The Economy – Why Does It Still Hurt?

The economy is getting a bit better in Nevada, but it ‘still hurts.’  Let’s poke some of the sore spots.

Unemployment percentages have been dropping and now stand at an uncomfortable 11. 6% statewide.  However, employment levels are up in 14 out of 17 counties, and the following chart taken from DETR (pdf) shows an uneven employment situation in the Silver State:

Some of the YOY comparisons are highlighted because they suggest why the recovery has been uneven.  Carson City was mentioned previously because no sooner did the hiring come to a halt in state agencies and departments than local businesses found their taxable sales on the downward skids. Job growth in the Carson City MSA of -0.9% is part of the overall drag on the Nevada economy.   While no one wants over-stuffed bureaucracy, there is a point at which scaling down government operations not only means reduced protection and services, but it also begins to affect the economic growth of the region.

Those who respond, “But Gee We Have To Balance The State Budget,” are missing one critical factor.  Capital expenditures aren’t subject to the balancing act.  Investing in capital improvements may not have saved 259 jobs in the Carson City area, but putting some coin of the realm into deferred projects might have had a healthy impact on local construction companies.  Money spent on local contracts means money in the pockets of local construction companies.

This might be a good time to remember that a government entity going into debt (issuing bonds) isn’t necessarily an economic evil.  Government debt doesn’t crowd out private investment unless interest rates are high.  And that just isn’t the case right now — a point also made previously.

The recent layoffs of 1,419 teachers in Clark County doesn’t show up in the figures in the chart, but it will eventually.  The Las Vegas metropolitan area has a double whammy.  First, it has been caught in the great budget bind of 2008-2012 and public sector jobs have been eliminated or deferred.  Secondly, it’s ground zero for the housing market debacle brought to us by our friends in very high places and trading desks on Wall Street.  The following chart from DETR illustrates the problem as of 2011 Q3:

No surprise, the economic sector taking the biggest hit was construction, down 11.4%.  Public administration (-4.2%) and educational services (-3%) were the next highest in the job loss categories.  Many little pixels have given their all toward explaining what happened in the Housing Bubble and its Spectacular Splatter.  However, because we have a candidate for the presidency who is advocating the repeal of the Dodd-Frank Act, and a senatorial candidate who has co-signed a bill to that purpose, a few more pixels should go in a good cause.  *Feel free to skip this next part if you haven’t bought into the Big Lie that the “poor billionaire bankers were the victims of icky government and dishonest home buyers.”

(1) Private banking interests generated loans to homeowners (2) while reducing lending standards (3) to accumulate as many loans as possible in order to (4) package the mortgages into CDOs which (5) were sold to other banking firms and (6) bet on using credit default swaps.  When investment institutions like Bear Stearns, Lehman Brothers, etc. etc. couldn’t cover their bets they got sold off, bought out, or as in the case of Lehman Brothers just flat out collapsed in a heap of bankruptcy.

Unsophisticated homebuyers didn’t help, the conflicted ratings agencies which slapped AAA ratings on Junque didn’t cover themselves with glory, having the mortgage twins reduce their lending standards and start playing in the shark pool didn’t help either.   The bottom line is that very few investment institutions knew what their bottoms looked like — they knew the price of everything and the value of nothing, especially the increasingly toxic assets on their own books.

OK the review is over, and it’s time to return to the more tangible world of statewide economic problems.

Declining Household Wealth.

Here’s where Clark and Washoe Counties took the Big Double Whammy.  As of September 12, 2008 Nevada achieved the dubious distinct of having the nation’s highest foreclosure rate.  One out of every ninety-one households had received some kind of foreclosure notice.  [LVSun]  The collapse wasn’t pretty:

“Americans lost nearly two decades of accumulated wealth from 2007 to 2010, according to a survey by the Federal Reserve. The median American family’s net worth dropped to $77,300 in 2010, from $126,400 in 2007.”  [Bankrate]

The collapse is even more unpleasant when we go to the source of that report.  The June 2012 Federal Reserve Bulletin (pdf) observes:

The decreases in family income over the 2007−10 period were substantially smaller than the declines in both median and mean net worth; overall, median net worth fell 38.8 percent, and the mean fell 14.7 percent. Median net worth fell for most groups between 2007 and 2010, and the decline in the median was almost always larger than the decline in the mean. The exceptions to this pattern in the medians and means are seen in the highest 10 percent of the distributions of income and net worth, where changes in the median were relatively muted. Although declines in the values of financial assets or business were important factors for some families, the decreases in median net worth appear to have been driven most strongly by a broad collapse in house prices.

The changes for those in the top ten percent of net worth were “muted” because more of their assets are in the financial markets, which have recovered rather nicely.  Middle class Americans tend to have more of their net worth tied up in the family manse.  Again, from the Federal Reserve Bulletin:

“Housing was of greater importance than financial assets for the wealth position of most families. The national purchase-only Loan Performance Home Price Index produced by First American CoreLogic fell 22.4 percent between September 2007 and September 2010, by which point house prices were fully 27.5 percent below the peak achieved in April 2006. The decline in house prices was most rapid in the states where the boom had been greatest. For example, California, Nevada, Arizona, and Florida saw declines of 40 to 50 percent, while Iowa saw a decline of only about 1 percent.” (emphasis added)

As property values dropped in Clark and Washoe counties so did the net worth of most of the residents.  What do people do when faced with foreclosures, underwater properties, or a devaluation of their total net worth?

Deleveraging.   The Federal Reserve Bulletin tells us that debt “ownership” generally fell as families “deleveraged” their obligations.  Home secured indebtedness declined. No surprise there.   By 2010 there was a 0.6% decrease in installment loans (education, vehicles) and the number of credit card holders declined.  Meanwhile back at the bank, the credit lines diminished as well, generally dropping from $18,900 to $15,000.   One practical result of this reduction is that individuals found their credit scores going down as their credit line declined.  Recessions are, as Angry Bear explained, a good way to keep the little guys down.

Unemployment + declining household wealth + deleveraging = A Really Big Hole.

Watching 19.3% trillion in household wealth evaporate between 2007 Q2 and 2009 Q1 is a tsunami-like shock to any economy, but one that’s fueled by consumer spending will really take a serious punch.

All is not lost.  Nevada demonstrated job growth in all but seven categories. (see above) Employment increased, at least minimally, in all but three Nevada counties.   And, last but not least, after holding on to the Top Spot in Home Foreclosures for 62 months, Nevada dropped to Number Two in March 2012. Now the rate is about 1 in every 313 households — a definite improvement from 1 in every 91. [RealtyTrac]

What we cannot expect is that the housing sector will lead Nevada’s economic recovery, as housing was wont to do in times past. [LVSun] If we can stanch the flow from public sector employment declines, continue to see increases in most categories of wages and salaries, and see further growth in health care, tourism, professional & technical, and manufacturing employment we’ll begin to climb out of this pit.

What Nevada needs now are fiscal and financial policies at the state and national level that promote stability over volatility — we’ve had enough of the latter to last for the next decade.  The state would also benefit from housing policies that help homeowners hang on such that further reductions in household wealth can be mitigated.  And, while we’re about it, it wouldn’t hurt to have regulatory structures in place to restrict the kind of Irrational Exuberance on Wall Street that helped get us into this mess in the first place.