and asset prices high by historical standards, this is surely the area to watch over the next 12 to 18 months.”
Dean Baker, from the left-leaning Centre for Economic Policy Research in Washington, says “there is no real evidence that the US economy is reaching its supply limits and that the concerns expressed over the impact of Trump’s tax cuts for the budget deficit are overblown.”
But the Fed might see it differently. Keith Wade, chief economist and strategist at the investment firm Schroders, says “the US central bank has a tricky task in raising interest rates without triggering a sharp [economic] downturn and that its dilemma is made worse by the fading impact of the fiscal boost after 2019.”
Whether the U.S. is headed for a minor market correction or significant economic downturn is anyone’s guess. In the business world, it is always best to keep enough cash on hand to weather the storm or at least have a resource that you can rely on to acquire the needed cash.
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