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Home Front: War Likely to Hurt Las Vegas Economy

LAS VEGAS -- The chances are rising rapidly that the U.S. involvement in Iraq will slam Las Vegas' economy, community leaders who dealt with fallout from America's first Persian Gulf War are saying.

Before hostilities with Iraq broke out in 1991, local gaming officials confidently noted that initial indicators suggested the gaming industry and Southern Nevada's economy would feel little pinch.

But once the bombs started falling on Baghdad, Las Vegas' visitor count plunged, occupancy rates nose-dived, gaming revenues tumbled, retail sales slipped and residential construction staggered.

That's the way it was in 1991, but local leaders note Las Vegas is even more vulnerable economically than it was 12 years ago and is already starting to reel from the effects of the U.S. war with Iraq.

Former Gov. Bob Miller, who was in office at the time of the first war and is now a partner in the Las Vegas law firm of Jones Varga, said Southern Nevada is more vulnerable today in part because of heightened anxiety about the possibility of domestic terrorism.

The community is still recovering from the economic shock waves following the Sept. 11, 2001, terrorist attacks, analysts said, noting leisure travelers react much more strongly to every rumor of additional threats.

Additionally, the Las Vegas economy has diversified somewhat, while the gaming industry has spread geographically, leaving both more prone to national trends than they were 12 years ago.

"Even if the war goes away, business people are going to be more conservative investing than they were in the last half of the '90s," said Keith Schwer, director of the Center for Business and Economic Research at the University of Nevada, Las Vegas.

Gaming expert and UNLV professor Bill Thompson predicts the Las Vegas economy is going "to take a hit" comparable to the impact on the national economy.

"We've matured. We're part of the rest of the country now, and we can't pretend we're immune to what's happening in the rest of the country anymore," he said.

Deutsche Bank analyst Andrew Zarnett said the combination of negative economic numbers -- lagging job creation, falling consumer confidence and rising joblessness -- and terrorism fears marks the biggest difference from 1991.

"There are a lot of compounded negatives already impacting our lives, the most obvious being the recession, fear of terrorism, geopolitical uncertainty and the airline industry," he said.

Also, Nevada, like most other states, is facing a fiscal crisis today, unlike the situation 12 years ago.

"The state's in a different position," Miller said. "The governor has called for sizeable increases in taxes, making public finance more dicey than it was back then."

And, finally, informed sources are saying U.S. involvement in Iraq will last longer than the 42-day limited conflict that occurred in 1991, while the cost of reconstruction and the share to be borne by this country will probably be much larger.

Pricewaterhouse Coopers recently forecast a drop of 0.5 percent in revenue per available room for the lodging industry in 2003, assuming a "brief war" scenario of four to six weeks of military action in Iraq.

UNLV's Schwer agreed that travel will likely be one of the biggest differences from 1991.

"In the short run, people have made their plans. When events are abrupt like 9-11 and persist, that's when they take the biggest toll (economically)," Schwer said.

When hostilities broke out 12 years ago, the biggest business concern was the possible effect on Nevada's tourism-based economy of a gasoline price hike or possible shortages, then-Sen Richard Bryan said at the time.

Gasoline prices, however, remained stable, and then-Gov. Miller issued assurances that supplies were adequate.

Today, it's a very different story. Las Vegas gasoline prices have been hitting record highs since January, AAA Nevada has reported.

In its monthly Fuel Gauge Report released in mid-March, the auto club said the average price for a gallon of unleaded self-serve gasoline in Las Vegas was $1.98, up 20 percent from a month earlier and up 38.5 percent from January.

And local station operators are saying they have no idea when prices will stop rising, or how high they might go.

Las Vegas Convention and Visitors Authority President Manny Cortez has been citing a study showing that increasing gasoline prices directly result in declining hotel occupancy nationwide.

UNLV's Thompson agrees "the war will hurt Las Vegas in the short run," but argues that financial turmoil in the airline industry poses the biggest long-term threat to Las Vegas.

"We've got to get the airlines stabilized," he said.

Las Vegas is more dependent on major air carriers than it was 12 years ago, and those carriers already had been double-punched by the continuing recession and the effects of the Sept. 11 terrorist attacks.

Moreover, foreign travel to Las Vegas is being deterred, and domestic air carriers are suffering collateral damage, Miller said about the impact of the current war in Iraq.

"If any (more airlines) go bankrupt or cut back on flights, that could have an impact," he said.

During the first war in the Persian Gulf, Clark County tourism was stalled by a rash of canceled room reservations blamed on the conflict.

In the initial weeks following the outbreak of hostilities, gaming revenues tumbled as much as 13 percent and the number of visitors fell about 12 percent.

Shortly after hostilities ended in February 1991, the Las Vegas Convention and Visitors Authority was reporting a return to rapid rates of tourism growth.

However, occupancy rates during the six weeks of war were down more than 10 percent, and when earnings reports were released for the first quarter of 1991, it became clear that the MGM Grand, Desert Inn and Tropicana all had been losing money.

Since the 1991 conflict, the casino companies have learned some lessons.

In the downturn following Sept. 11, casino companies proved more adept at shielding earnings, but laid off thousands of hotel and casino workers to do so.

Still, the Las Vegas gaming industry may be more vulnerable to an economic downturn and the effects of hostilities than it was during the first Persian Gulf War.

Although it has grown, Las Vegas' market share has decreased because of increased competition from new gambling sites across the country.

UNLV's Thompson said American Indian casinos and riverboats are going to do very well during any gaming slump because people will be able to stay close to home and gamble, even as they escape the anxiety of the world situation.

The impact on the rest of the economy may be harder to gauge because of lags in market responses and normal business cycles that swamp short-term trends.

During hostilities 12 years ago, retail sales fell 13 percent compared with sales during the last half of 1990, but January and February sales normally are slower months in any event.

Housing permits also dropped 25 percent in January and February 1991, but that may have been the effect of the recession that began in mid-1990 and from which the national economy was just beginning to emerge, Schwer said.

Dennis Smith, then as now president of Home Builders Research, blamed part of the local housing downturn on the war 12 years ago, but said the industry recovery was well under way by October 1991.

This time around, new-home sales were down 9.1 percent in January and February compared with sales during the first two months of 2002, and Smith said the decline was largely attributable to the world situation.

Further, the spread of gambling generally means the local economy and gaming industry are more vulnerable to both the world situation and the national economy "because we're getting into competition with ourselves in effect," Schwer said.

"It won't help Las Vegas when travel, security issues and a weak economy are all hitting us at the same time," he said.

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