The economic cycle is turning, and not in a good way for the Washington area.
When the nation plunged into a deep recession, the region fared better than most as the federal government cranked up stimulus spending.
Now that a broader recovery is underway, the local picture has become bleaker, as federal spending cuts, a lagging job market and excess real estate plague the Washington area. Big law and lobby firms are adjusting to less work, while the military drawdown overseas has yet to yield a peace dividend here.
“This dependence [on federal spending], which served the economy so well historically, is now an albatross,” Stephen Fuller, an economist at George Mason University’s Center for Regional Analysis, said last week during a state-of-the economy presentation at Capital One’s headquarters in Tysons Corner, Va. “Everybody is outperforming us. We’re at the bottom of the list.”
The region’s once-dependable job market is sputtering. Between July 2013 and July 2014, the Washington metropolitan area added 19,800 jobs. Dallas, by comparison, added about 120,000 jobs, while New York created more than 155,000.
Federal government jobs took the biggest hit in that period, with the elimination of 8,000 positions in the Washington region. The District lost the largest concentration of federal government jobs (4,000), while Northern Virginia and suburban Maryland lost 3,000 and 1,000, respectively.
“This is America’s version of austerity — and no metropolitan area stands to be as impacted by this as the Washington area,” said Anirban Basu, chief executive of Sage Policy Group, an economic consultancy based in Baltimore. “The federal government has become a significant drag on overall economic activity.”
The jobs that are being created in the Washington area — typically low-wage retail and hospitality positions — are less valuable to the broader economy than white-collar jobs in the federal government and professional and business services, Fuller said.
Each hospitality job adds about $43,000 to the region’s gross domestic product — less than half the $92,000 each construction job contributes, he said. Jobs in the federal government contribute about $142,000 each, and jobs in professional and business services, $158,000 each, he said.
“If we add up all the private-sector jobs that we lost and what their value added was, we’re down $27.2 billion,” Fuller said. “How do you grow an economy when pieces of it have just disappeared?”
Only half of the 96,000 construction jobs lost during the recession have been recovered, Fuller said.
Meanwhile, Virginia has replaced only 2,000 of the 62,000 manufacturing jobs it lost during the downturn.
“We’re running at half-speed at this point,” Fuller said. “There’s nothing driving growth.”
Compounding the issue, economists say, is the surge of construction in the region.
“The Washington metropolitan area recently went through a building boom,” Basu said. “Apartments were constructed, hotels were constructed, pricey office buildings were constructed — many of them in the District of Columbia itself. This real estate has come online precisely during a period of softening economic growth in the Washington metropolitan area.”
The area’s office vacancy rate — 15.6 percent at the end of the second quarter, according to real estate services firm Cassidy Turley — is among the highest it has been in the recent past, Fuller said.
Meanwhile, economic uncertainty continues to keep area residents from buying homes, pushing prospects for a housing market recovery to 2018 or 2019, he added.
“We keep building more buildings, which makes us think everything’s good,” he said, adding that the new projects are largely luring tenants away from existing developments for little net gain to the region. “This musical chairs gives us the sense that we’re just fine.”
Fuller says that he expects the region to add about 40,000 jobs for the year. But, he warned, the Washington area must find a way to make up for lost government spending by attracting large companies operating in new private sectors with high-paying jobs.
“What’s the next driver?” Fuller said. “If it’s not the federal government, who’s going to pick up the slack?”
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