Sequester not biting District yet

Tracy A. Woodward/The Washington Post - The damage from the sequester cuts appears to have been smaller and slower-developing than many forecasters predicted. In the three months since they took effect, Washington hasn’t bled jobs, it’s added them.

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In the months since the automatic federal spending cuts known as the sequester took effect, the Washington area has added 40,000 jobs. Income-tax receipts have surged in Virginia, beating expectations. Few government contractors have laid off workers.

It’s too early to be certain, but initial indications are that the damage from the sequester has been modest and slow to develop.

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Labor Department statistics released Wednesday showed that the area’s unemployment rate held steady at a seasonally adjusted 5.3 percent in April, the same as in March. The pace of job growth from January to April was only slightly slower this year than last year. Large government contractors are reporting relatively modest revenue hits and few layoffs due to reduced contracts.

Economists caution that the effects could worsen in the months to come, especially once furloughed federal workers drain their savings accounts and contractors adjust to the reality of less government work ahead. Most forecasting models still calculate that sequestration will shave at least half a percentage point off national gross domestic product growth this year.

Still, some forecasters are growing more optimistic that the Washington region, so dependent on federal spending to power economic growth, will endure the cuts better than originally expected.

“The surprise is that the economy is as good as it is,” said Stephen S. Fuller, the economist who directs the Center for Regional Analysis at George Mason University. “We’ve done better than I expected.”

In January, Fuller predicted that the sequester, if enacted, would be an “end-of-the-world kind of hit” to the regional economy. He wrote an analysis of the cuts in March concluding they would kill more than 325,000 jobs in Virginia, the District and Maryland combined.

That estimate included both direct and indirect effects — that is, layoffs not just among federal workers and contractors, but also the workers, such as waiters or car salespeople, whose jobs depend on spending from federal paychecks.

So far, the direct job effects have been relatively small. The metro area shed 1,000 federal jobs in April, accelerating a belt-tightening trend; in the 11 months before that, the area lost nearly 4,000 federal jobs. Meanwhile, professional business services — the job category that includes government contracting — has grown at roughly the same rate this year as in 2012 and 2011. No major contractor has issued a government-required notification that it is planning a mass layoff.

Analysts say it appears that contractors and many federal agencies anticipated the cuts and began trimming spending well in advance of the sequester’s March 1 start date, smoothing the economic impact. Fuller said many agencies have allowed open positions to sit vacant, saving money and reducing the need for layoffs.

“I think the sequestration isn’t going to be quite as bad as a lot of people had feared, at least in terms of direct job losses,” said James Bohnaker, an associate economist at Moody’s Analytics who focuses on the Washington region. “The reason for that is that people were already planning for this last year.”

Still, the cuts are beginning to sock some federal workers in the pocketbook by forcing them to take unpaid days off. An administration official estimates that more than 125,000 federal employees have been placed on furlough due to the sequester. Eighty-five percent of the Defense Department’s 770,000 civilian employees will be furloughed for 11 days this fiscal year, beginning in July.

Possibly reflecting the onset of furloughs, average hourly wages fell by 0.5 percent in the region from March to April, the Labor Department said Wednesday.

Further declines will likely ripple through the economy as furloughed employees cut back on spending to compensate for lost wages.

There’s some evidence that’s already happening. Sales tax receipts have fallen in the District this year through March compared with the previous year. Virginia’s sales tax collections were flat in April from the previous month, and they’re falling short of state officials’ expectations for the year.

It’s tough to say exactly what’s driving the decline in D.C. sales tax revenues, but sequestration could be a factor, said Stephen C. Swaim, a senior economist in the D.C. Office of the Chief Financial Officer.

“We’re at the beginning of what looks like might be a possible turn” downward in sales tax collections, he said. “It’s a little difficult to sort out what it is all about, . . . but it is worrisome.”

Several economists, and many large government contractors, worry that the sequester’s effects will worsen.

The cuts are scheduled to be in place for 10 years unless Congress undoes them. This year’s cuts were reduced by Congress in a tax deal at the end of 2012, so next year’s cuts are on track to be larger.

There’s another reason that next year could be more painful: Some of the contracts not being funded this year because of the cuts would have supported work done next year, Fuller said, meaning their impact is still months away.

Consumer impacts may be backloaded as well, said Dean Baker, an economist at the liberal Center for Economic and Policy Research. Furloughed workers, he said, may be treating their reduced pay like a temporary tax increase that could expire soon, and dipping into savings rather than changing consumption habits. But the longer that “tax increase” lasts, he said, the more likely the workers will reduce their spending to adjust.

Several economists say the longer-term effect of the sequester will be a downshifting in the quality of new jobs in the region. With federal employment shrinking slowly and contractors creating fewer jobs than they did in the mid-2000s, other fields — particularly in the hospitality industry — have emerged as the area’s largest sources of job growth.

Those fields tend to pay considerably less than federal government work or high-end contracting.

Marjorie Censer and Sarah Halzack contributed to this report.

 
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