Gaming CEOs Prepare for Upcoming, 'Moderate' Financial Downturn
This year, the gaming industry in Nevada has seen a record-breaking amount of gross gaming revenue (GGR). However, some top executives in the gaming industry are worried that a recession might hit the US economy as early as the current quarter. In the just-released American Gaming Association's (AGA) Gaming Industry Outlook, the Current Conditions Index was measured at 100.6 in the third quarter, indicating slight growth between April and June. On the other hand, the Future Conditions Index was recorded at 99.6 and is expected to drop slightly over the next six months.
The Future Conditions Index represents gaming CEOs' positive outlook on the gaming industry, but it also takes into account their cautious outlook on the broader economy, which is expected to experience a mild recession starting in the fourth quarter. Although many gaming executives are optimistic about the current state of the industry, their expectations for future business conditions are more balanced.
Contrary to what has been believed in Las Vegas, some gaming executives have noticed that high inflation has prompted some customers to reduce their spending while in Sin City.
Historically, a recession occurs when a country's economy experiences negative GDP growth in two consecutive quarters, a condition the US economy encountered last year. However, this definition has been disputed for political reasons, and the media and banks jumped in to argue their case. The recent spending spree by the government has led to the highest inflation in four decades and the highest interest rates in 20 years, potentially making the US economy vulnerable over the short term. This volatility could negatively affect the gaming industry.
The AGA states that the downturn will be caused by the cumulative effect of Fed rate hikes, tighter lending conditions, and high inflation, which is driving consumers and businesses to reduce their spending, hiring, and investment. The AGA predicts that while consumer spending will slow, more than one-third of adults still plan to visit a casino within the next 12 months, consistent with past results.
Adding to the concerns are the findings that as of May, more than 70% of all job gains since January 2021 were not new jobs, but rather people returning to jobs they held before the pandemic. Another issue that raises questions about the industry's viability is that real wages have dropped 5% since January 2021 due to rampant inflation, as per data from the partisan House Budget Committee.
A recession would have an obvious impact on the gaming industry through a decline in consumer spending. But there is more to the story. Firms that are heavily indebted, like many casino operators, generally face difficulty during economic contractions. According to the AGA survey, gaming executives are optimistic about their balance sheet health, but their revenue growth and hiring expectations have slowed down. Furthermore, the AGA found that about 26% of gaming executives describe access to credit as tight, while only 19% say it's easy. More than half of the executives, meanwhile, pointed to inflation or interest rate concerns as the leading constraint on operations.
In conclusion, the fear of a mild recession is causing concerns in the gaming industry, as it may lead to a decline in consumer discretionary spending and affect businesses with high levels of debt.
