1. A monthly report produced for Commerce Real Estate Solutions by Stephen P. A. Brown, PhD, Center for Business & Economic Research University of Nevada, Las Vegas
Issue 15 March 2012
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Will an Improving Economy Be
Dragged Down by Higher Oil Prices?
The high gasoline and jet fuel prices seen in March and April raise concerns about the possibility
that high energy prices will lead to yet another economic slowdown. Although high gasoline
prices are visible and alarming, current energy market conditions are unlikely to push the U.S.
economy back into recession. The gains in oil prices that produce higher gasoline and jet fuel
prices have not been enough to trigger a recession.
In addition, oil prices are likely to play less of a role in had oil prices not risen, the economy would have merely
current U.S. economic conditions than the past. Other slowed down rather than downshifted into recession.
energy prices—particularly those for natural gas—have In early 2012, oil prices have not shown the sharp
not moved with prices for oil and petroleum products. increases that signal that a recession is imminent. That
The U.S. economy has become much less dependent is, oil prices have not risen to the point where they are
on energy. As a result, high oil prices mean much less higher than they have been during the past three years.
headwind to overall economic activity than in the past. In addition, the future market shows oil prices falling
Current Oil Prices Are Not at Recession-Producing from current levels, rather than heading upward to the
Heights heights necessary to cause a recession.
The United States has seen a number of episodes in Falling Natural Gas Prices
which oil prices rise sharply and are higher than had History suggests oil and natural gas prices move
been seen in the previous three years. These episodes together. In fact, economists Stephen Brown and
have preceded all but two of the U.S. recessions since Mine Yücel found weekly movements in natural gas
World War II. The two exceptions are the 1960 and prices from 1994 through 2007 are well explained
1970 recessions.1 by movements in oil prices in a model that takes into
Sharply rising oil prices also provided false signals in account seasonality, variations in weather, natural gas
the mid-1990s and from 2002 to 2005. In addition, in storage, and disruptions in natural gas production
most attribute the 2008-2009 recession to a financial
market meltdown rather than the 2007 oil price spike.
Nonetheless, economist James Hamilton argues that This report is commissioned by
Commerce Real Estate Solutions
info@comre.com • 801-322-2000
1 James D. Hamilton, “Causes and Consequences of the
Oil Shock of 2007-08, Brookings Papers on Economic Activity,”
Spring 2009, pp. 215-84.

2. nevada’s Economy March 2012
caused by hurricanes in the Gulf of Mexico.2 That relationship between movements in oil prices and
historical relationship seems to have broken down as energy purchases as a share of U.S. GDP has changed
natural gas prices have diverged from oil prices since considerably since the 1970s and 80s. In the 1970s and
early 2009—continuing to fall as oil prices rise. early 1980s, there was a tight relationship between
The divergence of natural gas prices from oil prices oil prices and overall energy prices. In addition,
has been created by the technological revolution in considerably more energy was used to produce GDP
production of natural gas from shale formations. The than is the case today. As a result, energy purchases as
combination of horizontal drilling with hydraulic a share of U.S. GDP moved relatively tightly with oil
fracturing (aka fracking) has led to a substantial prices.
reduction in the cost of producing natural gas from In early 2012, however, energy purchases as a share of
shale formations.3 GDP have not moved nearly as tightly with oil prices.
As a result of the shale gas revolution combined with That fact, suggests that the sharp rises in oil prices seen
the weakness of the industrial sector coming out of in early 2012 will not have nearly as much impact on
the recession, the United States is awash in natural overall economic activity as previous history might
gas supplies, and natural gas prices have been pushed suggest.
to extremely low levels. One consequence of recent Oil Price Shocks and U.S. Economic Activity: The
declines in natural gas prices is that overall prices paid New Wisdom
for energy in the United States declined in the first In early 2012, the sharp increases in gasoline and jet
three months of 2012—even as oil prices were rising. fuel prices brought about by higher crude oil prices
Reduced U.S. Energy Dependence have raised concerns about the possibility of slowing
U.S. economic output also has become substantially economic activity. Because natural gas prices have
less dependent on energy consumption over the past declined since mid-2011, however, the impact of oil
40 years. In 1973, 15,414 Btu were required to produce price increases on the overall price of energy has been
each dollar of U.S. gross domestic product (GDP). In substantially blunted. In addition, reduced U.S. energy
2011, only 7,327 Btu were required to produce each dependence means that oil price movements have not
dollar of U.S. GDP.4 That represents a reduction of led to large changes in energy purchases as a share
52.4 percent. of GDP. These facts do not lessen the painful feeling
at the pump, but they suggest that energy prices are
When we combine the effect of reduced dependence creating much less headwind to overall U.S. economic
on energy with the divergence of overall energy prices activity than they did in the past.
from those for oil, an interesting picture emerges. The
2 Stephen P. A. Brown and Mine K. Yücel “What Drives
Natural Gas Prices?” The Energy Journal, 29(2), 2008.
3 See Stephen P. A. Brown, “Abundant Natural Gas
Could Mean a Paradigm Shift in U.S. Energy Markets and
Policy,” Resources, Summer 2010.
4 GDP is measured in 2005 constant dollars.
Commerce Real Estate Solutions | comre.com

3. Will an Improving Economy Be
Dragged Down by Higher Oil Prices?
Nevada Economic Conditions
U.S. economic growth was fairly strong in fourth February than a year earlier. Taxable sales were
quarter 2011. Consumer spending and employment up by 4.8 percent in January above a year earlier.
were fairly strong in first quarter 2012, but indicators According to the establishment survey conducted
that more closely track GDP—such as personal by Nevada’s Department of Employment, Training
income—show slower growth. Nevada’s tourism and and Rehabilitation (DETR), Nevada’s employment
gaming continue to drive the state’s economic recovery. declined in February. Nonetheless, the statewide
Nevada’s construction sector remains at relatively unemployment rate decreased from 12.9 percent in
low levels. Nevada’s employment fell in February, January to 12.1 percent in February because DETR’s
but reduced labor force participation meant a lower household survey showed employment gains, Table 2.
unemployment rate. Clark County’s Economy Remains Slightly Ahead
U.S. Economy Showing Mostly Positive Signs Clark County’s economy is expanding at a slightly
U.S. real GDP grew at an annualized rate of 3.0 faster pace than the state’s. Compared to a year earlier,
percent during fourth quarter 2011, representing visitor volume and gaming revenue for February were
a substantial gain over the third-quarter rate of up by 5.2 percent and 5.5 percent, respectively. Taxable
1.8 percent. Consumption spending and inventory sales for January were 3.5 percent above those for a
investment were particularly strong. Residential year earlier. Residential construction permits rose from
and business fixed investment slowed. Imports and January to February, and commercial construction
government spending made negative contributions. permits remained at a low level. DETR’s establishment
U.S. nonfarm employment rose by only 120,000 jobs survey shows Las Vegas metropolitan employment fell
in March after three straight months in which the in February. Nonetheless, the region’s unemployment
gains were more than 220,000 jobs per month. The rate fell from 13.0 in January to 12.2 percent in
unemployment rate slipped to 8.2 percent in March February—mostly because DETR’s household survey
as labor force participation fell. Consumer sentiment showed employment gains, Table 3.
increased in March, but consumer confidence slipped. Washoe County’s Economy Showing Improvement
Sales of existing homes slipped in February, but were
8.8 percent higher than a year earlier. Sales of new Washoe County’s economy showed some improvement.
homes rose slightly from extremely low levels. Personal Compared to a year earlier, February visitor volume
consumption expenditures increased in February was only down 2.4 percent. Gaming revenues were
Story continues after graphs
for the eighth straight month, and retail sales rose
in March for the tenth straight month. The Kansas
City Financial Stress Index remained below its long-
run average in March, indicating a lack of financial
headwinds to economic growth. Nonetheless, the
National Federation of Independent Businesses reports
small businesses are having more difficulty obtaining
financing, Table 1.
Nevada Economy Continues to Show Uneven
Growth
The Nevada economy continues to show uneven signs
of growth. Visitor volume took a seasonal decline
in February but was 4.5 percent higher than a year
earlier. Gaming revenue was 5.7 percent higher in
Issue 15 | ©Copyright 2012 - All Rights Reserved

4. nevada’s Economy March 2012
U.S. Date Units Current Previous Change Year Ago Change
Table 1
Employment 2012M03 million, SA 132.821 132.701 0.1% 130.922 1.5%
Unemployment Rate 2012M03 %, SA 8.2 8.3 -0.1% 8.9 -0.7%
Consumer Price Index 2012M03 82-84=100, NSA 229.1 228.4 0.3% 223.2 2.6%
Core CPI 2012M03 82-84=100, NSA 228.4 227.9 0.2% 223.4 2.3%
Employment Cost Index 2011Q4 89.06=100, SA 114.7 114.2 0.4% 112.8 1.7%
Productivity Index 2011Q4 2005=100, SA 110.7 110.4 0.2% 110.5 0.1%
Retail Sales 2012M02 $billion, SA 407.8 403.5 1.1% 383.0 6.5%
Auto and Truck Sales 2012M03 million, SA 14.31 15.04 -4.8% 13.02 9.9%
Housing Starts 2012M02 million, SA 0.698 0.706 -1.1% 0.518 34.7%
Real GDP*** 2011Q4 2000$billion, SA 13,429.9 13,331.6 3.0% 13,216.1 1.6%
U.S. Dollar 2012M03 97.01=100 98.727 98.121 0.6% 96.944 1.8%
Trade Balance 2012M02 $billion, SA -46.025 -52.522 -12.4% -45.381 1.4%
S and P 500 2012M03 monthly close 1,408.47 1,365.68 3.1% 1,325.83 6.2%
Real Short-term Rates* 2012M03 %, NSA -3.82 -3.21 -0.6% -4.50 0.7%
Treasury Yield Spread 2012M03 %, NSA 2.09 1.88 0.2% 3.31 -1.2%
Nevada Date Units Current Previous Change Year Ago Change
Table 2
Employment 2012M02 000 employees 1,113.2 1,117.1 -0.3% 1,108.8 0.4%
Unemployment Rate* 2012M02 %, NSA 12.1 12.9 -0.8% 13.8 -1.7%
Taxable Sales 2012M01 $billion 3.154 4.216 -25.2% 3.009 4.8%
Gaming Revenue 2012M02 $million 932.17 1,038.41 -10.2% 881.83 5.7%
Passengers 2012M02 passengers 3.418 3.480 -1.8% 3.280 4.2%
Gasoline Sales 2012M01 million gallons 85.12 90.07 -5.5% 89.76 -5.2%
Visitor Volume 2012M02 million visitors 3.821 3.859 -1.0% 3.656 4.5%
Clark County Date Units Current Previous Change Year Ago Change
Table 3
Employment 2012M02 000 employees 799.5 802.9 -0.4% 797.3 0.3%
Unemployment Rate* 2012M02 %, NSA 12.2 13.0 -0.8% 14.0 -1.8%
Taxable Sales 2012M01 $billion 2.332 2.992 -22.1% 2.252 3.5%
Gaming Revenue 2012M02 $million 812.14 925.49 -12.2% 769.53 5.5%
Residential Permits 2012M02 units permitted 460 317 45.1% 246 87.0%
Commercial Permits 2012M02 permits 18 21 -14.3% 10 80.0%
Passengers 2012M02 million persons 3.108 3.176 -2.1% 2.916 6.6%
Gasoline Sales 2012M01 million gallons 59.50 61.12 -2.7% 63.10 -5.7%
Visitor Volume 2012M02 million visitors 3.326 3.398 -2.1% 3.160 5.2%
Washoe County Date Units Current Previous Change Year Ago Change
Table 4
Employment** 2012M02 000 employees 186.2 185.8 0.2% 186.6 -0.2%
Unemployment Rate* 2012M02 %, NSA 12.2 13.0 -0.8% 13.5 -1.3%
Taxable Sales 2012M01 $billion 0.397 0.579 -31.5% 0.374 6.1%
Gaming Revenue 2012M02 $million 60.26 53.73 12.2% 55.73 8.1%
Residential Permits 2012M02 units permitted 42 95 -55.8% 49 -14.3%
Commercial Permits 2012M02 permits 4 11 -63.6% 11 -63.6%
Passengers 2012M02 million persons 0.265 0.259 2.3% 0.299 -11.4%
Gasoline Sales 2012M01 million gallons 13.02 14.49 -10.2% 13.45 -3.2%
Visitor Volume 2012M02 million visitors 0.314 0.278 12.8% 0.321 -2.4%
*Change in percentage rate
**Reflects the Reno-Sparks MSA which includes Washoe and Storey Counties
***Recent growth is an annualized rate
Sources: Nevada Department of Taxation; Nevada Department of Employment, Training, and Rehabilitation; UNR Bureau of Business and Economic
Research; UNLV Center for Business and Economic Research; McCarran International Airport; Reno/Tahoe International Airport; Las Vegas
Convention and Visitors Authority; Reno-Sparks Convention and Visitors Authority; U.S. Department of Commerce; U.S. Bureau of Labor Statistics;
U.S. Census Bureau; U.S. Federal Reserve Bank.
Note: NSA = Not Seasonally Adjusted, SA = Seasonally Adjusted
Commerce Real Estate Solutions | comre.com

5. Nevada Economic Conditions
up by 8.1 percent over the same period. Residential
and commercial construction permits fell in February.
According to DETR’s establishment survey, Reno-
Sparks employment rose by 400 jobs (0.2 percent) from
January to February. The Reno-Sparks unemployment
rate fell from 13.0 percent in January to 12.2 percent
in February because DETR’s household survey for the
region showed stronger employment gains than its
establishment survey, Table 4.
Nevada Economic Outlook in Brief
Driven by strong gains in consumer spending and
inventory investment, national economic conditions
improved in fourth quarter. Spending growth remained
relatively strong in early 2012, but the employment
growth slipped in March. Southern Nevada’s tourism,
hospitality, and gaming industries continue to grow,
but other sectors aren’t contributing much. In Washoe
County, some favorable economic signs were seen
in February. Nevada’s construction remains close to
bottom.
Issue 15 | ©Copyright 2012 - All Rights Reserved

6. This information is provided compliments of
Michael M. Lawson
President and CEO of Commerce Real Estate Solutions
Commerce Real Estate Solutions
Mike Hillis, CCIM, SIOR 3980 Howard Hughes Parkway, Suite 100
Las Vegas, NV 89169
Managing Partner of Commerce Real Estate Solutions, Las Vegas
Tel (702) 796-7900 • Fax (702) 796-7920
www.comre.com
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at www.comre.com/subscribe This report has been prepared solely for
information purposes. It does not purport
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The information contained in this report,
For further information on the Nevada commercial real estate while not guaranteed, has been secured
market, visit www.comre.com or call 702-796-7900. from sources we believe to be reliable.