Washington D.C. economy feels chill as budget cuts loom

Reuters News
Posted: Oct 26, 2011 3:19 PM
Washington D.C. economy feels chill as budget cuts loom

By Ian Simpson

WASHINGTON (Reuters) - Washington was long buffered from the Great Recession because of steady federal spending, but fears about budget cuts are putting the brakes on the economy of the nation's capital.

The culprit for the slowdown in the seventh-biggest U.S. metropolitan area is close at hand, analysts said -- the congressional "super committee" charged with finding $1.2 trillion in budget savings over 10 years.

Job expansion this year is almost zero and close to the bottom among the 15 biggest U.S. metropolitan areas, according to a study by George Mason University's Center for Regional Analysis.

Pay growth is slackening after President Barack Obama froze federal salaries last year. Buoyant commercial real estate sales are dropping off in as developers put projects on hold, industry executives say.

"My impression ... is that those companies are concerned about what is going to happen with the federal money and federal budget so they're not hiring as much," said John McClain, a senior fellow at George Mason University.

Greg Leisch, founder and chief executive of Delta Associates, a commercial real estate advisory company, said it could be 18 months, or two election cycles "before there is comfort that it's business as usual" or that belt-tightening could be less severe than expected.

"I think the private sector is waiting to see what this super committee will do and how this austerity plays out," he said.


The Washington area and its Maryland and Virginia suburbs were sheltered from the worst of the 2007-2009 recession by paychecks to federal workers and by government contracts to local companies.

Washington had the highest growth -- 10.8 percent -- among the 15 biggest metropolitan areas from 2007 to 2010 even as the U.S. economy suffered its worst contraction since the 1930s, according to the Bureau of Economic Analysis.

Federal workers nationwide have been largely immune from job cuts, with only 30,000 lost this year through September, Bureau of Labor Statistics numbers show. Cash-strapped state and local governments, on the other hand, have shed about 207,000 workers.

Income per person in the area is more than half again as much as the U.S. average. Joblessness is around 6 percent, well below the nationwide average of 9.1, and the lowest among the biggest metropolitan areas, according to George Mason's Center for Regional Analysis.

In another sign of the yearslong boom, the decennial 2010 census saw the District of Columbia's population climb for the first time in 60 years as long-neglected downtown and residential areas revived.

Buoyant taxes from commercial real estate deals mean the District of Columbia was set to close its 2011 fiscal year on September 30 with $89 million more than it had expected, according to a report last month from its financial officer.

The report warned that the economy had "lost momentum", adding: "The growth in federal employment appears to have ended and may reverse. Wages are already frozen and other cuts may be coming."


The slowdown stems in large part from caution about what the 12-member "super committee" will come up with in spending cuts and tax hikes. The panel of six Congressional Democrats and six Republicans is racing against a November 23 deadline.

Democrats are proposing $2.5 trillion to $3 trillion in measures to reduce the budget deficit, including revenue hikes and cuts to Medicare, congressional aides told Reuters on Wednesday.

With the Defense Department already facing at least $450 billion in cuts over the next decade, analysts say local companies who rely on military and intelligence spending could be among the hardest hit.

Heavyweight Washington-area defense companies include Northrop Grumman Corp. and General Dynamics Corp..

Even with the potential cuts some executives say the fear could be overdone.

John Germano, executive managing director at real estate services company CBRE, said the local economy was likely to emerge largely unscathed from the cuts given the relentless growth in federal spending under both Democratic and Republican administrations.

"History would indicate it doesn't matter who gets into office," he said.

Bucking the slowdown, First Potomac Realty Trust paid $46.8 million for downtown Washington's Greyhound bus terminal in August. It plans to use the site for development.

Chairman and chief executive Douglas Donatelli said First Potomac was working on other deals as well. He declined to give details.

"The resilience of the Washington, D.C., market, the educated work force that we have, and just the overall additional concentration of federal government spending we have, all these drive demand at the end of the day," he said.

(Editing by Greg McCune)