Wynn Resorts this week forecast doom for revenues in the gambling capital of the world, Macau.

Some on Wall Street say the casino giant is being overly conservative, but economic indicators on mainland China tell a different story.

We know that China's economy is slowing dramatically, and one of the places where you can see that very clearly is Macau, the gambling capital of the world.

Wall Street was reminded of that on Wednesday, when Wynn Resorts reported earnings. While the third quarter didn't look that bad — Macau revenue was up over $200 million from the same time a year before — the casino giant had a dark outlook for the fourth quarter. Wynn projected earnings 20% below what Wall Street expected.

According to analyst Cameron McKnight at Credit Suisse, this implies that the Macau gambling market could be negative over the last two months of 2018.

"Wynn noted that Golden Week was very strong in October, but business dropped sharply after that and has remained volatile since then," McKnight wrote in a note to clients. "Further, the company noted that it does not believe it is losing share – this means their guidance is either extremely conservative or the market has turned negative in November and December."

Wynn's stock fell 12% on Thursday following the report.

Wynn makes the lion's share of its revenue from its two casinos in Macau, so of the American casino operators on the glittering Cotai Strip, Wynn is most susceptible to market volatility.

But of course this would be bad for the entire industry. A slowdown of the kind Wynn is projecting is a flashback to a dark time for the casino world, when a slowing Chinese economy and new government regulation sent casino revenues crashing as much as 50% in 2014 and 2015.

Strip

Now there are some on Wall Street, like Carlo Santarelli at Deutsche Bank, who think that Wynn made an "overly conservative guide."

And the gentleman is entitled to his opinion.

But macro data is on Wynn's side. As McKnight notes, gaming revenue tends to lag credit cycles on the mainland by 15 months, and as we know, about a year ago the Chinese government started to slow the flow of credit through its economy.

And then there's the housing market. McKnight posits that Macau gambling revenue lags Chinese housing prices by 8 months.

All sorts of signals in China's housing market are flashing red right now. Earlier this week S&P warned that weaker Chinese property developers were in danger of default. Housing sales fell 3.6% in September, and new research indicates that 22% of all homes in China are unoccupied.

So far, as Societe Generale economist Wei Yao pointed out in a note to clients, China's real estate investment — which makes up half of all investment in the country — has stayed pretty stable. But she does not see that lasting very long.

From a recent note to clients (emphasis ours):

"Real estate investment and construction growth remained surprisingly resilient in light of further weakening in housing sales. Investment growth strengthened from 13.8% in 2Q to 14.5% in 3Q, despite the slight moderation to 8.9% in September from 9.3% in August.

Growth in new floor space started surged to 27.8% in 3Q - the quickest since 2014 - from 16.6% in 2Q, thanks only partly to positive base effects.

In contrast, housing sales contracted by 3.6% in September, bringing down the quarterly growth rate to 2% from 3.1%. We still believe that demand determines supply, not the other way around, and that, as a result, the strong trend in housing supply is unsustainable."

The world will get fresh credit data from China next week, and perhaps it will show that policymakers have decided to loosen conditions in the face of a downturn and a potential trade war with the United States.

Even so — since Chinese credit is leading Macau gaming revenue as an indicator — that means Macau will have to continue to work through some pain for the next few months.

The question is going to be not whether the pain is coming, but how long it's going to last.