Uncertainty over pandemic, inflation, Ukraine cloud economic outlook

Policy, politics and progressive commentary

Economists at UNLV predict Nevada’s economy will remain in recovery mode for the remainder of the year, “but the picture is less clear for 2023,” says the biannual Outlook report released Wednesday by the school’s Center for Business and Economic Research. 

“Economic recovery depends to a large extent on a continued recovery from the pandemic and inflation. We have made great progress in adjusting our habits to live with the coronavirus,” says the report. “But new variants, such as the BA.2 omicron variant, if more deadly, could throw us back into a recession. That is if inflation and rising interest rates don’t do it first.”

Nationally, the report predicts gross domestic product will grow at 1.7% for 2022 and 2.5% for 2023, down slightly from CBER’s last report in November 2021, “due in part to continued impacts to the supply chain, higher-than-anticipated inflation, Fed actions in the coming months to clamp down on inflation, and the war in Ukraine.”

San Francisco Federal Reserve President Mary Daly, the keynote speaker at Outlook, told an audience of UNLV faculty, students, and business leaders that the best means of getting inflation in check is analogous to safe driving.  She warned against “slamming the brakes” on the economy by rapidly raising interest rates, an approach she says “risks forcing unnecessary adjustments by business and households.”  

Successful monetary policy, she says involves “tapping the breaks” and assessing how much more deceleration is necessary to slow price growth.   

Daly noted that a series of interest rate hikes worked to get inflation in check after a decade of rising prices in the 1970s. “But the correction that the economy went through was absolutely a history that no one wants to repeat,” she said.  

She says the Fed remains focused on its “mantra” to foster “long-term economic expansion to deliver both full employment and price stability.” 

Russia’s war on Ukraine is complicating that charge, Daly said, because energy shortages have historically led to economic contraction, in the U.S. and abroad. 

“It makes it hard to know what the future will bring,” she said.  

The consumer price index was up 8% last month. 

“The question is how much of that will actually be confirmed to be more transitory, in other words shorter term in nature, and decline when supply constraints are eased, versus how much of it is built into the underlying overall price level?” asked Douglas Duncan, senior vice president and chief economist of Fannie Mae. “Our perspective is a significant portion, a greater portion of that is now built into the underlying price price level change and will need to be addressed through the tightening monetary policy.”

Last month the Fed raised its COVID-era interest rate from zero to .25 basis points.  Daly predicts “an expeditious march to neutral (2.5 basis points) by the end of the year.” 

“Our expectation is at least the next two meetings will be 50 basis point increases as they (the Fed) lead into attempting to get inflation under control,” Duncan said, adding the current and anticipated rise in rates is already affecting affordability in housing. 

‘New structure’

The labor market, Daly says, remains good for job seekers. 

“Anyone who wants a job in our economy has not just one opportunity, but many opportunities to choose,” she said, adding “workers of all types are benefiting, even those who are traditionally left behind.”

While Las Vegas appears to be “back” from the pandemic, UNLV economist Stephen Miller projects some 25,000 pre pandemic hospitality industry jobs will never return, part of what he calls the employment market’s “new structure” with more people “going into retail…”  

CBER’s Clark County Tourism Index – a combination of gross gaming revenue, room occupancy, and airport passengers – “has recovered to more than 114% of its COVID-era decline.”  

Weekend visitor volume is strong, but midweek visitation remains off, in part due to “slowly rebounding convention business,” the report says, adding pre-pandemic levels of visitation are projected to return after 2023. 

The UNLV report projects unemployment in Southern Nevada may remain above its pre-pandemic low of 3.7% for another two years.  

“Because the Southern Nevada economy heavily depends on tourism, its outlook ties to the future path of all these factors,” the report says. “Continued progress on vaccinating a higher percentage of the population, the absence of a new variant that can avoid the protection of vaccines, a reasonable resolution of the war in Ukraine, and how the economy reacts to higher interest rates will make economic recovery more likely.”

Housing prices in Southern Nevada are up 35% since the beginning of the pandemic in 2020. Even with rising interest rates, the market is expected to remain strong through this year, with “maybe a slight downturn in prices” in 2023, says Miller. 

Duncan of Fannie Mae says housing prices nationwide are expected to increase 10% this year, which is half of last year’s increase. He attributes strong demand and rising prices in the first quarter to “people anticipating the rising rates and trying to get in ahead of that…” 

From 2002 through 2008, America’s housing market saw a disconnect between  housing prices and family income, Duncan said, a scenario some suggest is repeating today.

“We don’t believe we’re at a price bubble that looks anything like that period,” he says, adding “it’s very possible that we will have inflation-adjusted price declines and possibly even some nominal price declines in the 2024 time period to readjust that relationship between sales price of the median single family house and median household incomes. Those things we believe do eventually have to come back to some sort of a long-term relationship.” 

Amid all the economic uncertainty, one industry – batteries – is the closest thing to a sure bet in Nevada, according to UNLV’s economists.  The industry, which includes lithium mining, currently employs between 14,000 and 20,000 in Nevada, predominantly at Tesla’s factory and its support firms in Storey County.  The industry is expected to multiply by five to seven times in the next eight years.  

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