Will 2014 be ‘a lost year’ for the greater Washington economy?


This was supposed to be a year of improvement for the greater Washington economy.

Sequestration had taken its toll in 2013, choking job growth and contributing to a regional economic slowdown. But experts predicted that after Congress struck a federal budget deal last December, local contractors might feel a newfound sense of clarity that would help stoke hiring, and in turn, the broader recovery.

But more than halfway through the year, there is scant evidence of economic advancement. James Bohnaker, an economist with Moody’s Analytics, called 2014 “a lost year” for the D.C. area, one in which there has so far been little movement toward a healthier economy.

Here are five things to know about how the regional economy is looking right now and whether the back half of the year is poised to be any stronger.

1. The labor market is showing little growth. The Washington region added only 6,000 jobs in the one-year period ending in May 2014. To put in perspective how paltry that growth is, the metropolitan area added 38,300 jobs between May 2012 and May 2013.

If you look at the labor market sector by sector, you’ll find even more discouraging developments: The bedrock of the local economy is the federal government and its contractors, but those categories are shedding jobs. Federal government lost 10,300 positions, while the professional services industry lost 4,000 jobs.

Economists say the inertia in the job market is likely tied to the federal spending cuts known as sequestration. While it was largely expected that the cuts would deal a blow to contractors, economists say they did not expect that the ripple effects would be as long-lasting.

“We kind of thought it’d be this quick jolt to the economy, and yeah, it’d be bad, but businesses and consumers would recover more quickly,” Bohnaker said. “Certainly, by this time in the year, we thought things would be getting back to normal.”

The losses in those sectors might not be so troubling if the region had a more diverse economy that was adding other kinds of middle-wage positions. But the biggest job creator for much of 2013 and 2014 has been the hospitality industry, which is typically low-paying.

2. Our lousy jobs picture looks even worse when compared to other areas.

During the recession, the D.C. region was an anomaly: We shed fewer jobs than most other metro areas as the government ramped up spending and hiring.

About five years after the recession officially ended, a very different picture has emerged. Of the 15 largest metropolitan areas in the nation, Washington ranks 14th in year-over-year job growth.

“We’re not the envy of the rest of the country anymore,” said Robert Peck, director of consulting for the Southeast Region at the architecture firm Gensler.

This has been true for some time, but the most recent figures illustrate it especially starkly. While the D.C. area added 6,000 jobs year over year, the similarly-sized Dallas area added 113,000 positions. Houston added 111,000. And in Seattle — where there are about half as many total jobs as in the Washington area — 41,000 positions were gained.

The only large metro area faring worse than us on job growth? Detroit, which was perhaps harder hit by the Great Recession than any other U.S. city.

When we don’t stack up favorably to other areas, “our competitive edge is diminished,” Fuller said.

3. The lackluster job market appears to be weighing on the housing market.

A more robust housing market could be the lynchpin of the regional recovery, and yet home-buying activity here remains tepid. RealEstate Business Intelligence reports that June was the sixth consecutive month that the metropolitan area saw year-over-year declines in home sales. Meanwhile, the region is seeing its highest number of active real estate listings in two years.

Economists and experts say the health of the local housing market is closely linked to the situation in the job market: The local economy is not generating in high volume the kinds of middle-class jobs that would position prospective home buyers to make a purchase.

“It isn’t consumer confidence, because that keeps moving up slowly,” Fuller said. “It’s just that people have realized their economic limits because the region isn’t booming as it used to.”

Jerry Berman, Washington area president of M/I Homes, said he has seen comparative weakness in demand for the kinds of homes that are most accessible to first-time home buyers.

“I think for the most part we’re seeing better sales and better traffic with the higher-priced communities than the entry-level communities,” Berman said.

Economists and experts say the appetite for multi­family housing is also cooling, which is evident from weak growth in rental rates.

“We’re going to suffer through that for the next couple of years,” said Gregory H. Leisch, chief executive of Delta Associates, a real estate analysis firm. “This is a cycle where we’ve got too much supply.”

4. Lots of office space is going empty. There are a number of reasons why the office absorption rate in the Washington area is currently running well below its 15-year average. Changes in workplace culture are a critical contributor: As telecommuting becomes more feasible and as companies look to go green and cut costs, many employers are looking to reduce the amount of space they occupy per worker.

This has been especially noticeable at law firms, which are in abundance in this region, especially downtown Washington.

“The economy for law firms has shifted,” Peck said. “Their clients have started to raise questions about fees, they work differently, they don’t have big libraries or file rooms, so they had that reason alone to downsize.”

The weak labor market is also creating challenges for the office market. If the economy were adding tens of thousands of office jobs, employers would likely have more of a need to buy up or lease additional space. But at a time when the professional services and government categories are shedding jobs, there is little demand for new space for expanded work forces.

“The office construction market is going to remain pretty subdued, except for renovations,” said Ken Simonson, chief economist for the Associated General Contractors of America.

5. The jury is still out on whether the rest of the year will be any better.

Economics experts have mixed views as to whether we’ll see things look up in 2014. Sequestration will be further in the rearview mirror, which could boost hiring among contractors and stem job losses in the federal government. Still, Fuller worries that local employers haven’t adapted to the federal government’s broader belt-tightening.

“I haven’t seen too much sign that the business community has actually embraced the new economy and what it means,” Fuller said. “They still think it’s going back. And that’s not going to happen.”

Could growth in other industries make up for slack in the contracting and government job markets? Maybe, economists say. Bohnaker says he sees some indication that the professional services sector is diversifying to include more technology and other commercially focused firms. Fuller notes that if interest in single-family homes were to pick up, we might see some growth in construction jobs.

But still, Fuller said a slow slog seems a more likely scenario for the local economy in late 2014.

“A government-based economy can do well, [but] it has to have the rest of the parts,” Fuller said. “And we don’t have the rest of the parts. We’re still sort of a single-sector economy.”

Sarah Halzack is The Washington Post's national retail reporter. She has previously covered the local job market and the business of talent and hiring. She has also served as a Web producer for business and economics news.
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