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Federal austerity could hit the region's economy hard

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Washington Post Staff Writer
Monday, January 3, 2011

The Washington region rose above all other metropolitan areas in 2010 when it came to economic progress. Bolstered by federal hiring and a boost in procurement, the region recorded the nation's highest net number of jobs gained during a 12-month period as the year came to a close.

But economists are concerned that the momentum may now be threatened as the region's major industry -- the federal government -- prepares to face the budget ax. Many in Congress have expressed an interest in slowing federal spending in order to bring the $1 trillion or so deficit in line.

Welcome to the era of government austerity.

The last time the federal government went down this path, in 1995, the region felt the pain. During a two-year period, the federal workforce in the Washington area shrank by 32,000 with cuts at NASA, Agriculture, Transportation and numerous other agencies. Federal contracts were canceled. The government scrapped construction projects in the area. The after-shocks reverberated throughout the region's economy. Consumer confidence plummeted, driving down retail sales and exacerbating a depressed housing market. Declining federal aid and local tax revenues prompted several jurisdictions, including Prince George's County, to lay off employees to help close their budget gaps.

This time, the private sector in metropolitan Washington is more diverse. But federal spending and procurement still represent about one-third of the region's $443 billion economy. Some forecasts suggest that the growth of federal spending and procurement could plunge to 1 percent or below in 2011 from an average of about 8 percent annually during the past several years. That could hurt even if the local economy benefits from improvements this year in the U.S. economy.

"The days of Washington being the leader in terms of job growth and economic strength are really over," said Steven Cochrane, managing director of Moody's Analytics. Experts say federal spending reductions could cut in half the number of new jobs created in the area to 40,000 from 80,000. "I think there's no way that [the pace of job growth] could be kept up any longer, particularly now that the federal government is undergoing pretty strict scrutiny" of the budget.

In a report submitted to President Obama late last year, the National Commission on Fiscal Reform recommended that the government put all discretionary spending -- including defense and domestic programs -- on the table for review. The report calls for a freeze in discretionary spending in fiscal 2011, followed by "serious belt-tightening" in fiscal 2012 and "substantial moderate cuts" in 2013.

Commission members also are pressing the administration to consider "restructuring" the federal workforce, resizing it based on the government's needs.

Though it likely will be months before firm plans in Congress materialize, experts already are beginning to assess the collateral damage of a deficit-reduction effort on the area's economy. Here's a look at how the sectors potentially could be affected this year by federal spending reductions and other economic factors:

GOVERNMENT

With numerous new initiatives, the government not long ago was planning to hire about 600,000 employees over the next few years -- as many as 120,000 of them in the Washington region, according to the nonprofit Partnership for Public Service, which is helping agencies with recruitment.

Now the organization is projecting that the government likely will reduce those numbers by up to 10 percent.


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