After two years of accelerated growth, the Washington-area economy will lose some momentum in 1986, the likely result of sluggishness in the national economy and anticipated reductions in federal spending, according to economic forecasters and business leaders in the region.
Several observers of the local economy expect moderate growth to continue through the first half, but expressed some concern about federal policies and national economic developments that could hasten a slowdown here later in the year.
Based on its long-term forecast for the area, Potomac Electric Power Co. (Pepco) estimates total real personal income will grow about 1.4 percent this year in the District and 2.6 percent in Montgomery and Prince George's counties in Maryland. In Virginia, resident personal income will increase by 8.5 percent, led by continued strength in employment and business relocations in the D.C. suburbs, the College of William and Mary estimates.
Employment will continue to expand, but not nearly as much as it has in recent years, say labor market analysts in the region. Most of the area's employment growth in 1986 is expected in the burgeoning services area. But, even there, fewer jobs will be added this year than in 1985, according to projections obtained from local government officials and others.
Although fewer new jobs will be added, unemployment is not expected to run much higher in 1986 than in 1985. Forecasters are projecting an unemployment rate of 5.1 percent in the Washington region this year, compared with last year's rate of 4.7 percent, based on year-end estimates.
In addition, there are some especially bright spots for unemployment. For example, the rate should be much lower in the Maryland suburbs just outside of Washington where unemployment was below 3 percent at the end of 1985, according to the Maryland Department of Employment and Training. In the District, the unemployment rate will decline about one-half of 1 percent, from an estimated 8.5 percent at the end of 1985, according to the D.C. Department of Employment Services (DCDES).
"I think the cyclical unemployment is working itself out in the District, and what we're seeing is more structural unemployment ," said Richard Groner, director of the DCDES division of labor market information, research and analysis.
Virginia Employment Commission officials expect little change in the unemployment rate this year in Northern Virginia. In November, the latest month for which figures are available, the unemployment rate in Northern Virginia was 3.4 percent, compared with 5.4 for the state.
"Since growth in Northern Virginia is rapid, unemployment in 1986 should be about the same as in 1985," said Charles Greene, assistant manager of the Virginia Employment Commission's Northern Virginia office.
A new planning report by the employment commission projects an unemployment rate of 2.6 percent through July 1987 in most Northern Virginia communities (Fairfax County, Fairfax City, Loudoun County, Manassas, Manassas Park and Prince William County).
In Arlington and Alexandria, however, the jobless rate through July 1987 will be 3.9 percent, according to projections by the state employment commission.
Long-term projections developed by the Virginia Employment Commission show that nearly 200,000 jobs will be added in the state's northern region between 1980 and 1990.
Similar projections by analysts in the D.C. Department of Employment Services call for total employment in the Washington area to increase by more 370,000, or 2.3 percent between 1980 and 1990.
In 1985, job growth in the area continued at the "phenomenal" rate reported by officials over the past five years. About 79,000 new jobs -- 64,000 of them in the suburbs -- were added to the area's economy last year, according to the DCDES.
Approximately 91 percent of that growth occurred in the private sector, with services (29,000 new jobs) leading the way. In the District, a 2.4 percent increase in jobs last year quadrupled the historic long-term growth rate, said a DCDES official.
A similar rate of growth should not be expected in the District or other local jurisdictions, this year, however, say labor market experts.
Total employment in the Washington-Baltimore Common Market, for example, will increase by less than 2 percent this year, according to estimates developed by the Washington-Baltimore Regional Association. A Potomac Electric Power Co. forecast for its service area indicates an employment growth rate of 2.7 percent this year in Montgomery and Prince George's counties and only 0.4 percent in the District.
Job growth this year in Virginia will decline also, according to The College of William and Mary's Bureau of Business Research. The bureau forecasts a gain of 2.8 percent in nonagricultural employment.
"Northern Virginia will remain the growth leader in Virginia, but its growth rates will not exceed the state averages by such a wide margin," noted Roy L. Pearson, director of the business research bureau.
That applies to other sectors of the state's economy as well, Pearson said. Although Virginia's economy slowed somewhat in 1985, it outperformed the nation's, William and Mary's comparison of leading indicators show. This year, the state's "decelerating growth can be expected to continue," said Pearson.
In Maryland, the economy "continues to outperform the nation's and is expected to continue that performance," said an official in the comptroller's office. State revenues are expected to increase from $4.19 billion in the current fiscal year, to $4.55 billion in the next fiscal year, a gain of about 8.5 percent, the comptroller's office reported.
Projections of continued though moderate growth notwithstanding, some fallout from a sluggish national economy could filter down to the region's economy later in the year, several analysts indicated.
"One of the things I see on the horizon, which could have a significant impact, is Gramm-Rudman," observed Groner of the DCDES.
The Gramm-Rudman-Hollings bill, which President Reagan signed into law late last year, is designed to balance the federal budget by 1991. The measure could mean cuts in domestic and defense spending.
The District could be hit especially hard by any further cutbacks in spending, said Groner, whose agency compiles labor market information for D.C. and other jurisdictions that comprise the Washington Standard Metropolitan Statistical Area (SMSA).
"The impact may not be felt until 1987, but the private sector may begin wondering in 1986 what the impact will be," Groner said of the budget measure. "I think what you will see will be more psychological in terms of what 1987 will bring."
Similar concerns about the Gramm-Rudman-Hollings bill are shared by others in the region's public sector and the business community.
Corporate economists at Bell Atlantic Corp. project strong long-term growth in the area, but they too have some reservations about the possible effects of changes in the national economy and federal spending decisions. Over the next year, "as the nation's economy is expected to be sluggish, the area's growth will slow," according to Bell Atlantic.
"Efforts to balance the federal budget by curtailing government spending could hasten this slowdown," the company's corporate economic office added. "As is normally the case in the Washington area, close observation of the political process is warranted since austere political decisions may translate into economic hardship. If government spending is cut, if government employment is cut, and if defense spending is cut, the region's economy could suffer."
If heavy cuts are made in defense spending, said one Bell Atlantic economist, "the ring of defense contractors around the Beltway would be hurt."
In the meantime, the region is experiencing what another Bell Atlantic economist describes as a "breathing spell," following the robust growth of the past two years. That has considerable significance for the economy, he added.
"People are so much in debt that they can't spend very much," the economist said. "Some of that is built-in installment debt they have to pay off over time."
That, according to some analysts, suggests that consumers will make fewer major purchases in 1986, leading to relatively flat retail sales. Pepco forecasts real department store sales in the Washington area to grow by 2.6 percent in 1986, compared with 4.5 percent in 1985.
"I think there is going to be cash-flow shock among consumers," said Kenneth M. Gassman Jr., retail analyst at Wheat First Securities Inc. in Richmond. "Consumers will get their Visa and Mastercard bills after Christmas, and you're going to see them pull back on spending in January and February."
Gassman projects an increase in retail sales in the range of 6 to 8 percent this year, compared with roughly 7 percent in 1985. "I don't see anything that will stimulate the economy quickly or take it down quickly."
In any event, consumer-loan demand will drop off from the high level of the past two years, according to Daniel J. Callahan III, chairman and chief executive officer of Washington's American Security Corp. and American Security Bank. "There is already some slowdown in that area," Callahan noted.
On the other hand, he continued, commercial and residential construction continue to expand at a brisk pace, despite softness in some office building markets in the area. Continued strong activity in real estate development should generate substantial construction loans, according to Callahan.
The fact that interest rates have remained relatively low should be a plus for the commercial construction and housing industries, most analysts believe. The National Council of Savings Institutions reported from its headquarters in Washington that home buyers can expect stable mortgage rates of about 11.5 percent for long-term, fixed-rate loans through the first half of 1986. There could be an increase in mortgage rates later in the year, however, the council's economic advisory board said.
Locally, Pepco cites a forecast by Chase Econometrics that indicates new housing starts in the SMSA will slow only slightly from the "extremely rapid pace" of the past two years. Chase forecasts 27,600 housing starts in the SMSA during 1986, compared with 28,300 in 1985.