The belief that the Washington area is recession proof has been dealt a double blow in the past year.
The same high interest rates that have meant recession nationwide are hurting the Washington economy, though not as badly as other, more industrial areas.
But President Reagan's aim of shrinking the federal government also strikes at the very heart of Washington's economic strength: government employment. It is the existence of the federal government with thousands of relatively well paid and--even more important--secure jobs that has sheltered Washington from the worst of recessions in the past.
Burgeoning government has also meant lucrative contracts for private consultants. State and local government employment, which grew rapidly nationwide during the 1970s, soared by 43 percent in this area between 1970 and 1980, providing more than 58,000 new jobs.
Reaganomics means that in today's national recession--which is by some measures the deepest since the Great Depression--government employment is falling along with private sector employment, rather than shoring up the economy.
At the beginning of this year, the federal government was employing 4.3 percent fewer people in the Washington area than 12 months earlier. State and local government employment had shrunk by more than 3 1/2 percent, and was more than 6 1/2 percent below its peak in 1979. This contraction in government employment translates into a loss of almost 30,000 jobs in the area since 1980, when 559,000 people worked for federal, state and local governments combined.
A shrinkage in government employment has a ripple effect on the rest of the local economy. Moreover, the mere threat of reductions-in-force (RIFs) is likely to make many government employes cautious about taking on new spending commitments even if they still have their jobs. Slower promotion than in the past, and low federal pay raises, may also cut back on the spending growth that has traditionally buoyed this area's economy.
As the Metropolitan Washington Council of Governments pointed out recently, the reduction in the government share of regional employment "reduces the region's ability to resist severe national recessionary trends to the extent that it has in the past."
Reagan's program, however, is not all bad news for this area.
The president's planned increase in defense spending will give a big boost to some areas of the local economy, and will thus offset some of the effect of cutbacks in other areas of the budget, analysts say.
Naval installations and shipbuilding in Virginia will benefit from increased military pay and a strengthening of the Navy, although this will mostly affect parts of the state that are some distance from Washington. Defense contractors and Pentagon consultants in Maryland and Virginia--generally nearer to the city--will also pick up business as Pentagon spending expands.
In addition, the boost in defense spending means more business for Washington-area companies ranging from tiny Tech-Serv, which makes target drones for anti-aircraft practice, through component suppliers like Atlantic Research, which provides the rocket motors for many missiles, to prime contractors like the aircraft manufacturing divison of Fairchild Industries.
Reagan's planned defense buildup is big enough to help pull Virginia out of recession, the Virginia Employment Commission predicted this month, provided that the rest of the nation's economy also begins to turn around when the large tax cuts due this summer kick in.
New jobs in shipbuilding and other defense industries at Tidewater and in defense installations in Northern Virginia will likely lead the economic recovery in the state, the VEC study said. And "once the turnaround comes, Virginia may move out of recession quicker than the rest of the nation," William F. Mezger, a VEC analyst, said earlier this month. "That's because Virginia is not hampered by the most severely depressed industries such as auto and steel making," he said.
However, Virginia has suffered record unemployment this year along with the rest of the nation. In March, the jobless rate in the state averaged 8 percent. The comparable figures for Maryland and the District were 9.5 percent and 10.5 percent, while nationwide unemployment on the same basis reached 9 percent.
The metropolitan Washington area typically has much lower unemployment than Virginia, Maryland or the District individually. This is still true. In February and March unemployment for the Washington SMSA averaged 6.1 percent. But this figure represents a substantial rise from a year ago. When Reagan took office, the jobless rate for the metropolitan area stood at 4.6 percent. In the last 12 months the numbers out of work in the Washington area have soared by about one-third, Bureau of Labor Statistics figures show.
Ironically, the dismal jobs outlook in the private sector makes it harder for the public sector to cut back on its employment. Fewer people are leaving their city government jobs than usual, Diana Carsey of the D.C. budget office said recently. This means that the reduction in job levels that the city had expected to come through normal attrition--people leaving voluntarily--is less than the planners assumed.
Instead of the 10 percent attrition rate that the city had expected, "nobody's leaving," Carsey said.
There is little doubt, according to the Council of Governments, that Washington is now in recession along with most of the nation. Apart from the unemployment figures, other clear indications of the economic hard times are languishing retail sales, a sharp rise in business bankruptcies and a deep slump in the real estate industry.
In the first two months of this year, Washington retailers' turnover was up by only 2.1 percent from January and February in 1981--far less than the more than 6 percent increase in prices over that time. For the nation as a whole, retail trade was up by 4.9 percent over the same period. Virginia and Maryland were both even harder hit than the Washington area, with sales declines of 2.2 percent.
Sales of department stores merchandise have been even more depressed than the average. In the Washington area, these were down by 7.9 percent in the first two months of 1982 compared with January and February 1981. January was particularly bad this year because of poor weather. Sales picked up in February, with an increase of 3.3 percent from the previous month, but this increase was probably largely a reaction to January's slump rather than an indication of a lasting recovery, analysts say.
Local governments as well as local businesses are being affected by the economic slowdown: a weak economy hurts the local tax base. Sluggish retail sales translate into sluggish receipts from sales taxes, and a depressed real estate industry hurts governments whose revenues are largely dependent on real estate transfer taxes.
For example, Montgomery County's tax receipts from real estate transfers are running 40 percent to 45 percent below 1981 levels, Director of Finance Daniel Lucas said. The decline started later in Montgomery County than in other local areas, probably because of the ability of the county's largely affluent residents to arrange unusual financing deals when conventional mortgage rates soared last year and squeezed others out of the market, he said. But since last December there has been a sharp slide in house sales there, too.
Construction figures compiled by the Bureau of the Census show a drop of one-third in the total value of building permits issued in the Washington region between January and February 1981 and the same months this year.
Permits for new residential building were valued at $27.9 million in January and $31.7 million in February of this year, compared with $39.3 million and $50.7 million in the same months of 1981. With mortgage rates in the area averaging close to 17 1/2 percent in the first quarter of this year, compared with 15 1/2 percent a year ago, the falloff in housing is not surprising. Office building has dropped dramatically, too, from $96.6 million in the first two months of 1981 to a total of $61.6 million in January and February this year.
Construction employment is down sharply in this area, as it is across the nation. There were only 76,300 jobs in the sector last year, 17 percent fewer than at the 1970s peak of 92,000 in 1973. By February 1982 this had shrunk further to 65,000.
Meanwhile, further job cuts are likely at all levels of the government, as many of Reagan's budget cuts are only now beginning to bite. Federal agencies are expected to have more RIFs this year, and state and local governments--squeezed by the combination of recession-reduced tax receipts and smaller federal grants--also may cut back more.
Washington is still not as badly off as the industrial heartlands of the country, hardest hit by the shrinkage in factory employment and output. But it is not recession-proof.