Nevada's Economy - May 17 12


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Is U.S. Monetary Policy Creating
an Inflationary Environment?

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Nevada's Economy - May 17 12

  1. 1. A monthly report produced for Commerce Real Estate Solutions by Stephen P. A. Brown, PhD, Center for Business & Economic Research University of Nevada, Las VegasIssue 17 May 2012 To receive this newsletter by e-mail, please subscribe at U.S. Monetary Policy Creatingan Inflationary Environment?With the U.S. economy still performing poorly, U.S. monetary policy remains quite easy. Becauseexpected inflation is greater than short-term interest rates, real short-term interest rates are negative.In addition, the Federal Open Market Committee (FOMC) announced on Wednesday, June 20that it will take steps to further reduce long-term interest rates by selling some of the shorter-term government bonds it holds and using the proceeds to buy longer-term government bonds.Is conduct of monetary policy creating an environment in which we should worry about inflation?Evidence of Monetary Ease inflationary environment. In the first four years afterThe most convincing evidence of monetary ease is real U.S. monetary policy took real short-term interest ratesshort-term interest rates—that is, interest rates on negative, the price of gold rose by 121 percent, whichshort-term treasury bills minus expected inflation. In provides a strong indication of inflationary fears. Afterlate 2007, the FOMC began targeting interest rates reaching a high in November 2011, however, goldbelow expected inflation, and that action has yielded prices have slipped by 11 percent, perhaps because thenegative real interest rates for nearly five years. feared inflation had not been realized or the dollar began strengthening.To maintain these exceedingly low real interest rates,the Federal Reserve System (Fed) greatly boosted U.S. inflation has been relatively subdued. As measuredmonetary liquidity. Since late 2007, the U.S. monetary by the consumer price index (CPI), inflation hasbase has grown at a 28.3 percent annual rate.1 The been fairly volatile over the past five years, but it hasbiggest gains occurred in 2008 and 2009, when averaged about 2.0 percent. Much of the volatility inannualized growth rates in the monetary base were the CPI owes to fluctuations in food and energy prices.around 100 percent. Excluding food and energy prices from the index yields a much less volatile series known as “core CPI.” CoreGold Prices Suggests Possible Inflation; CPI shows inflation has averaged 1.8 percent over theActual Inflation Remains SubduedGold prices typically rise in an inflationary environmentor from fears that monetary policy is creating an This report is commissioned by Commerce Real Estate Solutions • 801-322-20001 The monetary base is a relatively narrow measure ofmoney. It includes cash and reserve accounts that commercialbanks hold at the Fed.
  2. 2. nevada’s Economy May 2012 past five years. By the historical standards set over the rate of more than 6 percent since late 2007. In fact, past 40 years, these inflation rates are quite low. the velocity of money—which measures the amount Why Not Much Inflation? of economic activity supported by a given quantity of money—has dropped considerably over the past five Several different reasons have been offered for monetary years. ease not generating much inflation. One reason offered for lack of inflation is that the broader monetary The drop in velocity suggests a different explanation aggregates—such as M2—have not grown nearly as for relatively mild inflation—the considerable excess fast as the monetary base.2 Another reason offered for capacity in the economy. At 8.2 percent, the U.S. the lack of inflation is the considerable excess capacity unemployment rate is much higher than the 5.6 percent in the economy. Both of these developments are the rate the Congressional Budget Office (CBO) estimates result of the financial crisis that created the most recent as the natural rate of unemployment. Similarly, the recession. first quarter 2012 reading of U.S. GDP was 5.5 percent below potential. With such excess capacity in the Examining M2, we do find that it has grown much more economy, competition keeps prices from rising, and slowly than the monetary base since late 2007, with inflationary pressure remains subdued. the former showing an annualized growth rate of only 6.6 percent. As the Fed The Inflation OutlookThe drop in velocity pushed more liquidity These findings suggest that current monetary easesuggests a different into the economy is unlikely to generate much inflationary pressure inexplanation for through the monetary the near future. Inflation is likely to remain subdued base, it found weaker as long as the U.S. economy has considerable excessrelatively mild inflation— growth in the broader capacity. As the economy nears full capacity and thethe considerable monetary aggregates. relationship between money and the economy tightens,excess capacity in the Because commercial the Fed must be prepared to act quickly to remove anyeconomy. banks have not been excess liquidity. Otherwise, the liquidity will quickly lending very much, they turn into inflationary pressure. have not turned all of the additional liquidity provided by the Fed into equally strong growth of M2. Nonetheless, the growth rate of M2 since late 2007 is consistent with a considerably higher inflation rate than we have actually seen. Given the annualized growth rate of real GDP has been only 0.3 percent since late 2007, we might have expected an annualized inflation 2 M2 includes the monetary base plus checking and savings accounts. Commerce Real Estate Solutions |
  3. 3. Is U.S. Monetary Policy Creating an Inflationary Environment?Nevada Economic ConditionsU.S. economic growth slowed substantially in first by 600 jobs (0.1 percent) from March to April. Thequarter 2012. Consumer spending remained fairly Nevada unemployment rate decreased from 12.0strong, and investment expenditures made positive percent in March to 11.7 percent in April as the resultcontributions, but government spending and net of reduced labor force participation. Visitor volumeexports made negative contributions. Nevada’s was 1.2 percent lower in April than a year earlier.tourism and gaming industries continue to drive the Nonetheless, gaming revenue was 6.2 percent higher instate’s economic recovery. Nevada’s construction April than a year earlier—mostly as a result of baccaratsector remains mired at relatively low levels. Rising and slot play. Taxable sales were 7.2 percent higher inemployment and reduced labor force participation March than a year earlier, Table 2.meant a lower statewide unemployment rate in April. Signs of Slowing Economic Growth in Clark CountyU.S. Economy Continues to Show Slowing Growth Clark County’s economy also shows signs of slowing.The U.S. economy continues to show signs of slowing Seasonally adjusted, the region’s employment fellgrowth. Revised data show U.S. real GDP grew at by 600 jobs (0.1 percent) from March to April. Thean annualized rate of 1.9 percent during first quarter Las Vegas unemployment rate fell from 12.6 percent2012, which represents a substantial slowing from in March to 12.4 percent in April. Compared to athe fourth-quarter rate of 3.0 percent. Consumer year earlier, visitor volume was down by 1.2 percent inspending drove most of the gains. Business fixed April. Nonetheless, gaming revenue was 8.9 percentinvestment, residential investment and inventories also higher in April than a year earlier—mostly as a resultmade positive contributions. Government spending of baccarat and slot play. Taxable sales for Marchand net exports made negative contributions. U.S. were only 1.9 percent above those for a year earlier.nonfarm employment rose by only 69,000 jobs in Residential construction permits slipped in April afterMay, marking the weakest gain since May 2011. The rising sharply in March. Commercial constructionunemployment rate ticked up to 8.2 percent in May, permits dropped to a very low level, Table labor force participation rose by more than new Slowing Economic Growth in Washoe Countyemployment opportunities. More favorably, housingprices stabilized, and sales of both new and existing Washoe County also shows slowing economic rose in April. Consumer sentiment increased Seasonally adjusted, Reno-Sparks employment fell byslightly in May, but consumer confidence slipped. Story continues after graphsPersonal consumption expenditures increased for thetenth straight month in April, but retail slipped inMay for the second straight month. The Kansas CityFinancial Stress Index rose to just about its long-runaverage in May, which suggests financial headwindsare not impeding economic growth. The quantity ofcommercial paper outstanding remains low, whichmeans relatively little external financing is being usedto support business investment, Table 1.Some Evidence of Slowing Economic Growth inNevadaThe Nevada economy shows some evidence of slowing.Seasonally adjusted, statewide employment decreased Issue 17 | ©Copyright 2012 - All Rights Reserved
  4. 4. nevada’s Economy May 2012 U.S. Date Units Current Previous Change Year Ago ChangeTable 1 Employment 2012M05 million, SA 133.009 132.940 0.1% 131.227 1.4% Unemployment Rate* 2012M05 %, SA 8.2 8.1 0.1% 9.0 -0.8% Consumer Price Index 2012M04 82-84=100, SA 229.2 229.1 0.0% 224.0 2.3% Core CPI 2012M04 82-84=100, SA 229.0 228.4 0.2% 223.8 2.3% Employment Cost Index 2012Q1 89.06=100, SA 115.3 114.7 0.5% 113.2 1.9% Productivity Index 2012Q1 2005=100, SA 110.5 110.7 -0.2% 110.1 0.4% Retail Sales 2012M05 $billion, SA 404.6 405.3 -0.2% 384.2 5.3% Auto and Truck Sales 2012M05 million, SA 13.73 14.37 -4.5% 11.69 17.4% Housing Starts 2012M04 million, SA 0.717 0.699 2.6% 0.552 29.9% Real GDP*** 2012Q1 2005$billion, SA 13,491.0 13,429.0 1.9% 13,227.9 2.0% U.S. Dollar 2012M05 97.01=100 100.724 99.027 1.7% 95.307 5.7% Trade Balance 2012M04 $billion, SA -50.062 -52.617 -4.9% -43.556 14.9% S and P 500 2012M05 monthly close 1,310.33 1,397.91 -6.3% 1,345.20 -2.6% Real Short-term Rates* 2012M04 %, NSA -3.12 -3.82 0.7% -4.54 1.4% Treasury Yield Spread* 2012M05 %, NSA 1.71 1.97 -0.3% 3.13 -1.4% Nevada Date Units Current Previous Change Year Ago ChangeTable 2 Employment 2012M04 000s, SA 1,128.6 1,129.2 -0.1% 1,123.2 0.5% Unemployment Rate* 2012M04 %, SA 11.7 12.0 -0.3% 13.6 -1.9% Taxable Sales 2012M03 $billion 3.910 3.223 21.3% 3.649 7.2% Gaming Revenue 2012M04 $million 855.71 854.59 0.1% 806.05 6.2% Passengers 2012M04 million persons 3.881 4.000 -3.0% 3.827 1.4% Gasoline Sales 2012M03 million gallons 90.40 83.72 8.0% 91.47 -1.2% Visitor Volume 2012M04 million persons 4.160 4.377 -5.0% 4.212 -1.2% Clark County Date Units Current Previous Change Year Ago ChangeTable 3 Employment 2012M04 000s, SA 809.5 810.1 -0.1% 807.7 0.2% Unemployment Rate* 2012M04 %, SA 12.4 12.6 -0.2% 14.1 -1.7% Taxable Sales 2012M03 $billion 2.791 2.416 15.5% 2.738 1.9% Gaming Revenue 2012M04 $million 743.67 733.49 1.4% 682.95 8.9% Residential Permits 2012M04 units permitted 612 841 -27.2% 375 63.2% Commercial Permits 2012M04 permits 5 23 -78.3% 16 -68.8% Passengers 2012M04 million persons 3.554 3.655 -2.7% 3.462 2.7% Gasoline Sales 2012M03 million gallons 62.72 57.89 8.4% 63.14 -0.7% Visitor Volume 2012M04 million persons 3.609 3.836 -5.9% 3.654 -1.2% Washoe County Date Units Current Previous Change Year Ago ChangeTable 4 Employment** 2012M04 000s, SA 188.9 190.2 -0.7% 189.6 -0.4% Unemployment Rate* 2012M04 %, SA 11.5 11.7 -0.2% 13.1 -1.6% Taxable Sales 2012M03 $billion 0.466 0.398 17.1% 0.452 3.0% Gaming Revenue 2012M04 $million 54.20 61.43 -11.8% 64.11 -15.5% Residential Permits 2012M04 units permitted 82 42 95.2% 38 115.8% Commercial Permits 2012M04 permits 5 9 -44.4% 13 -61.5% Passengers 2012M04 million persons 0.276 0.293 -5.8% 0.296 -6.6% Gasoline Sales 2012M03 million gallons 13.50 13.10 3.0% 13.44 0.5% Visitor Volume 2012M04 million persons 0.353 0.333 6.1% 0.357 -1.2%*Growth data represents 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 EconomicResearch; UNLV Center for Business and Economic Research; McCarran International Airport; Reno/Tahoe International Airport; Las VegasConvention 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 AdjustedCommerce Real Estate Solutions |
  5. 5. Nevada Economic Conditions1,300 jobs (0.7 percent) from March to April. TheReno-Sparks unemployment rate fell from 11.7 percentin March to 11.5 in April. Compared to a year earlier,April visitor volume was down by 1.2 percent. Gamingrevenues were down by 15.5 percent over the sameperiod. Residential construction permits rose sharplyin April, and commercial construction permits fell toextremely low levels, Table 4.Nevada Economic Outlook in BriefThe pace of national economic growth slippedduring first quarter, and a number of signs—suchas employment and the pace of spending—point torelatively weak economic growth in second quarter.The most recent data suggest slowing in Nevada’stourism and hospitality sectors—both in SouthernNevada and Washoe County. Employment gains areproving to be elusive in most areas of the state. Issue 17 | ©Copyright 2012 - All Rights Reserved
  6. 6. This information is provided compliments of Michael M. Lawson President and CEO of Commerce Real Estate Solutions Commerce Real Estate Solutions Mike Hillis, SIOR, CCIM 3980 Howard Hughes Parkway, Suite 100 Las Vegas, NV 89169 Principal, Las Vegas office Tel (702) 796-7900 • Fax (702) 796-7920 To receive this newsletter by e-mail, please subscribe at This report has been prepared solely for information purposes. It does not purportCommerce is a regional real estate firm with international ties, to be a complete description of thededicated first and foremost to our clients. With the industry’s markets or developments contained inpremier professionals, and industry leading technology, our mission this to exceed our clients’ expectations through service excellence. The information contained in this report,For further information on the Nevada commercial real estate while not guaranteed, has been securedmarket, visit or call 702-796-7900. from sources we believe to be reliable.