John Restrepo has seemingly spent his entire life observing the Nevada economy, when in actuality it has been less than 20 years. A former vice president with Coopers & Lybrand (now PricewaterhouseCoopers), Restrepo has become one of the most quoted and consulted economists in the region. He predicted the real estate collapse in Las Vegas and has consistently been correct about the slumping economy. A consultant who has clients in gaming, real estate and the financial industries, Restrepo Consulting produces several publications that present in-depth information available nowhere else. Restrepo met with Casino Connection Publisher Roger Gros and Managing Editor Greg Jones at his offices in Las Vegas in March to discuss the current state of the gaming industry and the economy in Southern Nevada.

Casino Connection: What do you see right now in the economy?

Restrepo: What we see now is the expression about known unknowns. We know we are going to come out of this pretty deep recession eventually, the question is how long will it take. And, when we do, is the market going to be materially different?

Are we going through a transformational period now? Do we have to put the old business models—those developed between 1995 and 2005—on a shelf while we go back to an older business model or do we have to find a new model? Is this recession going to have a material effect on how people view spending? If this becomes a period of time that people start saving, staying home and rebuilding their 401(k) plans, then we may have a different business model. People won’t stop coming to Las Vegas, but maybe they will come less frequently or spend less money.

We do know it is probably going to last longer than we thought it was going to last six months or a year ago.

Las Vegas was like the canary in the coal mine in terms of the housing bubble. Do you see the housing market improving anytime soon?

We’ve always had this belief here that we come out of recessions faster than other parts of the country—we go in later and come out faster. I don’t know if that is true or not. I’m thinking that is a bit of an urban myth. We’ve had times when we have done that and other times when we haven’t.

The housing market is a critical thing for us here in Southern Nevada. We understand now that we are on the bubble. We knew back in ‘05, and I would make presentations that would show the ratio of house price to income. For many years we were 2.5 to 3 times the average income. In ‘04 we went to 4.5. In ‘05 we went to 5.5 and so you could see what I call the left side of the bubble. We would include that in some presentations and say, “This sounds good and it looks like you’re making a lot of money because the house you bought for $200,000 is now worth $400,000, but this is not good. It’s not sustainable.”

A lot of folks didn’t believe it at the time. They said the only business cycle that Las Vegas had experienced was a permanent up-cycle. We started believing our own PR a little too much. Now we’ve seen the impacts of that kind of bubble. It is going to take at least two years to get back to a sustained recovery in the housing market.

For that, the core, fundamental statistic you need to look at is jobs. Everything else is important, but everything is tied to jobs. Until we see a sustained recovery in job growth for at least six months, all bets are off.

We just finished an analysis that showed that the period from March 2008 to February 2009 was the first time that we had 100,000 unemployment claim filings. That is pretty major. Until the unemployment rate starts trending down and job growth starts trending up, all bets are off on where we are heading no matter what Washington does with the stimulus package.

So jobs are the key factor. But it doesn’t look like there will be a rebound in job creation in the gaming industry for some time.

Jobs are key to everything. They are the fundamental key. If you don’t have a job you’re not going to be spending much money.

In Nevada, the gaming industry influences everything. It affects real estate; it affects pretty much everything the state does.

We’re learning now the price of an undiversified economy. I was looking at statistics the other day and noticed that Phoenix has all the same problems we have with housing, the economy and credit markets, but one thing they don’t have as bad as we do is they have an unemployment rate that is two or three points below our unemployment rate because they have a more diversified economy.

A diversified economy wouldn’t have mitigated what happened to Southern Nevada, but it would have definitely lowered the impact. We’re understanding that now. We’ve talked about diversification here for many years but we’ve never really invested in it very much. We’ve talked about it in terms of how the state and business communities invest. We understand now that maybe with a more diversified economy we could have gotten through this with a little less of an impact than we have felt.

These are the questions people are starting to ask now. One of the silver linings in this cloud is that is has made people re-evaluate old beliefs.

The legislature is considering ways to increase taxes in Nevada to fund important things like education and infrastructure improvements. Do you have a prediction about who is going to take the hit? What method would you prefer to see that would cause the least impact on the business community?

I sit on a panel appointed by the governor and the legislature called the Economic Forum, and we forecast the state’s general fund revenues for the next two years. It’s a major challenge facing us. We’re not going to be able to tax or spend-cut our way out of this. We won’t be able to generate enough taxes to get out of this. Probably for the first time in Nevada history, we’ll have the greatest spending cuts at the same time as the largest increase in taxes.

But not all taxes are created equally. Some taxes affect an economy longer term than others. We have to be careful about how we tax ourselves. If a lot of taxes and all kinds of taxes were a good thing, California would be in great shape. We’re finding out now that it’s the health of the economy that drives the health of the tax base, and so we have to be very careful in how we raise these taxes not only to solve the short-term problem but the long-term problems. Any adjustment to the gaming tax would be the absolutely wrong thing to do based on how gaming taxes flow in the short term and the long term. If there was a perfect tax structure, every state would have the same tax structure.

The $64,000 question: When will this begin to get better?

We have to look at all data on a regional, national and global level, because we’re understanding now that Las Vegas, while physically isolated, is intricately tied to the global economy, so you have to look at everything. When we look at all this data and look at the financial markets as well, we think it is going to take probably at least a year to a year and a half to see a sustained recovery. My basic indicator of recovery is six months of job growth, and we don’t think we’re going to see that six months of steady job growth for at least 12 to 18 more months.

By Roger Gros

Roger Gros is publisher of Casino Connection and editor and publisher of Global Gaming Business magazine, the industry’s leading gaming trade publication. Prior to joining Global Gaming Business, Gros was president of Inlet Communications, an independent consulting firm. He was vice president of Casino Journal Publishing Group from 1984-2000, and held virtually every editorial title during his tenure. Gros was editor of Casino Journal, the National Gaming Summary and the Atlantic City Insider, and was the founding editor of Casino Player magazine. He was a co-founder of the American Gaming Summit and the Southern Gaming Summit conferences and trade shows. He is the author of the best-selling book, How to Win at Casino Gambling (Carlton Books, 1995), now in its third edition. Gros was named “Businessman of the Year” for 1998 by the Greater Atlantic City Chamber of Commerce.