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

Will an improving Economy BEDraggED DoWn By HigHEr oil pricEs?

issuE 15 marcH 2012

the high gasoline and jet fuel prices seen in march and April raise concerns about the possibility that high energy prices will lead to yet another economic slowdown. Although high gasoline prices are visible and alarming, current energy market conditions are unlikely to push the u.s. economy back into recession. the gains in oil prices that produce higher gasoline and jet fuel prices have not been enough to trigger a recession.

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In addition, oil prices are likely to play less of a role in current U.S. economic conditions than the past. Other energy prices—particularly those for natural gas—have not moved with prices for oil and petroleum products. The U.S. economy has become much less dependent on energy. As a result, high oil prices mean much less headwind to overall economic activity than in the past.current oil prices are not at recession-producing Heights

The United States has seen a number of episodes in which oil prices rise sharply and are higher than had been seen in the previous three years. These episodes have preceded all but two of the U.S. recessions since World War II. The two exceptions are the 1960 and 1970 recessions.1 Sharply rising oil prices also provided false signals in the mid-1990s and from 2002 to 2005. In addition, most attribute the 2008-2009 recession to a financial market meltdown rather than the 2007 oil price spike. Nonetheless, economist James Hamilton argues that

had oil prices not risen, the economy would have merely slowed down rather than downshifted into recession. In early 2012, oil prices have not shown the sharp increases that signal that a recession is imminent. That is, oil prices have not risen to the point where they are higher than they have been during the past three years. In addition, the future market shows oil prices falling from current levels, rather than heading upward to the heights necessary to cause a recession.Falling natural gas prices

History suggests oil and natural gas prices move together. In fact, economists Stephen Brown and Mine Yücel found weekly movements in natural gas prices from 1994 through 2007 are well explained by movements in oil prices in a model that takes into account seasonality, variations in weather, natural gas in storage, and disruptions in natural gas production

1 James D. Hamilton, “Causes and Consequences of the Oil Shock of 2007-08, Brookings Papers on Economic Activity,” Spring 2009, pp. 215-84.

neVADA’s EConomy marcH 2012

CommERCE REal ESTaTE SoluTionS | Comre.Com

caused by hurricanes in the Gulf of Mexico.2 That historical relationship seems to have broken down as natural gas prices have diverged from oil prices since early 2009—continuing to fall as oil prices rise. The divergence of natural gas prices from oil prices has been created by the technological revolution in production of natural gas from shale formations. The combination of horizontal drilling with hydraulic fracturing (aka fracking) has led to a substantial reduction in the cost of producing natural gas from shale formations.3 As a result of the shale gas revolution combined with the weakness of the industrial sector coming out of the recession, the United States is awash in natural gas supplies, and natural gas prices have been pushed to extremely low levels. One consequence of recent declines in natural gas prices is that overall prices paid for energy in the United States declined in the first three months of 2012—even as oil prices were rising.reduced u.s. Energy Dependence

U.S. economic output also has become substantially less dependent on energy consumption over the past 40 years. In 1973, 15,414 Btu were required to produce each dollar of U.S. gross domestic product (GDP). In 2011, only 7,327 Btu were required to produce each dollar of U.S. GDP.4 That represents a reduction of 52.4 percent.When we combine the effect of reduced dependence on energy with the divergence of overall energy prices from those for oil, an interesting picture emerges. The

relationship between movements in oil prices and energy purchases as a share of U.S. GDP has changed considerably since the 1970s and 80s. In the 1970s and early 1980s, there was a tight relationship between oil prices and overall energy prices. In addition, considerably more energy was used to produce GDP than is the case today. As a result, energy purchases as a share of U.S. GDP moved relatively tightly with oil prices.In early 2012, however, energy purchases as a share of GDP have not moved nearly as tightly with oil prices. That fact, suggests that the sharp rises in oil prices seen in early 2012 will not have nearly as much impact on overall economic activity as previous history might suggest.oil price shocks and u.s. Economic activity: The new Wisdom

In early 2012, the sharp increases in gasoline and jet fuel prices brought about by higher crude oil prices have raised concerns about the possibility of slowing economic activity. Because natural gas prices have declined since mid-2011, however, the impact of oil price increases on the overall price of energy has been substantially blunted. In addition, reduced U.S. energy dependence means that oil price movements have not led to large changes in energy purchases as a share of GDP. These facts do not lessen the painful feeling at the pump, but they suggest that energy prices are creating much less headwind to overall U.S. economic activity than they did in the past.

2 Stephen P. A. Brown and Mine K. Yücel “What Drives Natural Gas Prices?” The Energy Journal, 29(2), 2008.3 See Stephen P. A. Brown, “Abundant Natural Gas Could Mean a Paradigm Shift in U.S. Energy Markets and Policy,” Resources, Summer 2010.4 GDP is measured in 2005 constant dollars.

Will an improving Economy BEDraggED DoWn By HigHEr oil pricEs?

issuE 15 | ©Copyright 2012 - All Rights Reserved

Story continues after graphs

U.S. economic growth was fairly strong in fourth quarter 2011. Consumer spending and employment were fairly strong in first quarter 2012, but indicators that more closely track GDP—such as personal income—show slower growth. Nevada’s tourism and gaming continue to drive the state’s economic recovery. Nevada’s construction sector remains at relatively low levels. Nevada’s employment fell in February, but reduced labor force participation meant a lower unemployment rate.u.s. Economy showing mostly positive signs

U.S. real GDP grew at an annualized rate of 3.0 percent during fourth quarter 2011, representing a substantial gain over the third-quarter rate of 1.8 percent. Consumption spending and inventory investment were particularly strong. Residential and business fixed investment slowed. Imports and government spending made negative contributions. U.S. nonfarm employment rose by only 120,000 jobs in March after three straight months in which the gains were more than 220,000 jobs per month. The unemployment rate slipped to 8.2 percent in March as labor force participation fell. Consumer sentiment increased in March, but consumer confidence slipped. Sales of existing homes slipped in February, but were 8.8 percent higher than a year earlier. Sales of new homes rose slightly from extremely low levels. Personal consumption expenditures increased in February for the eighth straight month, and retail sales rose in March for the tenth straight month. The Kansas City Financial Stress Index remained below its long-run average in March, indicating a lack of financial headwinds to economic growth. Nonetheless, the National Federation of Independent Businesses reports small businesses are having more difficulty obtaining financing, Table 1.nevada Economy continues to show uneven growth

The Nevada economy continues to show uneven signs of growth. Visitor volume took a seasonal decline in February but was 4.5 percent higher than a year earlier. Gaming revenue was 5.7 percent higher in

February than a year earlier. Taxable sales were up by 4.8 percent in January above a year earlier. According to the establishment survey conducted by Nevada’s Department of Employment, Training and Rehabilitation (DETR), Nevada’s employment declined in February. Nonetheless, the statewide unemployment rate decreased from 12.9 percent in January to 12.1 percent in February because DETR’s household survey showed employment gains, Table 2. clark county’s Economy remains slightly ahead

Clark County’s economy is expanding at a slightly faster pace than the state’s. Compared to a year earlier, visitor volume and gaming revenue for February were up by 5.2 percent and 5.5 percent, respectively. Taxable sales for January were 3.5 percent above those for a year earlier. Residential construction permits rose from January to February, and commercial construction permits remained at a low level. DETR’s establishment survey shows Las Vegas metropolitan employment fell in February. Nonetheless, the region’s unemployment rate fell from 13.0 in January to 12.2 percent in February—mostly because DETR’s household survey showed employment gains, Table 3. Washoe county’s Economy showing improvement

Washoe County’s economy showed some improvement. Compared to a year earlier, February visitor volume was only down 2.4 percent. Gaming revenues were

nevada Economic conditions

neVADA’s EConomy marcH 2012

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 2012M03 million, sA 132.821 132.701 0.1% 130.922 1.5%unemployment rate 2012M03 %, SA 8.2 8.3 -0.1% 8.9 -0.7%Consumer Price index 2012M03 82-84=100, NSA 229.1 228.4 0.3% 223.2 2.6%Core CPi 2012M03 82-84=100, NSA 228.4 227.9 0.2% 223.4 2.3%employment Cost index 2011Q4 89.06=100, SA 114.7 114.2 0.4% 112.8 1.7%Productivity index 2011Q4 2005=100, SA 110.7 110.4 0.2% 110.5 0.1%retail sales 2012M02 $billion, sA 407.8 403.5 1.1% 383.0 6.5%Auto and truck sales 2012M03 million, sA 14.31 15.04 -4.8% 13.02 9.9%Housing starts 2012M02 million, sA 0.698 0.706 -1.1% 0.518 34.7%real GDP*** 2011Q4 2000$billion, SA 13,429.9 13,331.6 3.0% 13,216.1 1.6%u.s. Dollar 2012M03 97.01=100 98.727 98.121 0.6% 96.944 1.8%trade Balance 2012M02 $billion, sA -46.025 -52.522 -12.4% -45.381 1.4%S and P 500 2012M03 monthly close 1,408.47 1,365.68 3.1% 1,325.83 6.2%Real Short-term Rates* 2012M03 %, NSA -3.82 -3.21 -0.6% -4.50 0.7%treasury Yield spread 2012M03 %, NSA 2.09 1.88 0.2% 3.31 -1.2%

Tabl

e 2 nevada Date units current previous change year ago change

employment 2012M02 000 employees 1,113.2 1,117.1 -0.3% 1,108.8 0.4%unemployment rate* 2012M02 %, NSA 12.1 12.9 -0.8% 13.8 -1.7%taxable sales 2012M01 $billion 3.154 4.216 -25.2% 3.009 4.8%Gaming revenue 2012M02 $million 932.17 1,038.41 -10.2% 881.83 5.7%Passengers 2012M02 passengers 3.418 3.480 -1.8% 3.280 4.2%Gasoline sales 2012M01 million gallons 85.12 90.07 -5.5% 89.76 -5.2%Visitor Volume 2012M02 million visitors 3.821 3.859 -1.0% 3.656 4.5%

Tabl

e 3 clark county Date units current previous change year ago change

employment 2012M02 000 employees 799.5 802.9 -0.4% 797.3 0.3%unemployment rate* 2012M02 %, NSA 12.2 13.0 -0.8% 14.0 -1.8%taxable sales 2012M01 $billion 2.332 2.992 -22.1% 2.252 3.5%Gaming revenue 2012M02 $million 812.14 925.49 -12.2% 769.53 5.5%residential Permits 2012M02 units permitted 460 317 45.1% 246 87.0%Commercial Permits 2012M02 permits 18 21 -14.3% 10 80.0%Passengers 2012M02 million persons 3.108 3.176 -2.1% 2.916 6.6%Gasoline sales 2012M01 million gallons 59.50 61.12 -2.7% 63.10 -5.7%Visitor Volume 2012M02 million visitors 3.326 3.398 -2.1% 3.160 5.2%

Tabl

e 4 Washoe county Date units current previous change year ago change

employment** 2012M02 000 employees 186.2 185.8 0.2% 186.6 -0.2%unemployment rate* 2012M02 %, NSA 12.2 13.0 -0.8% 13.5 -1.3%taxable sales 2012M01 $billion 0.397 0.579 -31.5% 0.374 6.1%Gaming revenue 2012M02 $million 60.26 53.73 12.2% 55.73 8.1%residential Permits 2012M02 units permitted 42 95 -55.8% 49 -14.3%Commercial Permits 2012M02 permits 4 11 -63.6% 11 -63.6%Passengers 2012M02 million persons 0.265 0.259 2.3% 0.299 -11.4%Gasoline sales 2012M01 million gallons 13.02 14.49 -10.2% 13.45 -3.2%Visitor Volume 2012M02 million visitors 0.314 0.278 12.8% 0.321 -2.4%

nEvaDa Economic conDiTions

issuE 15 | ©Copyright 2012 - All Rights Reserved

up by 8.1 percent over the same period. Residential and commercial construction permits fell in February. According to DETR’s establishment survey, Reno-Sparks employment rose by 400 jobs (0.2 percent) from January to February. The Reno-Sparks unemployment rate fell from 13.0 percent in January to 12.2 percent in February because DETR’s household survey for the region showed stronger employment gains than its establishment survey, Table 4. nevada Economic outlook in Brief

Driven by strong gains in consumer spending and inventory investment, national economic conditions improved in fourth quarter. Spending growth remained relatively strong in early 2012, but the employment growth slipped in March. Southern Nevada’s tourism, hospitality, and gaming industries continue to grow, but other sectors aren’t contributing much. In Washoe County, some favorable economic signs were seen in February. Nevada’s construction remains close to bottom.

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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