Information technology appears to be one of the first segments of the private sector to sustain tangible damage from federal budget cuts — because it’s easier for the government to stop rewiring offices than it is to stop building a ship or a tank.
The region’s dependence on government IT, and contracting in general, makes it particularly vulnerable to the spending reductions put in place by President Obama and Congress over the past two years. Government procurement spending in the area grew by double digits from 2000 to 2010. In 2012, it shrank by 5.5 percent.
There’s a certain symmetry to the timing: All that federal spending pushed the Washington region to the top of the list of major U.S. metropolitan areas for job creation after the Great Recession, and it helped fill office parks along the Dulles Toll Road and elsewhere with well-paid white-collar workers.
Now, as growth is slowly picking up in many other cities, federal budget-tightening is dampening the economic outlook here.
Rapid government expansion “was dragging everything else along with it” in the local economy, said Stephen Fuller, director of George MasonUniversity’s Center for Regional Analysis. The sudden contraction “was like hitting a wall,” he said, adding: “This is a new way of life that we have to get used to.”
New, but not unexpected.
Economists have warned regional leaders that a shift in federal spending was coming. Defense contractors have been preparing for a military budget that’s expected to shrink as the wars in Iraq and Afghanistan wind down. The Pentagon budget is facing a reduction of $487 billion in projected spending over 10 years, the result of an agreement reached by Congress and the White House in 2011.
Local contractors are already feeling the hit.
The size of the loss at General Dynamics stunned some analysts who have grown accustomed to years of steady profits at the company.
Over the past year, the luster of providing basic services to the federal government, in particular, has been wearing off. Profits shrank. Some firms began to seek an exit.
At Northrop Grumman, a major rival of General Dynamics, some IT contracts now provide such little profit that executives are refusing to bid on them. Northrop Grumman and Lockheed Martin, another leading contractor, will report their earnings in the coming days.
General Dynamics went in a different direction, buying up a slew of smaller IT contractors. Wednesday, the company’s new chief executive, Phebe Novakovic, was highly critical of the approach.