The D.C. Department of Employment Services has effectively ended the debate over metropolitan Washington's ability to withstand a recession. While Washington is not as vulnerable to recessionary forces as most other major metropolitan areas, neither is it immune, according to a new study by DCDES. The timing of the study is purely coincidental, although its significance is underscored by concerns that the stock market's collapse may presage another recession.
Toward the end of the 1982 recession, DCDES concluded in a provocative report that the area is not immune from downturns in the national economy. The myth that the local economy is recession-proof still lingers in some quarters, nonetheless.
Now comes the new DCDES study of cyclical employment in the area's labor market during the past three recessions, which not only supports the conclusion reached by the department five years ago, but also is instructive for what it implies about the future.
"Our analysis of the cyclical behavior of industry employment suggests that the area economy has always been sensitive to national business cycles," DCDES says in its publication, Labor Market Update.
If there is a recession, DCDES concludes, the effects are likely to be felt most in the area's construction industry. DCDES's analysis shows that construction was more sensitive to cyclical shifts in employment in the recessions of 1973-75, 1980 and 1981-82.
On the other hand, economists at DCDES found that the services industry is the least cyclically sensitive sector in the Washington area. In fact, the past three recessions had almost no effect on services here, according to the study by DCDES's division of labor market information, research and analysis.
That's not only significant for employes in the services industry, but also reassuring for local government and business in general. It also helps to explain why the services sector, soon to become the area's largest employer, has had such sustained growth here as the structure of the local economy continues to undergo change.
Unhampered by economic downturns, the services industry has become the biggest contributor to job growth in the area's private sector, which now rivals the federal government as the major source of jobs. In fact, employment growth in the area has been fueled in recent years by other private-sector industries as well. The so-called FIRE (finance, insurance and real estate) and retail industries are affected less by national economic downturns than construction and manufacturing, for example, according to DCDES.
A strong private sector here, supported by the services industry, would appear to have an insulating effect against a recession. Thus, the Washington area "may be becoming less sensitive to downturns," says Richard Groner, chief of DCDES's division of research and analysis.
Still, it can't be said that the area is immune to an economic downturn, DCDES cautions in its analysis, which covers the period from early 1971 to late 1985. "We feel that it would be incorrect to conclude from this study that the Washington area economy is, or has been, recession-proof," it says.
The analysis shows that growth in local employment generally slowed during the 1973-75 recession. But total employment growth peaked during the fourth quarter of 1981, then fell for five consecutive quarters before bottoming out in early 1983.
The decline in construction employment was even more severe. More than 14,000 construction jobs disappeared from the Washington economy between the first quarter of 1980 and the final quarter of 1982.
The common features in each of the recessions studied by DCDES help explain why the area's construction industry is so sensitive to cyclical changes in the economy. Higher interest rates, fewer housing starts and slumps in commercial construction created sharp declines in employment.
Manufacturing, though not a big factor in the local economy, also took its lumps in the 1981-82 recession. But unlike its national counterpart, Washington's manufacturing sector has regained employment levels that existed before the 1981-82 recession.
Employment in the transportation, communications and public utilities sectors has been unaffected for the most part by the last three recessions, according to DCDES.
Further review of the agency's analysis, however, shows why researchers exercised caution in concluding that the area is becoming less sensitive to downturns in the national economy. Surprisingly, retail trade employment in metropolitan Washington was more sensitive to changes in the business cycles than retail trade nationally. What makes that so surprising is the fact that metropolitan Washington is one of the country's more affluent retail markets. The combined Washington-Baltimore market is the nation's fifth largest.
Sensitivity to changes notwithstanding, retail trade employment jumped 28,000 between 1983 and 1985, reflecting the area's stronger buying income power.
All segments of the area's private sector recovered all of the jobs that were lost during each of the past three recessions. In fact, the strength of the private sector in the recovery stages and the employment mix indicate that the private sector is less dominated by the federal government, according to DCDES.
It's probably safe to say that few would have believed until now that the area would be less sensitive to economic downturns without the federal government as the dominant factor in the labor market.