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Will Las Vegas Become the Detroit of the West?

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The New York Times' Adam Nagourney on Sunday chronicled the deep economic downturn Las Vegas and the state of Nevada are enduring as declines in gambling revenues and a bust in the construction industry take their toll.

“It’s been in bad shape before, but not this bad,” David G. Schwartz, director of the Center for Gaming Research at the University of Nevada, Las Vegas, told the Times. “If you look at the gaming revenues, they have declined and continue to decline over the past three years. “

Indeed, the chart below from Bloomberg shows the extent of the steep downturn in gaming revenues nationally:

Among the statistics the Times article pointed out:
  • Unemployment in Nevada is now 14.4 percent, the highest in the nation
  • Unemployment in Las Vegas is 14.7 percent (unemployment in Detroit is also ~15%)
  • For comparison's sake, unemployment in Nevada 10 years ago was just 3.8%
  • Gambling revenues increased 3% in Q1 of this year, prompting short-lived sighs of relief in Vegas as they then plummeted 5% in Q2
“I think we are bumping along the bottom,” Stephen P. A. Brown, the director of the Center for Business and Economic Research at the University of Nevada, Las Vegas, which has been tracking the downturn told the Times. “Expectations are that once the U.S. economy turns around, the gaming industry will begin to improve.”

But those expectations may prove wrong. Socionomically, a dramatic upturn in risk appetites and risk-seeking behavior provided fuel for the boom in Vegas. The expectations that such risk-seeking behavior will return once the economy improves may be misplaced. We may face a decade of dampened risk appetites, causing gambling revenues to remain depressed even as the broader economy recovers. If Detroit's economic woes are rooted in a structural decline in the automotive industry that made the city famous, a structural decline in risk-seeking behavior could have even starker implications for a city and state that have come to rely so heavily on casino gaming revenues. The casinos claim they are now resort destinations with portfolios of entertainment far more diverse than gaming, but the reality is that they still depend on people going to Vegas for the lure of gambling and risk.
But let's cut to the chase, what we really want to know is what kind of toll this economic downturn is having on casino comps, the freebies such as drinks and rooms and shows we've come to rely on.

In fiscal year 2009, 38 Las Vegas resorts surveyed reported comps totalling $310.7 million, a 2% decline from the previous year. In Atlantic City you can practically forget about scoring a free room or beverage; comps were down 5%.
POSITION:  No positions in stocks mentioned.