Local Economy Challenge

Growth May Slow, but Recession Looks Unlikely


The 2008 Local Economy Challenge
Illustration by Mark Zingarelli for The Washington Post
Washington Post Staff Writer
Monday, February 11, 2008; Page D01

For three years, The Washington Post has asked business and nonprofit leaders to predict how the Washington area economy will do in the coming year. For three years, the group forecast solid growth and were right.

Now it gets interesting. With the nation threatened with recession, the 23 participants in the fourth annual Local Economy Challenge faced the difficult task of figuring out how the national downturn will play out in the Washington region.

It will hurt here, our experts say, no question about it. But they don't foresee a local recession. They are looking for slower growth but not as painful a slump as 2001-02.

Their median forecast is for the region to grow 2.9 percent this year, down from 3.3 percent last year but far from recessionary. Economists surveyed by Bloomberg News expect the national economy to grow 1.7 percent.

The Post's panelists expect the unemployment rate to rise in the District, Maryland and Virginia, and for job growth to slow to 35,000 net new positions, from 40,900 in 2007.

"Sectors related to housing will have the most serious problems. The rest of the economy will feel it, but I don't think we'll feel it the way all of us in the technology industry did six years ago," said April Young, a managing director of Comerica Bank's technology practice.

The panelists expect the median single-family home price to dip 3.5 percent to $422,500, and forecast that the number of permits issued for new housing units will fall 21 percent more, to 16,192.

While the consensus projections were that the slowing economy will have only modest ill effects, there was more diffusion of views than in past years, reflecting uncertainty about the local and national economies.

In past years, Washington Post columnist Steven Pearlstein was the only outright bear on the panel. That has changed, with several of our experts indicating they expect hard times ahead.

"Our consumers and our homeowners are subject to many of the same forces that our counterparts nationally are," said Anirban Basu, chief executive of Sage Policy Group in Baltimore, who was the third-most accurate forecaster of the 2007 economy. "The consumer has taken on too much debt, and businesses have become very uncertain about the near term."

It's not that Basu -- or any of the 23 panelists -- is expecting the local economy to shrink. But sluggishness, in an area used to rip-roaring growth, could be painful, particularly for those looking for jobs or to sell their houses.

"To compare the Washington area to some of the cities that are suffering worst from the housing downturn isn't the right comparison," Basu said. "It's like comparing an NFL team's performance to the 1976 Tampa Bay Buccaneers, who didn't win a game. You're setting a really low standard there. You can be better than the Buccaneers and still be very bad."

Many of those who see significant weakness ahead link it to the problems in the financial system.

"It will harder to get a loan, harder to get a business deal done." said LaSalle D. "Donney" Leffall, who heads LDL Financial, an investment advisory firm. "The people sitting pretty are the people with cash and the knowledge to pick through what's out there."

The panelists expect local prices to increase to a degree that would pain a central banker. The median projection is that consumer prices in the Washington-Baltimore area will rise 4.2 percent this year, well above the 2 percent level under which the Federal Reserve aims to keep inflation.

While there was plenty of worry in this year's projections, some respondents took a more optimistic tone -- including the most accurate predictor of how the region would do last year, James C. Dinegar.

Dinegar is chief executive of the Greater Washington Board of Trade, a regional chamber of commerce, so it is his job to be bullish on Washington. (For example, he was the only one of the 23 respondents to expect the District's unemployment rate to fall this year.)

Part of the reason for his optimism: He sees the presidential race this year, and the focus it will put on Washington, as a clear positive for the local economy. "We'll be on the evening news every single night, with that shot of the Capitol dome and the White House as a constant reminder of Washington, D.C.," Dinegar said. "People may not think of San Francisco or Chicago every day, but they'll think about Washington."

Of course, the election year leaves others more troubled.

"The new administration is going to have to carry George Bush's water," said Stephen Joel Trachtenberg, by dealing with the Iraq war, a growing national debt, entitlement spending and other challenges. Budget cutbacks could hurt the region's economy, he argued.

"I'm very cautious," said Trachtenberg, who was president of George Washington University until last year and now teaches there.

Even assuming this will be a year of weak growth could sow the seeds for the next boom.

"My husband and I were both working in the real estate industry in the early '90s, the last time the home-building industry crashed," Young said. "That was exactly the same time AOL was getting started, UUNet was getting started, Nextel. These companies were being quietly created around what turned out to be the Internet communications revolution."

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