Nevada Gaming Control Boardr latest figures show that gross gaming revenues for the year ended June 2008 were almost 2 per-cent down on the 2007 result.
May was a particularly tough month, with statewide gaming revenue down 15.2 percent, and the Las Vegas Strip down a whopping 16.44 percent, year-on-year.
This is only the second fiscal year since the Gaming Control Board was set up in 1955 that the state as a whole has recorded a decline in its gaming revenues, and the first wholly attributable to economic conditions. The previous occasion was 2002, in the aftermath of the 9/11 tragedy.
The decline is the result of an unusual conflation of events, the best-publicised of which are the oil price hike and the ongoing, subprime induced, credit crunch.
In May, US gasoline prices rose well above US$4 a gallon (MOP32.15) and in some states, including Nevada, topped $4.50.
The impact was immediate, with vehicle traffic into Las Vegas from its main feeder market of California dropping by about 6 percent. At the same time, rising food prices and unemployment exacerbated the widespread reduction in personal disposable income, brought into sharp focus by the gasoline price hike.
Many people from neighbouring states, especially California and Arizona, either put their plans to visit Las Vegas on ice, or reduced the length of their stay.
Conversely, however, the weak US Dollar, and reduced room rates offered by premium Strip properties, raised the number of foreign visitors, the net result being virtually flat visitor numbers for Las Vegas for the month, and for the fiscal year to date.
The casinos are fighting back with a raft of packages, room rate reductions, more attractive reward programs, and subsidised or free benefits in travel, and leisure pursuits.
On the gaming floor, win rates on most machine games have fallen, particularly on the more popular tokenised slot games, such as 1 cent, $1 and multi-denomination.
Yet the demand for those games appears to have been largely unresponsive to the reduced cost of playing them; higher returns to players have not been sufficient to maintain revenue levels.
Las Vegas Strip properties have lagged Downtown and regional casinos in dialling up higher player returns on slots.
This may reflect a view that other inducements will be effective in maintaining slot play, without the need to sacrifice win rates.
The credit crunch has hit Nevada, and especially Las Vegas, hard, since it has been a market leader in the construction of project and speculative homes and condominiums.
In August last year, the Mortgage Bankers Association reported that Nevada lead the US in the percentage of residential real estate mortgage default, in both prime and subprime categories.
More recently, the association reported that Las Vegas recorded its highest retail and office vacancy rates in two decades, with commercial construction declining 66 per-cent in 12 months.
Median house prices through June 2008 dropped 22 per-cent, compared to the same month in 2007.
Adding to the pain has been a sharp rise in unemployment.
Figures published by the Nevada Department of Employment Training and Rehabilitation show that since March 2007, the stater unemployment rate has exceeded the US average and the gap is increasing.
In June 2008, the State had slumped to record the 7th highest unemployment rate of the 50 States and the District of Columbia.
It is becoming apparent that the Nevada casino industry isn㦙 as bulletproof as some observers might think. However, this has to be put in context; the current situation is a near Lerfect storm? which has no precedent in recent history.
This is best illustrated by looking at what happened to the industry during other periods of economic adversity.
In 1987, ~lack Monday?, October 19, caused the Dow Jones Industrial Average to plummet more than 22 per-cent to an all-time one day record low. Yet gaming revenue in Nevada held up, increasing some 11 percent year-on-year in 1988.
The subsequent Savings and Loan crises of the early 1990s may have cost the US economy as much as US$300bn, yet still Nevada soldiered on, with gaming revenues climbing more than 12 percent from 1990 to 1992.
So what is different now?
First, the size and pervasiveness of the subprime debacle. It is no longer just a subprime issue; prime lending is also being impacted by declining property values and impaired earnings outlooks.
Lender liquidity has been adversely impacted by the declining value of secured assets; defaults are realising less upon recovery, and reserve requirements have cut into available funds, a position the Federal Reserve has endeavoured to correct by pumping extra liquidity into the market.
The International Monetary Fund has recently estimated the value of losses attributable to subprime loan defaults to be around US$950bn, at least 3 times the level experienced during the Savings & Loan crises period.
Secondly, the substantial, and rapidly escalating cost of destination resorts, the favoured architecture of todayr multi billion US$ casino developments, demands yield curves more typical currently of Macau than Nevada.
Many of these developments are highly geared, and are premised on two key assumptions; that gaming revenues will only travel in one directionpwards, and that diversification of property offerings will provide an internal hedge against a decline in earnings or profitability of any one component.
Certainly gaming revenues are a declining proportion of overall revenue of major US gaming companies, some of which earn less than 40 per-cent from casino operations.
Yet it has been the relative certainty of those casino earnings, and their steady growth, which has underpinned investment in non-gaming ventures, and the confidence of the investment community to support such substantial developments.
Thirdly, to get to destination casino resorts requires consumption of fossil fuel, and the conscious exercise of choice when it comes to spending disposable income.
These properties suffer a serious distributional disadvantage in times when travel becomes constrained by externalities, such as sharply rising energy costs, and the rationalisation of transport services to maximise seat yield.
The $64 (billion?) question is whether this is merely a short-term hiccup, or indicative of a more fundamental decline in the fortunes of the gaming industry in Nevada.
There is no historical precedent which can help answer that question. In the meantime, Macau powers on?br/> </o:p>
David J. Green