Magazine

Las Vegas Isn't Feeling So Flush


French chef Andre Rochat started to notice around the beginning of this year. One by one, suppliers began tacking a fuel charge on to food shipments trucked or flown into Las Vegas, where he runs three high-end restaurants. The cost of items imported from Europe, such as Dover sole, rose even higher because of the dollar's weakness against the euro. To compensate, Rochat had to raise his own prices. Making matters worse, convention attendance is down 5% in Las Vegas this year because of higher airfares and hotel rates, thinning the ranks of affluent diners. "Business has slowed down," Rochat says. "Everything is changing."

Rising prices, burdensome fuel costs, flagging consumer spending -- these are the gathering storm clouds that could bring slower growth to Sin City for the rest of the year. More than most cities, Las Vegas has benefited from four years of low interest rates, a sizzling housing market, and explosive growth in jobs and population. The expansion will probably continue through 2006, but at a noticeably slower pace. With its heavy dependence on housing and consumers, Las Vegas may provide some hints of what a national slowdown might look like. "The lagging impact of what the Fed has done and energy prices will cause a slowdown in the U.S. led by the consumer," warns Merrill Lynch Investment Managers (MER) president Robert C. Doll.

Signs of slackening growth in Las Vegas showed up in second-quarter corporate earnings reports. On July 25, Station Casinos Inc. (STM) and Boyd Gaming Corp. (BYD), which run rival gambling houses catering to Las Vegas locals, reported earnings per share that missed analysts' consensus estimates by 3% and 19%, respectively. Both companies recently opened new properties in the southern Las Vegas area, but so far the locals' gambling market hasn't swelled to fill the added capacity.

HOLDING BACK

The disappointing results added to speculation about belt-tightening among consumers. In the 12 months ended May 31, the gambling market among locals in Clark County, which includes Las Vegas, grew 10.4%, vs. 14.1% a year earlier, the first decline in four years, according to the Nevada Gaming Control Board. "I suspect we may be seeing in the locals' gaming market some of the concerns that investors have about the general U.S. consumer, such as fuel prices, interest rates, and housing costs," says Matthew Jacob, an analyst at independent stock researcher Majestic Research.

In Las Vegas, as in other hot markets, soaring real estate prices have driven spending on cars and other consumer goods. Since 2003 home price appreciation has generated more than $20 billion in paper and real wealth for residents, according to Las Vegas economic consulting firm Applied Analysis. "A lot of that money was pumped back into the local economy," says Brian Gordon, a principal at the firm. Although the median price of existing Las Vegas homes is still rising, the annual appreciation rate slowed to 7% in May, says the Center for Business & Economic Research at the University of Nevada at Las Vegas. And the number of existing homes sold in May fell 18%.

Some Las Vegas executives point out that the city will add 80,000 new residents this year, fueling more growth. That's a lot of new potential gamblers, but it's down from a peak of 96,000 in 2004. Like it or not, Las Vegas seems poised for a slowdown.

By Justin Hibbard


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