News Column

Fiscal Uncertainty Looks Dicey for Gaming Industry

Dec. 18, 2012

Donald Wittkowski

Casinos nationwide could see their profits fall by as much as 10 percent if Congress and the White House fail to reach agreement to avoid a budget crisis, a top credit ratings agency warned Monday.

Moody's Investors Service said the gambling industry would be particularly vulnerable if Washington's budget negotiations falter, leading to a series of spending cuts and tax increases that could harm consumer confidence and drive the country over the "fiscal cliff."

"The gaming sector's economic health depends entirely on customers' discretionary spending habits," Moody's noted in a research report. "Even as the severe downturn during 2008-09 has faded, U.S. consumers remain under pressure from weak growth in their disposable personal incomes, as well as increasing living expenses. Any further drop in consumer confidence would keep even more potential gaming customers from spending their money at casinos."

Moody's predicted that casino operating profits could decline between 5 percent and 10 percent if wary gamblers stay home. Atlantic City's casinos, already suffering in the fragile economy, have seen their gambling revenue sink 8 percent in the first 11 months this year. A weeklong casino shutdown caused by Hurricane Sandy contributed to a 28 percent plunge in gambling revenue in November, the largest monthly drop in the city's 34-year history of legalized gambling.

Andrew Zarnett, a casino analyst at Deutsche Bank, believes consumer spending could decline by about $3,500 per household if the across-the-board spending cuts and tax increases take effect Jan. 1. As a result, gambling customers will be more cautious with their spending, he said.

"This decline in gaming spend will translate into lower revenues and (profits) for casino operators, who will have to compete for the limited discretionary dollars being spent by consumers," Zarnett wrote in a note to investors.

However, Israel Posner, a casino analyst at The Richard Stockton College of New Jersey, argued that the fiscal cliff has been "overly dramatized" and is not an accurate metaphor for any looming budget crisis. He said the lingering effects of Hurricane Sandy are a far more serious concern for Atlantic City's gambling industry.

"I never really saw it as a cliff. I see it as an adjustment of tax policy," said Posner, executive director of Stockton's Lloyd D. Levenson Institute of Gaming, Hospitality and Tourism. "In this region, the effects of the hurricane are more profound."

Casinos are expected to take months to fully recover from the storm. Hurricane damage in the feeder markets of New York and North Jersey has made it more difficult for customers to make gambling trips to Atlantic City.

Collectively, Atlantic City's 12 casino hotels lost an estimated $5 million in gambling revenue each day they were closed in the hurricane's aftermath. Hurricane woes are the latest setback for a market already stung by the sluggish economy and competition from casinos in surrounding states.

Since peaking at $5.2 billion in 2006, Atlantic City gambling revenue has declined six years in a row. It is on track to finish at slightly more than $3 billion for 2012.

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Distributed by MCT Information Services

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