Forecasting what will happen to the Washington area's economy has become a humbling experience.
A year ago, economists thought the jacked-up capital region was finally about to take a breather. Skilled workers would be in short supply and interest rates would rise, they thought, cooling off business expansion in 1999. Several forecasts predicted a net increase of just 45,000 to 55,000 jobs for last year.
That's not how it turned out.
Employment expanded by nearly 70,000 jobs throughout the region last year, to more than 2.6 million. Even the District began to add jobs, helping to make 1999 the strongest year for the region's economy in the entire decade. Northern Virginia, in particular, was acclaimed one of the most dynamic regions in the nation.
Most likely, 2000 will be another good year, close to matching 1999's banner performance, with the one big proviso that there is no stock market crash, according to forecasters Mark Zandi, Sara Johnson and Stephen S. Fuller.
"There is a major speculative element in the Nasdaq's rise this past year, and a lot of that involves the Internet," said Johnson, chief regional economist at Standard & Poor's DRI. "Those stocks are impossible to value. It's a safe bet to say they are overvalued."
A steep and long-lasting drop in stock prices that undercuts investor confidence would take some of the lift out of the region's wings, making it harder for young technology companies to keep growing. Some heavily indebted highfliers could be especially vulnerable should this capital flow slow.
But for now, there's nothing but blue skies.
"I've been consistently overly pessimistic about the region's economy," confessed Zandi, chief economist for RFA Dismal Sciences, a Pennsylvania firm that uses a computer model to project how fast states and metro areas will grow.
"Now it's hard not to be optimistic about the [Washington] region going into 2000," he says.
The reason, he and other forecasters say, is the stunning spread of the region's technology industries, whose growth in the past year easily outran experts' expectations.
Today, the region has at least 350,000 technology workers of all kinds, according to the most recent Labor Department analysis, perhaps as many as 400,000, including those who handle technology issues in "non-tech" companies.
And the region adds an estimated 150 tech workers, on average, each workday; they create the need for more employees in retailing, education, construction and other services.
The region "is being driven by technology industries, and from our current vantage point, it looks like the prospects for those industries are very good for the coming year," Zandi said.
When forecasters project slightly slower growth for the Washington region this year, it's mostly because they assume that interest rates will continue rising as the Federal Reserve tries to keep escalating wages from igniting damaging inflation, Johnson notes.
With that expectation, Zandi anticipates that the region's low unemployment rate will edge upward just a fraction, from last year's average of 2.6 percent to 2.7 percent. Job growth will slow from last year's exceptional 2.8 percent to a modest 2.2 percent this year, he figures.
But jobs will still be plentiful, most skilled workers will keep their leverage in bargaining for better pay and positions, and many employment doors will remain open to lesser-skilled workers.
As job growth slows, so will home building, car purchases and retail sales, all of which pushed through the roof last year.
Zandi's firm predicts that retail sales in the metropolitan region will total $56.1 billion this year, up 4.5 percent from 1999, while new housing permits are expected to total 28,128, down nearly 16 percent from the sky-high results in 1998 and 1999.
Overall, however, 2000 should almost match 1999, the forecasters say. Moreover, there is so much embedded wealth in the Washington area available for spending and reinvestment that even a slower pace of job growth won't deflate the region's output, the forecasters say.
Fuller, a regional analyst based at George Mason University, calculates that the area's gross regional product -- the output of goods and services -- will total $220.8 billion this year, a healthy 3.4 percent increase that would make 2000 the region's third-best year since the end of the 1980s.
Johnson also has charted a 3.4 percent growth rate for the region this year, a dip from nearly 4 percent in 1999 but a better performance than the nation's economy is expected to turn in.
She forecasts a drop in job growth from 2.8 percent last year to 2.1 percent this year, but there should be plenty of hiring in higher-paying tech positions, boosting the region's wealth.
The federal government remains the region's economic foundation, contributing an estimated $25 billion in purchases from area firms and $22 billion in salaries. The 4.94 percent federal raise that took effect this week will add $1 billion in pretax income to federal families in the region.
But the prognosis for growth in the region in 2000 is largely in the hands of thousands of Washington area technology companies of all sizes, whose successes and failures will dictate how far the economy advances.
In a region mesmerized by technology and its instant new wealth, there's a risk of exaggerating its importance to an economy in which nine of 10 jobs are still "non-tech." But technology is the region's lead engine, without doubt, Fuller says.
With so many of these firms staked out on the unpredictable frontiers of telecommunications, Internet applications and biotechnology, it may be an impossible future to predict with any accuracy.
Dan Simpkins's Gaithersburg company, Salix Technologies Inc., is a case in point.
Just a year ago, Salix had finished the lengthy development of its first product, an advanced telecommunications switch designed to permit the transmission of voice and data together over the same network. It's a convergence that, when it occurs, should trigger powerful new currents of competition among phone and Internet service providers.
In the past 12 months, Salix has shipped its first prototypes. Employment tripled, a new headquarters was acquired in Germantown, and in December, Salix was purchased by a leading U.S. telecommunications equipment company, Illinois-based Tellabs Operations Inc., for a stunning $300 million.
Simpkins's team benefited from crucial developments last year by other companies that have primed communications markets for the new technology.
"No one could have predicted [a year ago] that that could come together," Simpkins said.
Simpkins and industry colleagues predict that the Washington area has only begun to taste the economic growth spawned by a critical mass of telecommunications technology based around the Beltway. "This area will be ground zero" for the next generation of networking gear and software, he said. Similar predictions about a breakthrough in biotechnology are being made.
The forecasters don't dispute the upside possibilities. But there are risks in every forecast, and the region's primary potential stumbling block remains a scarcity of workers.
"The overriding problem for the region next year is the lack of available labor. Of course, we've been singing this song for quite some time," Zandi said.
Worker shortages will pinch technology firms, retailers, construction and transportation firms, and perhaps even wholesale trade and distribution.
Universities and community colleges around the Washington region are adding technology courses as fast as they can, and students are responding.
A Post survey last Labor Day found that enrollments in 10 technical programs at George Mason, the University of Maryland, Virginia Tech and the University of Virginia totaled more than 6,100 last year, about 1,500 more than in 1996.
But even this sharp increase would fill less than a third of the region's more than 20,000 technology vacancies if all the graduates went to work in this area. (A 1993 study concluded that no more than half of college graduates in Maryland and Virginia stayed to work in those states.)
Thus the region's future expansion also depends on how well local employers succeed in holding onto the region's technology graduates, and on new attempts at George Mason University, the University of Maryland and other schools to equip students in liberal arts and business programs for technology careers.
The region's appeal as a desirable place to live is a plus, provided that its housing doesn't get priced out of the reach of newcomers such as those who filled tens of thousands of jobs last year.
The greatest unknown about the economy's outlook remains the stock market.
"We're not anticipating a correction" in 2000, Johnson said. "We're expecting more modest gains in equity values."
Her firm's computer model estimates only a 10 percent chance of a 25 percent drop in stock prices this year, which would be followed by a relatively mild recession of six to nine months.
The more likely scenario is a continuation of the tech-led economic growth nationally through 2000 and into 2001, until interest rates finally reach a point that topples stock prices, constrains lending and bashes consumer confidence. Then a more serious recession could begin, the S&P DRI forecasters say. But even that is not the likely outcome. Johnson's firm puts the odds of that scenario at about one in three.
If that downturn ever comes, the Washington region has some built-in protection, Zandi said. Its umbilical ties to the federal government provide a source of income and spending that doesn't stop in an economic crunch. And the heavy concentration of the tech sector in telecommunications and Internet products and services is further insurance, since companies in this field aren't as vulnerable as high-wire Web companies whose main asset is a brand name, Zandi said.
"The Washington area would not be immune [from a market downturn]," he said. "It just may not suffer as badly."
THREE AREAS TO WATCH IN THE NEW YEAR
For those wanting an up-close look at the Washington region's economic performance in 2000, here are some front-row seats.
One is near the northeast entrance to the District at the crossroads of New York and Florida avenues. Two technology companies have moved into a renovated printing company warehouse there; alongside is a major expansion of an old Peoples Drug warehouse.
The Bureau of Alcohol, Tobacco and Firearms plans to build a $120 million headquarters for 1,000 employees nearby, giving a major boost to District officials' hopes for a new Red Line Metro stop at the intersection.
The steady advance of these projects in 2000 would signal real progress in the conversion of the dilapidated New York Avenue gateway into a corridor of technology and media companies and the first major outpost of the "new economy" in the capital.
A second vantage point is along Fenton Street in Silver Spring, where construction is underway on a supermarket and shops. Nearby is the historic Silver Theater, about to be renovated as the new home for the American Film Institute, and also the site of a new headquarters for Discovery Communications Inc., at Georgia Avenue and Colesville Road.
Together, the projects highlight Montgomery County officials' hopes for the restoration of one of the region's first suburban downtowns. Its renaissance would show that the region's economic uplift isn't necessarily confined to the new suburbs.
Finally, consider a perch on Waxpool Road, just off Route 28 north of Dulles International Airport in Loudoun County. There, D.C.-based DuPont Fabros Development is planning a vast and largely speculative construction of offices and manufacturing space for technology companies, plus a hotel and retail sites, on 118 acres.
The location is within plain view of the corporate campuses of America Online Inc. and MCI WorldCom, and the developers are counting on their presence to attract other technology companies. "There's a reason to be next to those people," says Lammot DuPont, one of the development firm's principals.
The region's technology boom has been so strong that developers are moving farther out on the limb, as they did before a huge real estate crash in the early 1990s.
In Northern Virginia, 7.3 million square feet of "speculative" office space in 54 buildings is currently planned but not fully leased, according to Kurt Stout, director of research at the Grubb & Ellis brokerage firm.
If the boom continues, the space should get filled, Stout says. "Our feeling is, if you are a believer in the knowledge economy, all is well out there."
"We've had all kinds of bites and nibbles" from prospective tenants, DuPont said. "The feedback is very strong." But if the tech boom slows abruptly, the nibbles are likely to as well.
CAPTION: GROWING . . . MORE SLOWLY
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