Austerity Comes Home to Roost for Metro Washington Economy

Metro Washington came through the recession better than almost any other part of the country. Federal employment in the region, boosted by stimulus spending, grew strongly. While the national unemployment rate peaked at 10 percent, the Washington metro region topped out at just 7 percent. The idea that the nation’s capital was insulated from the pain everyone else was feeling caused a certain amount of resentment, along with headlines such as this in the New York Times: “Washington’s Economic Boom, Financed by You.”

Now that the rest of the economy is finally coming out of the slump, metro Washington is feeling the pain of austerity budgets. I saw it up close last week when I participated in a conference in McLean, Va., put on by George Mason University’s Center for Regional Analysis and co-sponsored by Cardinal Bank. Stephen Fuller, the center’s director and a veteran observer of the region, flashed some scary slides (PDF). Among his factoids:

• Federal government employment in the region grew until early 2011, then flipped into the red, with job losses accelerating in 2013.
• Of the 15 largest U.S. job markets, metro Washington and Detroit were roughly tied for the least job growth from November 2012 to November 2013.
• The quality of job creation in metro Washington has deteriorated. There are more low-paying jobs in retail, food and drinking locations, and leisure and hospitality, but a slowdown in job creation has struck high-paying professional and business services.

It’s important to keep things in perspective, though. Even now, Washington’s metro unemployment rate is significantly lower than the national average (4.9 percent vs. 7 percent for the U.S. in November). The area is also at or near the top in educational achievement and income.

Metro Washington clearly needs to diversify its economy to reduce dependence on federal employment and procurement dollars because the gravy train isn’t returning to the station. The good news is that the quality of its workforce should make that possible. Beltway Bandits who have lived off federal contracts have skills that are valuable to other parts of the country and the world.

Last March, when sequestration hit, Mark Muro and Jessica Lee of the Brookings Institution’s Metropolitan Policy Program wrote a blog post in which they tried to calm readers’ nerves about the impact of across-the-board budget cuts. “Washington possesses the ultimate counter to adversity,” they wrote. “It is loaded with smart people—and smart people tend to figure things out.”

There are signs that the diversification has begun. Last year the Washington Post reported that Lockheed Martin, the Bethesda (Md.)-based defense contractor, had received a patent on Perforene, a filtering material that makes water potable. A small step, to be sure.

Fuller optimistically titled his talk “The Post-Federally Dependent Washington Area Economy.” Citing projections from IHS Global Insight, an economic consulting firm, Fuller predicted that metro Washington would roughly equal the nation in economic growth this year and edge ahead in the coming four years. The professional and business services segment will account for about half of the growth, according to the IHS Global Insight and George Mason forecast.

The availability of jobs may not even be the main constraint on growth between now and 2018. Rather, Fuller said, the top issues could be the availability of qualified workers, housing, and infrastructure.

Before it's here, it's on the Bloomberg Terminal.