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The Indy Outlook: Las Vegas Economy: A for growth, D+ for diversity

John Restrepo
John Restrepo
The Nevada Legislature building as seen in Carson City on Feb. 6, 2017.

By John Restrepo

The Economic Forum determined Nevada will have approximately $140 million in extra revenue to spend over the next biennium, with almost every tax source exceeding estimates. This is great news to be sure, and many will talk about it as proof of economic development strategies. But is this growth broad? Or are we just seeing the boom times back for our state’s juggernaut industry – gaming, hospitality, and tourism?

To answer that question, allow us to introduce you to the Hachman Index, dear readers. It assumes the national economy is perfectly diverse – that the percentage of the nation’s jobs in each sector is ideal averaging across a large group of people and diverse geography. We then compare a state or metro area’s share of jobs in a sector against the US to come up with what’s called a “location quotient,” basically the percentage of the national average. Apply a little more math and you get a score, where 100 is a perfectly diverse economy matching the US averages. The lower the score, the more heavily the state relies on a handful of industries.

We’ve done some analysis of where Nevada’s metro areas stand in regard to others in the region, and the news is not great.

Las Vegas is way behind other large metro areas in Western states. While most cities are fighting over their placement in the 90s (1 is 100 for the purposes of these charts) Las Vegas is scoring just .687 as of 2016. To be blunt, that translates as a D+ grade. We’re being surpassed in the index by similarly hot and dry Phoenix, similarly sized San Jose, smaller Reno, and massive Los Angeles. No matter your criteria for comparison, Las Vegas is lagging in economic diversity.

We went back to 1996 and plotted the change in this index among Las Vegas, Reno, San Jose, and Sacramento. The good news is that Southern Nevada has, with the exception of a lull in the Great Recession, seen its economy steadily diversify. The bad news is that our economy was even more lopsided to start.

Sacramento’s economy has remained relatively consistent and well-diversified, while Reno made a climb from 75 and broke into the 90s by 2009, and San Jose’s workforce is actually concentrating into fewer sectors. By looking at the location quotients for Las Vegas, we can see where we are – and are not – making progress on diversification:

The bigger the circle, the larger a portion of the state’s economy that sector is. Those in the top half make up a larger share than the national average, while the bottom is below average. Industries to the left make up a smaller share of the state’s economy than they did in 2007, and those to the right make up a larger share. Ideally we want to bring the top sectors down and the bottom sectors up to make the economy more diverse.

The Great Recession burst the Las Vegas construction bubble and the myth about it being “recession-resistant”, and moved it much closer to the national average. Leisure and hospitality also makes up a smaller share, but is clearly the main factor affecting economic development diversification – its portion of the Las Vegas economy is still almost three times that of the US. Meanwhile, manufacturing is makes up a smaller share of the region’s economy than it did a decade ago. Other areas lagging behind despite some progress include government, information, and education and health services.

A smart economic diversification strategy should focus on shoring up these sectors in Southern Nevada. It should also, as we’ve noted previously in this publication, include increased investment in research and development. Unless and until we get more diverse, too many of our jobs and too much of the tax revenue our state needs to operate will depend on the kindness of others.

John Restrepo, the author of this op-ed, is an economist and Principal of RCG Economics. He is an expert in regional economics and forecasting in Nevada and the Mountain West.

Disclosure: John Restrepo co-publishes the Stat Pack, a client of the communications consulting firm owned by The Nevada Independent’s managing editor, Elizabeth Thompson.



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