Defense and Government Contracting Still Robust, but Financials Soften
By Thomas Heath
Washington Post Staff Writer
Monday, January 28, 2008
The Washington region's major companies began reporting financial results last week, and the early returns show a lopsided split between the robust defense industry and the wheezing financials.
The divergence showed the two faces of the local economy these days. Some analysts believe sectors such as defense and government contracting may insulate the region from the withering ups and downs of the current economic cycle. Others say that the housing and financial sectors are sending enough economic toxins into the region to test the mid-Atlantic's immunity to downturns.
Last week's earnings reports did little to settle the debate.
"Defense spending has stabilized at a high level, and we have a support structure in the Washington area because of the robust defense industry. That will keep the whole area vibrant," said Phil Odeen, who has held senior positions at the Defense Department and is chairman of the board of directors at Northrop Grumman.
That support structure includes the hundreds of professionals, from engineers to scientists, to technology specialists, lawyers and accountants who are connected to government contracting, especially defense. People in those professions tend to have more stable jobs and are better able to ride out economic turbulence.
Both Lockheed Martin of Bethesda and General Dynamics of Falls Church, two giant defense contractors, reported strong earnings last week with no slowdown in sight.
"There's no shortage of information about speculation as to what the economy is looking like. We've taken that into full consideration and don't envision any," risks to state and local business, Bruce Tanner, chief financial officer of Lockheed Martin, told analysts last week.
It's the same with General Dynamics, which manufactures the Abrams tank and Stryker Armored Combat Vehicle, both crucial to the Iraq war. And sales of the company's popular Gulfstream business jet are thriving.
"A lot of things could go wrong here in the economy and Gulfstream would still look very, very powerful in '08 and '09, and probably '10 as well," General Dynamics chief executive Nicholas Chabraja said during his company's conference call with analysts. "So it's a long-term view and I believe we will have ample opportunity to behave like a good cyclical if we encounter a cyclical downturn here."
Things are much worse in the financial and housing construction sectors, where home values are declining and layoffs are occurring, creating a potentially nasty ripple effect for the construction trades, real estate workers and other caught in the housing slowdown.
"That's where the real pain is," Peter Converse, chief executive of Virginia Commerce Bank, said of the housing and real estate sectors. His company, one of several smaller local banks to report results last week, said its fourth-quarter profit slipped 12.8 percent from a year ago, largely because of the weakened housing market.
Two of Washington's best-known names in the financial sector have taken a beating, with student lender Sallie Mae and credit card giant Capital One each reporting declines. Capital One of McLean saw its profit fall on the growing number of credit card accounts going delinquent and defaulting. It also warned of particular weakness in its auto loans business.
"We're also seeing a really consumer-led worsening," Capital One chief executive Richard Fairbank said in meeting with investors and analysts. "Every day we obsess how bad could it get and the real answer, nobody knows how bad this environment could get . . . and we can't tell you how high our charge-offs will peak."
Sallie Mae of Reston said its profit declined sharply in part because company executives said they allowed the firm to lend money to students who had little prospect of paying it back.
Washington's role as the nation's capital brings economic stabilizers that other cities don't enjoy -- and different risks. A new administration could shift gears on defense and government spending, which could hurt the very sectors that are holding it up now.
On the other hand, 2008 is an election year, and no matter who wins, the change in administrations will eventually fill hotel rooms, bring a new flock of home buyers sniffing around Georgetown, and spur spending on everything from carpets to caterers.
Hotels are betting on the coming surge. The St. Regis, two blocks from the White House, just opened its doors after renovations designed to capture election-year travelers. Others hotels, such as the Hotel Jefferson up the street, are doing the same.
"It's going to be a very busy year, with a new administration, lots of visitors coming to town, which is positive for the real estate market," Odeen said.
For now, some business people say they've yet to experience significant effects from the downtown. Alan Warmund, president of Subway Development Corp. of Washington, which franchises about 1,000 Subway sandwich shops in the District, Delaware, Maryland and Virginia, said his customers are hungrier than ever.
"We have seen great sales increases in the third and fourth quarters of last year, and continuing on into this month we see positive gains," Warmund said. "I don't know why or how, but so far, so good."
Staff writer Zachary A. Goldfarb contributed to this report.
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