Apertor consumer deleveraging-gaming_industry_1c

717 views
655 views

Published on

The report addresses U.S. household debt and it's impact on discretioniary spending in the U.S. gaming industry. It also provides a regional analysis of Household debt and personal income levels.

Published in: Economy & Finance, Business
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
717
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
0
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Apertor consumer deleveraging-gaming_industry_1c

  1. 1. Apertor Research www.apertorhospitality.comOctober 12, 2010 Gregg Carlson Advisor 702.506.0475 x540 gcarlson@apertorhospitality.comConsumer Deleveraging and the U.S. Gaming IndustryHousehold Debt Slows Industry Deleveraging ©2010 Apertor Hospitality, LLC. All Rights Reserved.
  2. 2. Executive Summary 2 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010Executive Summary In late 2009 to early 2010, U.S. GDP data improved suggesting that a U.S. economic recovery had begun. 2Q10 GDP datapoints have since “rolled over” triggering fears that the U.S. could face a double dip recession. Current consensus is that the U.S. economy will recover at a slow pace over an extended period of time. Casino operators in the U.S. continue to face a challenging operating environment due to slow growth in consumer spending. The open question for the gaming industry is when demand will improve enough to drive a sustainable recovery. Subsequent to the recession in 2002, U.S. consumer spending grew at a robust pace driving growth in the U.S. gaming industry until late 2007 to 2008. Today, it is well understood that a significant amount of consumer spending between 2002 and 2007 was driven by debt driven consumption tied to housing appreciation. Estimates we have viewed suggest that as much as $2.2 trillion was extracted from housing appreciation through debt increases between 2003 and 2007. Much of this amount flowed into consumer spending, which in turn drove revenue growth in the gaming industry. The mortgage debt driven consumer spending tailwind that ended in 2007 is now a headwind as households deleverage from unprecented historical levels. As we write, U.S. households continue to save more and deleverage through both debt write-off and repayment. While this behavior may be healthy for individual households, we believe that it will continue to dampen spending in the gaming industry. At this juncture, the subjects of deleveraging and increased household saving have been addressed by economic forecasters and to a lesser degree by industry analysts. We initially focused on these issues a year ago by surveying available data and preparing an analysis of the topics to develop our thesis that consumer spending in the gaming industry was being dampened by deleveraging and would likely continue to be impacted for an extended period of time. Post the 2007 household leverage peak, deleveraging has been a mixed bag as the non- mortgage consumer credit to income ratio has now moved down to the year 2000 benchmark (pre household debt run up level) suggesting that deleveraging may have largely already occurred in this category of household debt. However, the largest category of household debt is mortgage debt. In this category, debt to income levels have moderated from a peak of 101% in 2007 to 91% today, but appear to have way to go before the deleveraging process is complete. For household mortgage debt to be deleveraged back to year 2000 levels, debt ratios would need to decrease to 65% of future personal disposable income. This implies that only 25% of the deleveraging process may have been completed to date. On the other hand, if debt levels ultimately bottom at higher rates of personal income at 80% or 70% for example, the consumer is further along in the process.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  3. 3. Executive Summary 3 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010 It is not known what the eventual long-term debt to income run rate will be and how much of the deleveraging process will be acomplished by the individual components of income growth, debt repayment and default. Economists we have surveyed have indicated that they expect the mortgage deleveraging process to continue over the next few years, but they do not know precisely where debt to income levels may bottom out (e.g. at 80%, 70% or 60% debt to income levels). If future personal income growth remains flat over a period of time, we know that a significant amount of debt (our estimate is $2.5 to $2.6 trillion) would have to be deleveraged to arrive at a 65% debt to income level (i.e. year 2000 level) with smaller amounts of deleveraging required to reach eventual higher run-rate debt to income levels.[1] Our belief is that a deleveraging of this magnitude could keep discretioniary consumer spending in check for an extended period of time. As a result, we believe household mortgage debt deleveraging will remain a negative structural issue for the gaming industry. Because the U.S. household remains in an unprecented economic position following the 2008 to 2009 downturn, we cannot forecast with certaininty how this issue will play out over time as the overall future debt to income level will be driven by a combination of income growth, debt paydown and default. This analysis includes a drill down into specific U.S. region and state level personal income growth rates and debt to income levels and compares these metrics to specific regional gaming market revenue performance to form a view on future performance in for these markets. We also present aggregrate household debt levels, aging trends and distressed debt data to provide an overall historic and current perspective on these issues. Our overall industry forecast is that current high household debt levels, deleveraging and weak income growth will continue to keep discretioniary gaming industry spending growth subdued during 2011, 2012 and maybe longer. Our regional and state level analyses suggest that significant differences exist between specific regions and states in terms of income growth and debt to income relationships. We believe these relationships could influence a divergence in the pace of recovery in individual gaming markets and operators located in these markets. In general, regions and states that experienced the highest rates of housing appreciation during the housing boom years now have the highest ratios of debt to income. These states which include Arizona, California, Florida and Nevada, among others, are home to some of the gaming markets that have experienced the worst declines since the industry downturn began in 2008. On the other hand, states like Texas that experienced modest housing appreciation during the boom currently have the lowest relative household debt to income levels in the U.S. Gaming markets that depend on Texas customers (e.g. Louisiana) have fared ralatively better since 2008 than1 Our estimates suggest that an eventual debt to income run rate of 80% based on an approximate 1.5% to 2.0% personal income growth rate over a three year period with unchanged tax rates, implies that between $720 and $860 billion of mortgage debt would need to be deleveraged over this period. If the deleveraging is accomplished entirely by repayment (which is not likely in our opinion), the annual consumer spending growth rate may be reduced by approximately 70 basis points, which is significant in our opinion. As we expect some portion of this debt reduction to be accomplished via default, the actual consumer spending basis point reduction would be smaller.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  4. 4. Executive Summary 4 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010 markets like the Las Vegas Strip that draw customers from feeder markets like California, where household debt to income levels remain high. We present a summary of the aggregate ramp-up of housing related household debt since 2000 and the related post 2002 recession consumer spending boom that culminated in 2008. In this research, we endeavor to provide a granular and regional view of the deleveraging issue. Our research suggests that operators, developers and investors should assess both household personal income growth rates and debt levels of their target customers in order to properly judge the depth and revenue potential of particular markets.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  5. 5. Introduction 5 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010Introduction Real U.S. GDP was recently revised downward to 1.6% for 2Q10. GDP has now sequentially declined for the second quarter in a row after the third and fourth quarter 2009 increases as follows:Figure 1 – Real U.S. GDP 6% 6% 4% 4% 2% 2% 3Q08 4Q08 1Q09 0% 0% 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 2Q08 3Q09 4Q09 1Q10 2Q10 1Q08 2Q09 -2% -2% -4% -4% -6% -6% -8% -8%Source: Bureau of Economic Analysis Recovery euphoria driven by improved Fall 2009 to Spring 2010 economic data points has been followed by fear of a double dip recession as economic metrics have since rolled over. Currently, there is a large amount of economic uncertainty and debate tied to reliance of government stimulus, budget deficits and negative economic signals from the credit markets, among other factors. Current consensus is that although the worst may be behind us, the economy is limping along in a slow growth fashion with structural issues that pose risks to a more typical cyclical recovery. In recent years GDP growth has been driven by consumer spending (PCE) growth. Between 4Q09 and 1Q10, PCE growth decoupled from GDP growth. PCE growth during 2Q10 remains well below the growth rate achieved during 2003 to 2007. PCE recreation services, the category that includes gaming revenues, has been correlated to PCE.[2] During 2Q10 recreation services spending remained negative despite positive growth in overall PCE. Between 2003 and 2007, a significant amount of consumer spending was driven by credit (debt) growth tied to housing (mortgages). This credit bubble has now burst triggering the worst U.S. downturn since the depression. During 2008, aggregate U.S. household balance sheets took an unprecedented $13 trillion hit (driven by declines in financial asset and household real estate values) that sent a massive shockwave through the economy that continues to reverberate today. Overall consumer spending and industries that depend on it have been significantly negatively impacted.2 PCE recreation services include commercial and racino gaming spending as well as recreation spending in other categories (e.g. bowling).©2010 Apertor Hospitality, LLC. All Rights Reserved.
  6. 6. Introduction 6 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010 Revenues in the U.S. gaming industry (commercial and tribal casino operators) have followed the downward trend in overall consumer spending. As we write, the industry is not out of the woods yet owing to an overall levered balance sheet and out of balance supply and demand conditions in most markets. Most public casino operators and regions where commercial gaming exists have reported declines in revenue on a same store basis since the industry peak of 2006. In this analysis, we examine overall consumer income levels and spending patterns, household leverage and the recent household deleveraging trend in an effort to understand how consumer spending will affect gaming industry revenues and therefore, cash flows and leverage looking forward. We specifically examine select broad macro metrics, consumer debt related metrics, relationships between income, spending, tax and saving rates as well as employment- unemployment trends. We also present recent results from regional gaming markets throughout the U.S. We have presented data in a chart format and provide historic perspective of the metrics examined. In February 2010, we published our initial analysis of this issue titled The U.S. Gaming Industry and the Great Deleveraging. Based on our research at the time, we hypothesized that recovery in the industry would be protracted, slow and at risk due to the large amount of household debt that will need to be repaid over the next several years that would consequently dampen discretionary consumer spending, GDP growth and therefore spending in the industry. Today our thesis is largely unchanged as we believe the deleveraging process and tepid income growth will continue to dampen consumer spending and overall economic growth in the U.S. gaming industry for the foreseeable future. For ease of use, the report is comprised of series of charts organized into five sections plus appendices as follows: SECTION 1. Summary of Select National & Regional Economic Metrics 2. Personal Income and Consumer Spending Data 3. Household Debt Metrics 4. Regional Gaming Market Data 5. Consumer Spending and Industry Revenue Regression Analysis, Industry Debt Metrics and Pace of Deleveraging APPENDIX 1. Residential Real Estate Values 2. Regional Personal Income Growth Rates 3. Regional Household Debt to Income Levels 4. Household Debt to Income Levels in Select States 5. Total U.S. Household Debt and Other Credit Metrics©2010 Apertor Hospitality, LLC. All Rights Reserved.
  7. 7. SECTION 1:Summary of Select National & Regional Economic Metrics©2010 Apertor Hospitality, LLC. All Rights Reserved.
  8. 8. SECTION 1: Summary of Select National & Regional Economic Metrics 8 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010 Figure 2 shows that consumer spending growth decoupled from GDP growth during 4Q09 and 1Q10 (after years of strong correlation). Inventory restocking drove GDP growth in Q409. The question today is whether sustainable demand will follow so that restocking is not a one-time phenomenon. 2Q10 GDP growth was recently revised downward while consumer spending growth rates remain below pre-recession growth rates. Consumer spending for recreation continues to remain negative and has remained largely negative since 2007.Figure 2–GDP and consumer spending growth 8% 0.25% Gross domestic 6% 0.20% product growth (left axis) 4% 0.15% 2% 0.10% Personal consumption 0% 0.05% expenditures growth (left axis) 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 2Q03 3Q03 4Q03 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q09 2Q09 3Q09 4Q09 1Q00 2Q00 3Q00 4Q00 1Q04 2Q04 3Q04 4Q04 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q10 2Q10 -2% 0.00% -4% -0.05% Recreation services growth -6% -0.10% (right axis) -8% -0.15%Source: Bureau of Economic Analysis, Apertor Research Figure 3 shows that Las Vegas Strip gaming revenue has been correlated to consumer confidence for an extended period of time prior to the 2008 recession. Absolute revenues declined during the 2008 – 2010 recession despite the increase in supply. As a destination market, LV Strip fundamentals are sensitive to international, national and regional economic conditions. Recent consumer confidence data points remain weak as the July 2010 reading of 50.4 sequentially declined from June 2010. Index values closer to 100 are considered to be normal non-recessionary numbers. Like the LV Strip, same store revenues have also declined in most regions during the recession.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  9. 9. SECTION 1: Summary of Select National & Regional Economic Metrics 9 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010Figure 3 – Consumer confidence and monthly LV Strip gaming revenue $’s in millions Consumer confidence index LV Strip gaming revenue Consumer confidence $700 140 $600 120 $500 100 $400 80 $300 60 $200 40 $100 20 $0 0 Mar 01 Jun 01 Sep 01 Dec 01 Mar 02 Jun 02 Sep 02 Dec 02 Mae 03 Jun 03 Sep 03 Dec 03 Mar 04 Jun-04 Sep 04 Dec 04 Mar 05 Jun 05 Sep 05 Dec 05 Mar 06 Jun 06 Sep 06 Dec 06 Mar 07 Jun 07 Sep 07 Dec 07 Mar 08 Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10Source: Nevada Gaming Commission, Conference Board, Apertor Research Figure 4 shows the relationship between consumer confidence and the U.S. unemployment rate. Consumer confidence began to decline during the latter half of 2007 and a rise in unemployment followed. Consumer confidence currently remains low, and unemployment has become a significant national issue. A consensus view has developed that unemployment may now be a structural issue as it is currently expected to remain high for the foreseeable future. The unemployment rate does not include underemployed workers.Figure 4 – U.S. consumer confidence and unemployment U.S. Unemployment Rate Consumer confidence12% 14010% 120 100 8% 80 6% 60 4% 40 2% 20 0% 0 Feb 01 Apr 01 Jun 01 Aug 01 Oct 01 Dec 01 Feb 02 Apr 02 Jun 02 Aug 02 Oct 02 Dec 02 Feb 03 Apr 03 Jun 03 Aug 03 Oct 03 Dec 03 Feb 04 Apr 04 Jun-04 Aug 04 Oct 04 Dec 04 Feb 05 Apr 05 Jun 05 Aug 05 Oct 05 Dec 05 frb 06 Apr 06 Jun 06 Aug 06 Oct 06 Dec 06 Feb 07 Apr 07 Jun 07 Aug 07 Oct 07 Dec 07 Feb 08 Apr 08 Jun 08 Aug 08 Oct 08 Dec 08 Feb 09 Apr 09 Jun 09 Aug 09 Oct 09 Dec 09 Feb. 10 Apr 10 Jun 10Source: Conference Board, Bureau of Labor Statistics, Apertor Research©2010 Apertor Hospitality, LLC. All Rights Reserved.
  10. 10. SECTION 1: Summary of Select National & Regional Economic Metrics 10 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010Regional Unemployment Trends The U.S. unemployment rate is considered to be a lagging economic indicator. Business and consumer confidence will need to increase so that economic growth can resume in a manner that drives employment growth. Businesses are currently not investing in hiring due to weak consumer demand conditions. Consumers are currently not spending due to weak employment and income growth. We do not believe the gaming industry can significantly recover without a recovery in employment. Regional unemployment trends have generally followed national trends as unemployment significantly increased during 2009 and 2010. Figure 5 shows that unemployment in the northeast increased during 2008 and 2009 and has remained high during 2010. The northeast includes several states with significant gaming markets including New Jersey, New York and Pennsylvania.Figure 5 – Northeast region unemployment rate (%)14 14 CONNECTICUT DELAWARE MAINE12 12 MASSACHUSETTS NEW HAMPSHIRE NEW JERSEY10 NEW YORK PENNSYLVANIA RHODE ISLAND 10 8 VERMONT WEST VIRGINIA 8 6 6 4 4 2 2 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 June 2010 July 2010Source: Bureau of Labor Statistics, Apertor Research Figure 6 shows unemployment trends in the Midwest significantly increased during 2009 and remains high during 2010. The Midwest includes several states with significant gaming markets including Illinois, Indiana and Missouri. Gaming facilities exist in all states included in this region.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  11. 11. SECTION 1: Summary of Select National & Regional Economic Metrics 11 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010Figure 6 – Midwest region unemployment rate (%)14 ILLINOIS INDIANA IOWA KANSAS 1412 12 MICHIGAN MINNESOTA MISSOURI NEBRASKA10 10 OHIO OKLAHOMA WISCONSIN 8 8 6 6 4 4 2 2 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 June 2010 July 2010Source: Bureau of Labor Statistics, Apertor Research Figure 7 shows that unemployment remains high for most southern states in 2010. Several states include significant gaming markets including Florida, Louisiana and Mississippi.Figure 7 – Southern region unemployment rate (%)14 14 ALABAMA ARKANSAS FLORIDA12 GEORGIA KENTUCKY LOUISIANA 1210 MISSISSIPPI NORTH CAROLINA TENNESSEE 10 8 TEXAS VIRGINIA 8 6 6 4 4 2 2 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 June 2010 July 2010Source: Bureau of Labor Statistics, Apertor Research The Western U.S. includes some of the states that have been the hardest hit by the recession including Arizona, California and Nevada (see Figure 8 below). The region also includes states with major gaming markets (Arizona, California, and Nevada) that are enduring major headwinds due to their reliance on the region for visitation. The latest data points for June and July 2010 remain challenged.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  12. 12. SECTION 1: Summary of Select National & Regional Economic Metrics 12 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010Figure 8–Western region unemployment rate (%) 16 ALASKA ARIZONA CALIFORNIA COLORADO 16 14 HAWAII IDAHO MONTANA NEVADA 14 12 NEW MEXICO NORTH DAKOTA OREGON SOUTH DAKOTA 12 10 UTAH WASHINGTON WYOMING 10 8 8 6 6 4 4 2 2 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 June 2010 July 2010Source: Bureau of Labor Statistics, Apertor Research Our view is that improvement in the unemployment rate will lag increases in consumer spending which will in turn be driven by other economic factors (e.g. household deleveraging or not, tax rates, improvement in the housing market, exports, etc.). Research we have reviewed suggests that levels of household leverage in specific regions of the U.S. preceded increases in unemployment, not visa versa, thus casting doubt that initial mortgage defaults reflected difficulties in the labor market.[3] Instead it was increased difficulty in repayment of household debt that precipitated the downturn. Household leverage currently remains high relative to the pre-recession 2008 period. Figure 9 shows that after years of growth retail sales significantly declined during the latter half of 2008. Since their low during 2008, retail sales have continued to grow slowly in a positive manner. Retail sales for July were better than expected and positive on a year-over-year basis. Despite the recent positive data point, fears exist that sales may be challenged during the upcoming key holiday shopping season. Continued improvement in sales could move economic expectations higher and provide evidence that recent inventory restocking was not a one-time event.3 For further detail see Household Leverage and the Recession of 2007 to 2009, Arif Main & Amir Sufi, University of Chicago, October 2009.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  13. 13. SECTION 1: Summary of Select National & Regional Economic Metrics 13 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010Figure 9 – Retail sales (seasonally adjusted) ($’s in billions) Retail and food services sales y/y retail and food services sales $400 15% $380 $360 10% $340 5% $320 $300 0% $280 $260 -5% $240 -10% $220 $200 -15% Jan 01 Apr 01 Jly 01 Oct 01 Jan 05 Apr 05 Jly 05 Oct 05 Jan 06 Apr 06 Jly 06 Oct 06 Jan 09 Apr 09 Jly 09 Oct 09 Oct 00 Oct 02 Oct 03 Oct 04 Oct 07 Oct 08 Jan 00 Jan 02 Jan 03 Jan 04 Jan 07 Jan 08 Jan 00 Apr 00 Apr 02 Apr 03 Apr 04 Jly 00 Jly 02 Jly 03 Jly 04 Apr 07 Apr 08 Apr 00 Jly 07 Jly 08 Jly 00Source: U.S. Department of Commerce, Apertor ResearchHousehold Balance Sheet Data In Figure 10, we present household balance sheet data supplied by the Federal Reserve.[4] Between 2000 and 2006, household real estate and financial assets increased on an absolute values basis while debt increased as well. During 2007 household real estate values decreased followed by a more significant decrease in real estate and financial asset values in 2008 that triggered a massive $13 trillion decrease in household net worth.[5] To put this number into perspective, the amount roughly matches one year of output from the entire U.S. economy. The decrease in net worth is depicted in red in Figure 10 for 2008. On a more granular basis, leverage measured on an asset to debt basis decreased between 2000 and 2006 due to housing and financial asset value increases. As a result of the significant collapse in housing values between 2007 and 2008, leverage ratios are higher as of 1Q 2010 (4.91x assets to liabilities) than 2007 (5.48x assets to liabilities), the year that immediately preceded the onset of the recession during 2008. On a total debt to disposable income basis, debt ratios increased between 2000 and 2007 (95% to 132%) and have since decreased to 120% at 1Q10 largely due to debt default and repayment as income has been generally flat between 2008 and 2010. The majority of total household debt is comprised of mortgage debt. Our calculations imply that if mortgage debt is ultimately deleveraged from the 2007 peak to the year 2000 debt to income level (101% to 65%), 25% of the process has occurred based on a current 91% debt to income reading. This calculation suggests that there is more deleveraging to follow over the next few4 The schedule includes amounts derived from households, domestic hedge funds and nonprofit organizations. Financial assets include assets of both households and hedge funds. Liabilities include home mortgages, consumer credit and other liabilities. Home mortgages and consumer credit comprise approximately 96% of the liabilities line item. Per Federal Reserve Flow of funds document Z-1, schedule B.100 at 1Q10, home mortgage debt and consumer credit has decreased approximately $303 billion between 2007 and Q110.5 The amount also includes domestic hedge funds and non-profit organization assets and liabilities per Federal Reserve Flow of Funds document Z-1, schedule B.100.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  14. 14. SECTION 1: Summary of Select National & Regional Economic Metrics 14 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010 years. What is not precisely known at this juncture is whether mortgage debt to income levels will eventually bottom out and how much deleveraging will occur through default. The Wall Street Journal recently reported that between 2Q08 and 2Q10 the majority of household debt reduction has been accomplished by default.[6] Currently household debt delinquencies and bankruptcies remain high suggesting that the default rate will remain high for the time being. As debt to income ratios remain in unprecedented territory, it remains to be seen how much debt will be paid down by belt tightening or by default, and if overall debt and mortgage debt levels are ultimately brought down from debt to income levels of 95% to 65% (current year levels to year 2000 levels). While debt relief via default may directly positively impact consumer spending, we do not believe strong overall growth in consumption will likely resume with this backdrop due to resulting tight credit conditions and lack of consumer confidence, among other factors. During 2009 and 2010, household real estate values decreased further while financial assets values (driven by 2009 equity market gains) offset real estate declines as total asset values slightly increased. The net effect is a modest increase in net worth (4.3% and 2.0% respectively). Personal income and consumer spending growth have been weak since 2008 and remain weak today. Our regression analysis of changes in household net worth to consumer spending suggests that net worth changes have a significant impact on consumer spending in subsequent years. See Section 5 for additional detail. Our thesis remains that the 2008 hit to net worth, lack of income and credit growth as well as deleveraging will keep consumer spending growth in check looking forward. Our view is that barring some unidentified catalyst, industries like the gaming industry that are dependent on discretionary consumer spending will continue to face a weak demand environment. As we write, the Federal Reserve reported that U.S. aggregate household net worth fell 2.7% between 1Q10 and 2Q10 with the decrease primarily driven by financial asset losses tied to the 2Q10 U.S. stock market decline.[7]6 For additional information see,” Number of the Week: Defaults Account for Most of the Pared Down Debt,” Wall Street Journal, September 18, 2010. The WSJ article implies that as much as 90% of deleveraged debt total over the last two years has been accomplished by default. Economists we have spoken to indicate they maintain debt default estimates that significantly vary from this published estimate. We were unable to reconstruct this number based on our review of recent Federal Reserve Z-1 data and other data. At this juncture opinions vary as to the total amount of debt that has gone into default over the last two years.7 For additional information see the 1Q10 & 2Q10 Federal Reserve publication Z-1, schedule B.100 issued June and September 2010.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  15. 15. SECTION 1: Summary of Select National & Regional Economic Metrics 15 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010Figure 10 – U.S. Household Balance Sheet ($’s in trillions) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010Q1Household real estate 12,136.6 13,572.9 14,919.4 16,395.1 18,982.0 22,084.6 22,943.6 20,978.0 17,037.8 16,572.6 16,507.2Other 4,567.7 4,747.8 4,998.9 5,270.9 5,649.3 6,303.3 6,791.8 7,058.9 6,852.2 6,487.9 6,485.7 Total tangible assets 16,704.3 18,320.7 19,918.3 21,666.0 24,631.3 28,387.9 29,735.4 28,036.9 23,890.0 23,060.5 22,992.9 % change in household real estate 14.0% 11.8% 9.9% 9.9% 15.8% 16.3% 3.9% -8.6% -18.8% -2.7% -0.4%Deposits 4,376.1 4,875.8 5,153.2 5,348.5 5,732.4 6,139.9 6,753.1 7,406.5 7,972.8 7,755.7 7,651.6Credit market instruments 2,464.6 2,374.3 2,527.5 2,723.1 2,997.9 3,327.4 3,479.4 4,089.4 4,024.9 3,983.1 4,180.2Equities 8,204.6 6,783.5 5,121.4 6,749.9 7,483.9 8,093.0 9,643.7 9,626.4 5,913.5 7,463.9 7,793.3Mutual funds 2,704.2 2,614.6 2,218.4 2,911.0 3,427.7 3,669.1 4,188.1 4,596.1 3,326.0 4,152.0 4,318.7Pensions 9,171.3 8,764.3 8,189.4 9,718.9 10,635.5 11,460.1 12,750.6 13,390.7 10,415.8 11,948.6 12,345.4Equity in non-corp business 4,870.1 5,031.6 5,261.2 5,852.4 6,758.3 8,358.0 8,843.4 8,797.6 7,326.6 6,507.7 6,525.3Other 1,610.2 1,732.3 1,778.7 1,990.7 2,192.5 2,267.2 2,465.6 2,780.2 2,688.7 2,699.1 2,728.4 Total financial assets 33,401.1 32,176.4 30,249.8 35,294.5 39,228.2 43,314.7 48,123.9 50,686.9 41,668.3 44,510.1 45,542.9 % change in financial assets -3.9% -3.7% -6.0% 16.7% 11.1% 10.4% 11.1% 5.3% -17.8% 6.8% 2.3%TOTAL ASSETS 50,105.4 50,497.1 50,168.1 56,960.5 63,859.5 71,702.6 77,859.3 78,723.8 65,558.3 67,570.6 68,535.8Home mortgages 4,798.4 5,305.4 6,009.9 6,894.4 7,835.3 8,874.3 9,865.0 10,538.5 10,496.9 10,334.4 10,240.3Consumer debt 2,188.9 2,353.9 2,474.4 2,610.6 2,734.3 2,869.1 3,064.5 3,263.6 3,346.1 3,267.6 3,259.2Total Household Debt 6,987.3 7,659.3 8,484.3 9,505.0 10,569.6 11,743.4 12,929.5 13,802.1 13,843.0 13,602.0 13,499.5Other debt and liabilities 390.6 349.5 321.7 360.2 459.7 440.6 514.9 563.9 422.1 466.4 470.9 Total Debt and liabilities 7,377.9 8,008.8 8,806.0 9,865.2 11,029.3 12,184.0 13,444.4 14,366.0 14,265.1 14,068.4 13,970.4NET WORTH 42,727.5 42,488.3 41,362.1 47,095.3 52,830.2 59,518.6 64,414.9 64,357.8 51,293.2 53,502.2 54,565.4% change in net worth -0.4% -0.6% -2.7% 13.9% 12.2% 12.7% 8.2% -0.1% -20.3% 4.3% 2.0%$ change in net worth (239) (1,126) 5,733 5,735 6,688 4,896 (57) (13,065) 2,209 1,063Assets/liabilities ratio 6.79 6.31 5.70 5.77 5.79 5.88 5.79 5.48 4.60 4.80 4.91mortgage debt to disposable income 65.5% 69.4% 75.0% 82.3% 88.1% 95.7% 99.5% 101.1% 95.8% 93.7% 91.3%consumer debt to disposable income 29.9% 30.8% 30.9% 31.2% 30.8% 30.9% 30.9% 31.3% 30.5% 29.6% 29.1%household debt to disposable income 95.4% 100.1% 105.9% 113.5% 118.9% 126.6% 130.4% 132.4% 126.4% 123.3% 120.4%Source: Federal Reserve Publication Z-1, Apertor Research©2010 Apertor Hospitality, LLC. All Rights Reserved.
  16. 16. SECTION 2:Personal Income and Consumer Spending Data©2010 Apertor Hospitality, LLC. All Rights Reserved.
  17. 17. SECTION 2: Personal Income and Consumer Spending Data 17 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010 In Figure 11, we present nominal personal income and consumer spending growth. Nominal U.S. personal income growth ranged between 1% and 3% from 2003 to 2007 with a peak growth rate of 2.7% achieved at 1Q06. During 3Q08 to 1Q09, growth declined for the first time during this decade. Growth resumed during 4Q09 and has continued through 2Q10, albeit at a sluggish sub 1% rate. In summary, recent data points suggest the recovery is progressing at a slow pace. On a state and regional level, personal income growth rates have followed the national pattern as the effect of the recession and recent recovery has been widespread. The current sluggish growth in personal income could slow the household deleveraging process as personal income is the “top line” item that provides cash flow which allows households to deleverage via debt pay down. While the growth pattern in personal income was fairly consistent throughout the U.S., state and regional level variations do exist that could influence the pace of deleveraging in specific regions. For regional and state level personal income detail, see Appendix 2. Nominal U.S. consumer spending grew at a 1% to 2% rate between 2003 and 2007 before collapsing during 3Q08 to 1Q09. Positive consumer spending growth has resumed, but at a low sub 1% growth rate during late 2009 through 2Q10 (the latest available data point). We believe that growth will continue but at an ongoing low rate absent an increase in wage growth that is currently running at .5%.Figure 11 – Nominal personal income and consumer spending (PCE) growth Nominal Personal Income Growth Nominal PCE Growth 4% 4% 3% 3% 2% 2% 1% 1% 0% 0%-1% -1% 1Q01 2Q01 3Q01 4Q01 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q09 2Q09 3Q09 4Q09 1Q00 2Q00 3Q00 4Q00 1Q02 2Q02 3Q02 4Q02 1Q03 3Q03 3Q03 4Q03 1Q04 2Q04 3Q04 4Q04 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q10 2Q10-2% -2%-3% -3%Source: Bureau of Economic Analysis, Apertor Research Figure 12 shows that between 2001 and 4Q05, the cumulative overall growth in consumer spending was greater than the growth in nominal personal income due to borrowing and the 2003 tax cut. Between 2006 and 2008, consumer spending grew at a slower rate than personal income as household borrowing contracted. During 2009, the consumer spending growth rate outpaced the income growth rate due to lower tax rates.[8]8 Nominal personal income growth is reported on a pretax basis, while consumer spending on an after tax basis. The lower tax rate in 2009 applied to personal income allowed consumer spending to grow at a higher period-to-period growth rate than personal income. If, for example, the tax rate had remained unchanged with no other variables, the growth rate of the two economic series would have been similar. See the NIPA accounts at the Bureau of Economic Analysis for additional information.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  18. 18. SECTION 2: Personal Income and Consumer Spending Data 18 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010Figure 12 – Nominal personal income and PCE growth, taxes and savings 20% 3.0% 2.5% Personal Savings 2.0% % of Nominal PI 15% 1.5% (left axis) 1.0% 0.5% Tax % of Nominal 10% PI (left axis) 0.0% -0.5% -1.0% Nominal PCE 5% Growth (right -1.5% -2.0% axis) 0% -2.5% Nominal Personal Income Growth 1Q01 2Q01 3Q01 4Q01 1Q02 2Q02 3Q02 4Q02 1Q03 3Q03 3Q03 4Q03 1Q05 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q09 2Q09 3Q09 4Q09 1Q00 2Q00 3Q00 4Q00 1Q04 2Q04 3Q04 4Q04 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q10 2Q10 (right axis)Source: Bureau of Economic Analysis, Apertor Research Figure 13 compares y/y growth in real employee earnings to the y/y growth in real consumer spending. The differential between the lines is comprised of employment growth and funds generated for spending by consumer borrowing. During expansions this differential increased as employment and credit growth occurred. During consumer spending slowdowns, y/y growth fell back to zero as employment and borrowing contracted. The retrenchment in borrowing typically preceded the next up cycle in consumer spending. During 2009, consumer spending was significantly below the underlying rate of wage growth due to a negative borrowing rate. An increase in earnings and/or decrease in savings would have a positive effect on consumer spending growth. Recent earnings data points indicate that earnings have essentially flat lined while savings remain at an elevated rate.Figure 13 – Y/Y change in real consumer spending (PCE) and real hourly earnings 10% Y/Y Real PCE Y/Y Real Average Hourly Earnings 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% -6% -6% 1Q71 4Q71 3Q72 2Q73 3Q75 2Q76 2Q79 3Q81 2Q82 1Q83 4Q83 2Q85 1Q86 4Q86 1Q89 4Q89 2Q91 1Q92 4Q92 3Q93 1Q95 4Q95 3Q96 3Q99 1Q01 4Q01 3Q02 2Q03 3Q05 2Q06 2Q09 1Q74 4Q74 1Q77 4Q77 3Q78 1Q80 4Q80 3Q84 3Q87 2Q88 3Q90 2Q94 2Q97 1Q98 4Q98 2Q00 1Q04 4Q04 1Q07 4Q07 3Q08 1Q00Source: Apertor Research[9] The Federal Reserve has reported that various types of credit have contracted since 2007 as banks have pulled back on lending.[10] The household debt service ratio (debt repayments as % of income) also continues to fall. As debt levels shrink, consumers are spending less of their9 Chart data for Figures 13, 15, 16 and 17 was sourced from the Bureau of Labor Statistics, Bureau of Economic Analysis and prepared by Apertor Research. The format and rational for the chart was developed and sourced from a book titled Ahead of the Curve by Joseph H. Ellis, October 2005.10 See, James Thompson and Kent Cherny, Commercial Bank Lending, Federal Reserve, March 2010.©2010 Apertor Hospitality, LLC. All Rights Reserved.
  19. 19. SECTION 2: Personal Income and Consumer Spending Data 19 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010 income on repayments of mortgage and consumer loans. Falling interest rates are also reducing payments. Despite the decline, the debt service ratio needs to fall to at least another 1 percent more to reach levels seen during 2000. See Figure 14 below.Figure 14 – Household debt service payments as a % of disposable personal income 14.5% 14.5% 14.0% 14.0% 13.5% 13.5% 13.0% 13.0% 12.5% 12.5% 12.0% 12.0% 11.5% 11.5% 11.0% 11.0% 10.5% 10.5% 10.0% 10.0% Jan-80 Apr-81 Jul-82 Oct-83 Jan-85 Apr-86 Jul-87 Oct-88 Jan-90 Apr-91 Jul-92 Oct-93 Jan-95 Apr-96 Jul-97 Oct-98 Jan-00 Apr-01 Jul-02 Oct-03 Jan-05 Apr-06 Jul-07 Oct-08 Jan-10Source: Federal Reserve Figure 15 depicts the relationship between real consumer spending and the combined effect of changes in employment (a lagging indicator) and hourly earnings (a leading indicator). The chart shows that changes in employment and earnings impact spending as the lines move closely together. The chart suggests that these two economic factors account for the majority of the change in consumer spending. Net borrowing or savings by consumers accounts for the majority of difference between the y/y real PCE (consumer spending) and y/y combined effect of real earnings and employment growth. Between 2002 and 2006 the gap between the lines occurred during the period when household mortgage debt significantly increased. During 2008 and 2009 the sharp reduction in borrowing (offset to some degree) by a tax cut forced consumer spending lower than the combined effect of wage growth.Figure 15 – Y/Y change in consumer spending and combined real earnings & employment growth Y/Y Real PCE Y/Y Combined Real Earnings and Employment Growth 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% -6% -6% 1Q71 4Q71 3Q81 2Q91 1Q01 4Q01 3Q72 2Q73 3Q75 2Q76 2Q79 2Q82 1Q83 4Q83 2Q85 1Q86 4Q86 1Q89 4Q89 1Q92 4Q92 3Q93 1Q95 4Q95 3Q96 3Q99 3Q02 2Q03 3Q05 2Q06 2Q09 1Q74 4Q74 1Q77 4Q77 3Q78 1Q80 4Q80 3Q84 3Q87 2Q88 3Q90 2Q94 2Q97 1Q98 4Q98 2Q00 1Q04 4Q04 1Q07 4Q07 3Q08 1Q00Source: Apertor Research©2010 Apertor Hospitality, LLC. All Rights Reserved.
  20. 20. SECTION 2: Personal Income and Consumer Spending Data 20 Consumer Deleveraging and the U.S. Gaming Industry October 12, 2010 Figure 16 shows that unemployment (shown inverted at the right scale) is a lagging indicator. In past cycles unemployment has generally continued to decrease well after economic cycles have peaked while it has tended to increase well after consumer spending began to recover. History and the recent slightly positive consumer spending data suggest that if consumer spending continues to rise in a modest manner unemployment could rise further but then will eventually fall at a modest rate.Figure 16 – Y/Y change in consumer spending and unemployment rate (rate presented on inverse basis – see right axis) Y/Y Real PCE Lagged Three Months Unemployment Rate 10% 0% 8% 2% 6% 4% 4% 6% 2% 8% 0% -2% 10% -4% 12% 1Q71 4Q71 3Q72 2Q73 3Q75 2Q76 2Q79 3Q81 2Q82 1Q83 4Q83 2Q85 1Q86 4Q86 1Q89 4Q89 2Q91 1Q92 4Q92 3Q93 1Q95 4Q95 3Q96 3Q99 1Q01 4Q01 3Q02 2Q03 3Q05 2Q06 2Q09 1Q74 4Q74 1Q77 4Q77 3Q78 1Q80 4Q80 3Q84 3Q87 2Q88 3Q90 2Q94 2Q97 1Q98 4Q98 2Q00 1Q04 4Q04 1Q07 4Q07 3Q08 1Q00Source: Apertor Research Figure 17 also shows that employment is a lagging indicator as employment trends have followed consumer spending. Past recoveries depicted in the chart look like jobless recoveries during the early stage of the recovery period. The chart suggests that if consumer spending continues to increase employment will eventually follow. The current open question is the pace of consumer spending looking forward as the most recent data point has “rolled over” from recent higher levels (2Q10 vs. 1Q10).Figure 17 – Y/Y change in real consumer spending and growth in employment y/y real PCE lagged three months growth in civilian employment 10% 10% 8% 8% 6% 6% 4% 4% 2% 2% 0% 0% -2% -2% -4% -4% 1Q71 4Q71 3Q72 2Q73 3Q75 2Q76 2Q79 3Q81 2Q82 1Q83 4Q83 2Q85 1Q86 4Q86 1Q89 4Q89 2Q91 1Q92 4Q92 3Q93 1Q95 4Q95 3Q96 3Q99 1Q01 4Q01 3Q02 2Q03 3Q05 2Q06 2Q09 1Q74 4Q74 1Q77 4Q77 3Q78 1Q80 4Q80 3Q84 3Q87 2Q88 3Q90 2Q94 2Q97 1Q98 4Q98 2Q00 1Q04 4Q04 1Q07 4Q07 3Q08 1Q00Source: Apertor Research©2010 Apertor Hospitality, LLC. All Rights Reserved.
  21. 21. SECTION 3:Household Debt Metrics©2010 Apertor Hospitality, LLC. All Rights Reserved.

×