- The Washington Times - Monday, December 18, 2000

Washington's "new economy" experienced a few growing pains this year and is likely to encounter more next year as the nation sinks deeper into an economic slowdown, area analysts and businessmen report.

The high-flying information technology companies that since 1995 have propelled growth and fueled employment in the region ran into major financial obstacles during 2000 that are hampering their growth today and will continue to diminish growth in the months ahead.

The D.C. region's own stock index, compiled by Bloomberg Financial News, reflects the sagging fortunes of the star-studded technology firms that in recent years lit up the local scene. By this week, it was down 22 percent from a high of 214 set in March. The index stood at 100 on Dec. 29, 1995.

"We started to see a real economic slowdown in the region, centered in the high-tech industry, in the last 100 days," says Michael A. Daniels, former chairman of Network Solutions, and current vice chairman of SAIC and the Potomac Conference, a regional business and academic think tank.

Several area technology companies such as PSINet and MicroStrategy, have announced layoffs or cutbacks in recent weeks in the wake of stock losses this year. The woes of the area's dot-coms and other budding technology firms started with the dramatic fall of the Nasdaq last spring, and have been unrelenting since then.

"We had a huge influx of money into dot-coms last year that truly was not warranted," Mr. Daniels says, adding that much of that money has dried up "fairly dramatically."

Until April, new technology companies could raise millions of dollars through stock offerings and were courted fervently by venture capitalists. Now even bank loans are hard to come by. Many companies must choose between selling valuable corporate assets, downsizing, selling out to larger technology firms or going bankrupt, he says.

Mr. Daniels predicts 10 percent will survive in the long haul.

Investors already have lost trillions of dollars in stock values as a result of the Nasdaq debacle. Now thousands of technology workers, hundreds locally, will lose their jobs as companies fold. But most will quickly find work elsewhere, analysts say, because the market for skilled technical workers remains tight.

Demand for office space already is softening in response to the "tech wreck," and spending by area consumers on homes, cars and most other items is starting to slow. But most analysts say the region will achieve stable growth and avoid recession next year as spending by the area's largest employer the government picks up and helps fill in the void.

Despite the woes of the area's technology firms, regional growth this year actually hit the highest pace of the record 8-year-long expansion, nearly 5 percent, after growing around the national average of 4 percent in previous years, says George Mason University professor Stephen S. Fuller.

The technology boom peaked at the beginning of the year, driving job growth in the area to a record 88,000 for the year ending in January, according to the D.C. Department of Employment Statistics. Job gains have decelerated gradually since that time, and the falloff of jobs and income has caused a softening of consumer confidence and spending recently.

"Northern Virginia's economy, which has been responsible for generating two-thirds of the area's jobs over the nineties, has experienced the greatest deceleration in job growth," Mr. Fuller notes.

Area unemployment in October stood at 2.3 percent about half the national average of 4 percent.

"The Washington metropolitan area economy should outperform the national economy in 2001," Mr. Fuller says, because it is not as vulnerable as other regions to shocks such as the loss of foreign markets that is causing a near-recession in Middle Western industries.

Various "wild card" threats could trip the national economy into recession next year, such as further steep drops in the stock market, another energy price shock, or a major breakdown of the political system, he said.

Barring a major energy crisis, he says, the Washington area economic won't be derailed.

Biotechnology boom

While the epicenter of the regional slowdown is the technology corridor running west along Route 66 and the Dulles Access Road from Tyson's Corner, Maryland's technology corridor along Route 270 enjoyed a prosperous year.

Biotechnology companies were also hit hard by the spring collapse of Nasdaq. But the sector managed a comeback later, with many biotech stocks remaining near or above their March highs.

Health care and drug companies were among the few sectors to enjoy rising profits this year, succeeding where other businesses failed at raising prices.

Montgomery County Executive Douglas Duncan noted recently that the county's thriving biotechnology community, the third largest in the nation, has become the engine of economic growth in Maryland, producing 15,000 new jobs last year.

The county's life sciences firms, including Celera, MedImmune, Gene Logic and Human Genome Sciences, shot into the spotlight this year with the first-ever mapping of the human genome.

"Maryland this past year has been growing much more rapidly than Virginia," notes Charles W. McMillion of MBG Services. Solid growth in the District for the first time in a decade also contributed to the region's growth, he adds.

Also defying expectations, the region increased its share of federal contracts, which promise to support growth in the more sluggish economy ahead, Mr. McMillion says.

He notes that the region's job growth remains among the strongest in the nation, because of its special dispensation as the center of government and, more recently, the home of the Internet and technology revolution.

The labor environment in the booming technology sector changed dramatically this year, as workers realized the once-lucrative stock options they formerly sought are now worth less, and they must seek more secure forms of compensation, he said.

"Employee morale has been affected," Mr. McMillion says. "Worker loyalty is being vaporized by the steep fall in stock prices. The contrast from this time last year is pretty remarkable."

Companies such as America Online earlier this year could attract top talent, advertising and even make major purchases like the pending deal with Time Warner on the strength of their ever-rising stock prices, he notes, but those days may be over.

Though Washington should escape recession, Mr. McMillion says he hopes the Federal Reserve will cut interest rates at a meeting tomorrow to soften the blow on hard-hit technology and manufacturing industries.

Debt load grows

Under the surface, growing debts have become a major concern as they were in previous economic downturns for some households, businesses and even countries such as Argentina and Turkey, Mr. McMillion says.

The debt of American households, including mortgages and credit cards, this summer for the first time exceeded disposable family income, reaching a record $7 trillion, Fed statistics say.

And the percentage of income spent servicing those debts has risen to the highest level since 1987 all at a time when Americans have almost stopped saving.

To some area residents, the slowdown in the local economy is welcome after years of robust growth that put unprecedented strains on the area's clogged roads, airports and town centers.

In response to the increased strains, local jurisdictions such as Loudoun County are contemplating limits on development that put a crimp on the expansion plans of some technology firms.

"Limits to growth have forced a slowdown in Northern Virginia," says Mr. McMillion, noting the traffic congestion and scarcity of workers.

Mr. Daniels of the Potomac Conference says some high-tech businesses have decided against expanding in Loudoun County because of the restrictions, and others have held back simply because there is no more room for drivers on bumper-to-bumper stretches of the Beltway and other major arteries.

"We're really starting to see limits to growth from traffic congestion," he says. "Tech employers are seeing this become the major concern of their employees."

Washington could start losing business to other regions because of the escalating traffic tie-ups, Mr. Daniels says. Washington now outranks Los Angeles and other major American cities for the most hours of delay caused by traffic 62 hours a year for each resident.

The gridlock problem arises from the diverse approaches to development and financing of the region's state and local governments, and the political and legal gridlock caused by environmental lawsuits that have held up major road projects such as the expansion of the Woodrow Wilson Bridge for years, Mr. Daniels says.

Julia Kriss, chairman of the Northern Virginia Association of Realtors, says she sees no decline in home sales so far as a result of technology's woes.

"I think all of us involved would like to see it get back to economic reality. You can't just have year after year of the same incredible pace," she says.

Despite an increase in interest rates of nearly two percentage points engineered by the Fed since June 1999, sales have remained at historically high levels because of strong demand from Generation Xers who are buying their first homes and baby boomers who are buying second homes and investment properties, she says.

"There is still a wonderful job market here, very strong consumer confidence, and the rates are palatable," Ms. Kriss says.

The low inventory of houses available has combined with strong demand to drive up prices dramatically in the past year, by 10 percent or more in most neighborhoods, she says.

Even without the Fed's rate increases, the scarcity of houses for sale would have forced a slowdown in sales, she says. "All of the agents I know have a cadre of buyers waiting for the right property to come on the market," she says.

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