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Long Insulated By Government, Region Dragged Into Downturn

By Neil Irwin and Dana Hedgpeth
Washington Post Staff Writers
Wednesday, March 4, 2009

This is the state of business in Washington: BearingPoint, a titan in government contracting, is in bankruptcy. Chevy Chase Bank, with nearly 250 local branches, has sold itself under distress. Allied Capital, the District-based buyout firm, has defaulted on more than $1 billion in debt.

Meanwhile, countless small businesses that have called this region home for decades are struggling to stay afloat.

In previous downturns, the region has been largely insulated, the beneficiary of business activity tied to the federal government. This time, local companies -- and residents -- face trials unlike any in at least a generation.

Their struggle is a reflection not only of the depth of the downturn, but also of a sea change in the economic makeup of the area. The private sector has grown more quickly than government in recent years, helping to diversify the local economy and fuel faster growth in good times -- but exposing it to more pain in bad times.

The region's economy remains considerably stronger than the rest of the country. Home prices have fallen in the past two years, but not at the rate of some of the hardest-hit parts of the country, including California and Nevada. Although median prices tumbled last year in outer counties such as Loudoun, they were off only about 2 percent in the District.

Employment in the region also is holding up. The jobless rate in the metro area was 4.7 percent in December, according to the most recently available data, when the national rate was 7.1 percent. Given the concentration of government activity here, the region may not even experience a net loss of jobs during the recession.

Yet the local pain is sufficiently severe that executives are questioning what has long been an article of faith: That Washington is protected from the vicissitudes of the national economy.

That was the lesson in the early part of this decade, when the dot-com bust caused the local jobless rate to spike to 4 percent and the Sept. 11 terrorist attacks took a severe if short-lived toll on businesses. Through it all, most companies here kept hiring, builders kept building and consumers kept buying.

Now, business owners are reporting a sharp decline in demand for goods and services.

Thomas Brown, owner of a home-remodeling and repair business in Bethesda, said his phone has simply stopped ringing.

"This downturn isn't like the last one," he said. "We just sailed through that one. We always thought we were in the right place and we couldn't be hurt because our clients are in the seven-figures. They don't go borrow money to redo their kitchens. They cash in some stocks. But that's changed."

One big difference between this downturn and others over the past two decades is that this one is more broad-based. The liquidation of retailers such as Circuit City means that thousands of area sales clerks and store managers will lose their jobs. At the same time, law firms with sizable offices in the District, including Latham & Watkins, have announced layoffs, as has the private-equity firm Carlyle Group.

"Even though this all started with a slowdown in the housing market, it's now become a financial crisis that affects everybody," said Stephen S. Fuller, a George Mason professor who has studied the regional economy for decades. "If you break your arm, you fix it. If you have a blood disease, it affects everything."

The growth of the private sector and relative shrinking of government has made local workers even more vulnerable, analysts say. In 1991, about 39 percent of economic activity in the region was driven by either federal spending or procurement, according to the George Mason University Center for Regional Analysis. In 2007, before this crisis began, that figure had fallen to 33 percent.

As a result, companies that have relied on the private sector for business are suffering the consequences.

Charlie Atwell, owner of Innovative Business Interiors in Silver Spring, said he built the office furniture company by selling to the biggest employer in town: Uncle Sam. In the company's early years, in the 1990s, 90 percent of his business was selling office chairs, desks, and cubicle walls to the Defense Department and intelligence agencies.

More recently, 75 percent of his sales have been to the private sector, including technology companies, doctors offices and universities. Those private clients, with their own financial woes, have cut back dramatically.

"Now whether you're a small, medium or large company, people are sticking with what they've got," Atwell said. "They're maintaining or downsizing their employees and don't need more furniture."

As it did elsewhere in the country, the global credit bubble fed large imbalances in the Washington area, especially involving real estate. From 2000 to 2006, per-capita income in the region rose 27.5 percent, while home prices rose 151 percent. That gap is not as bad as some places that are now epicenters of the housing bust (in Miami, income rose 27 percent while home prices were up 178 percent), but it nonetheless has depleted Washington area residents' wealth.

That has meant bad business for companies that once benefited from people having considerable disposable income.

Rebecca Foley, of Ace Spas in Rockville, said not long ago she sold 150 to 200 hot tubs in a year. In 2008, she sold 50. In January, she went two weeks without talking to a single customer.

That's different from past downturns, she said. "You felt like you could still squeak it out," Foley said. "Now nobody's spending money."

With consumers tapped out, all sorts of businesses are cutting back, creating a vicious cycle of decline.

Don Beyer Volvo in Falls Church began scaling back last summer, laying off employees, eliminating some phone lines, canceling some of its advertising. Jon Holl, the dealership's general manager, has cut back even with little things, like sending forms by e-mail instead of spending money on postage, and putting lights and computers on energy-saving timers. Overall, Holl expects to trim expenses by $800,000 this year.

"We're doing things you probably should, but don't think about when you're fat and happy," he said. "You wouldn't even pay attention to when the computer would shut down, but now when you're looking at every single number on your financial statement you can't help but think about these things."

For all the gloom among regional executives, there is reason for hope that things will change. James Dinegar, chief executive of the Greater Washington Board of Trade, notes a realignment of military bases will result in new jobs in the region, that the region could disproportionately benefit from the government stimulus package and that several major building projects are already on track.

"They're not a panacea, but that puts construction people to work and could keep the dip from going too much lower," said Dinegar, whose organization represents businesses in the region.

Still, his members are experiencing a downturn akin to that of the early 1980s, the most severe downturn since the Great Depression. "If it doesn't start to turn soon, it eclipses the early '80s," Dinegar said. "That's what has everyone on the edge of their seat."

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