- The Washington Times - Monday, December 24, 2001

This year was relatively kind to the Washington area, with home sales booming and jobs and income growing, while setbacks in the technology and manufacturing sectors plunged most of the country into recession starting in March.
But with unemployment spiking and the travel and tourism industry reeling after the September 11 terrorist attacks, the region's fabled ability to weather national recessions was tested this fall. Analysts say the area faces even more difficulties next year if consumers hunker down and pull back spending.
Potomac Inc. surveyed local consumers shortly after September 11 and found Washington residents, like most other Americans, were inclined to start saving more money. That meant they would reduce debt loads, travel less and stay at home more out of a mix of fear for their jobs and personal safety. One in 10 area residents were worried about losing their jobs and one in four planned to spend less money.
Unemployment in the area jumped to 3.4 percent in October from 2.4 percent a year earlier as job growth slowed to 46,000 over the year after reaching a year-over-year peak of 110,000 in February, according to the D.C. Department of Employment Statistics. Leading local employers like AOL and Aetna have announced job cuts that will drag down job growth further in coming weeks.
But the pain from the slowdown hasn't been spread evenly. The District, which emerged from a long economic slump in 1998, turned down again this fall. Business and employment dropped dramatically in Washington's critical hospitality industry after the attacks forced the temporary closure of Ronald Reagan Washington National Airport and residents and tourists made fewer trips downtown.
Analysts say it could take months or years for the city to recover from the losses.
The economies of Maryland suburbs were slowing rapidly even before the attacks as stagnant business conditions around the country took a toll on the usually vibrant health care, drug and biotechnology concerns fueling growth in Montgomery County.
Only Northern Virginia, whose burgeoning information-technology sector led Washington-area growth throughout the record-long expansion of the 1990s, so far appeared to have escaped the grips of recession. Fairfax County still enjoys one of the lowest unemployment rates in the country 2.2 percent, compared with 6.2 percent in the District. Though joblessness in Fairfax County has doubled since hitting a record low of 1.1 percent last year.
The prospects for this vital core of Washington-area growth remain bright, thanks largely to a surge in defense and intelligence contracting as the nation pursues its war in Afghanistan and beefs up homeland defenses.

A bright spot
"Fairfax County is continuing to do well. Northern Virginia has been very successful in gaining market share of federal contracts," says Charles McMillion, president of MBG Information Services, a local economic-forecasting firm. The Washington region gained contracts totaling $28.6 billion last year and grew to more than $30 billion this year even before President Bush declared a war on terrorism.
"Northern Virginia may escape recession," he says, "but the region as a whole really is facing some stiff head wind" that already has snuffed out growth in the District and Maryland suburbs.
"September and October were absolute disasters" for local retailers as well as travel and tourism businesses, he says.
The local economy has stabilized some since the attacks, but businesses and consumers continue to downsize their spending plans, he says. "Convention traffic is still a fraction of what it was. And beer joints are doing well, but upscale places are suffering," he says.
Washington-area consumers and other Americans generally are shunning luxury goods and stores, spending their money more at discounters like Wal-Mart and Costco.
Mr. McMillion says he expects consumers to get even more serious about saving money with the start of the new year. Americans have become increasingly conscious that their spending binge throughout the 1990s, combined with a nearly two-year-long fall in the stock market, has led them deeply into debt and exhausted their thin cushions of savings.
The personal savings rate touched a record low of 0.2 percent in October after spiking to 4 percent during the summer when consumers decided to largely save their $300 to $600 federal income-tax rebates. Many economists believe the summer savings trend will re-emerge and continue for a while as consumers rebuild their balance sheets.
"The first quarter is going to be really difficult. Consumers are going to sit on their credit cards after the holiday," Mr. McMillion says. "It has been a bleak holiday season, but the real bloodbath for retailers starts after the holidays."

Bleak jobs picture
Spending inevitably will weaken because of the loss of income associated with big job losses in recent months, he says. Those who continue to hold jobs have grown increasingly cautious, with the fear of unemployment prompting many to build deeper financial cushions.
Recent job statistics showed that Washington-area employers created about 4,000 more jobs than they cut in the three months ending in October. But Mr. McMillion believes those figures which are not adjusted for seasonal distortions in the job market like the influx of teachers into the work force in the fall may be masking net job losses in the region.
During the like three months of 1999, Washington employers created 48,000 jobs, he says, and last year they created 34,000 jobs in the like period. October's local unemployment report showed that private job growth had stopped altogether. The only reason the region added the few jobs it did was because of heavy hiring of schoolteachers by local governments.
"Seasonally adjusted, we've probably had job losses since June or July, but definitely since August," says Mr. McMillion. "We haven't escaped recession. The question is: 'Will it be a real recession or just a pause in job growth?'"
An analysis of the official employment figures by Towson University's Regional Economic Studies Institute also found net job losses in the area starting in August.
One key source of the job growth in recent years robust hiring by state and local governments will not be of much support to the economy next year, Mr. McMillion says.
With revenues tumbling and budget gaps looming for the first time in years, local authorities have been announcing freezes on hiring and construction, which have stoked a boom in building jobs in past years. Construction jobs locally are now declining as a result of the contraction in local budgets combined with a drop in commercial building and softening housing market.
Federal hiring has been on the decline for the past decade, and at best would stabilize in the next year as the government adds workers to pursue its war on terrorism and beef up homeland defenses and airport security, Mr. McMillion says.
Even the fountain of federal contracts expected next year could prove hard to tap, as Northern Virginia businesses are forced to compete with other regions hit hard by unemployment, he says. Members of Congress whose districts are deep in recession will fight aggressively for a share of the federal pie. "There will be pressure to spread the government wealth around," he says.

Washington's advantages
The specialized technical skills offered by local contractors and workers, and their proximity to the Pentagon and CIA, are big pluses. But the high cost of living compared with the U.S. average puts the area at a competitive disadvantage. Living around Washington has become even more expensive in the past two years with double-digit jumps in home prices
Still, analysts say Washington in the past decade grew more attractive to business as it diversified its economy away from dependence on the federal government and became a major hub of technology and culture.
One asset that may help Washington weather the recession is the emergence of two distinct "cluster" economies. They are Northern Virginia's cluster of information technology and telecommunications firms, which have grown up around MCI and AOL, and Maryland's cluster of pharmaceutical, biotechnology and health care concerns.
A study this month by the U.S. Council on Competitiveness found that such cluster economies fueled by close and supportive links among area businesses, government and academic institutions that attract workers with specialized talents have an internal growth dynamic and can thrive even during a national downturn.
"In healthy regions, competitiveness and innovation are concentrated in clusters," the report says. "Higher levels of innovation output lead to higher levels of prosperity."
Stephen Fuller, director of the Center for Regional Analysis at George Mason University, is optimistic that the Washington area will experience a quick recovery early next year.
"We're not even close to a recession," he says, noting the small job increases in recent months. Only Houston among major metropolitan areas is growing faster than Washington, he notes.
"We're doing quite well in spite of a national economy that is in recession," he says, "and we'll be doing better next year." Mr. Fuller projects that economic growth locally will increase to 3.5 percent next year after dipping to 2.5 percent this year.
Federal contracts have grown steadily each year since 1980, Mr. Fuller notes, to the point that federal spending now fuels a third of local economic activity. With federal spending growing at an 8 percent pace, he says, the surge in government activity next year should overwhelm the decline in hospitality and construction, which together constitute only one-tenth of local economic activity.

Limits of government
Mr. Fuller says the District and Maryland stand to benefit less from the federal largess than Northern Virginia businesses, which could reap a sizable share of $7 billion in increased defense and intelligence spending earmarked for the Washington area by Congress.
"There will be winners and losers," he says. Particularly hard hit are the lower-income workers and immigrants recently let go by Washington's hotels, restaurants and other service businesses. They are not likely to benefit from the growth in highly skilled, technical jobs at defense and intelligence contractors, he says.
"When they lose their jobs, they have fewer choices," he says. "A lot of workers at the lower end are dropping out" and lining up for unemployment benefits, with little prospect of finding new jobs anytime soon, he says.
While certain sectors may suffer, Mr. Fuller expects Washington-area consumers to keep spending as long as jobs and incomes continue to grow. He discounted the Potomac Inc. finding that one in four area consumers planned to spend less. He says people think they are saving money because they are spending more at discount stores, but their total spending actually is increasing.
Thomas F. Carpenter, chief economist with Chevy Chase Trust and ASB Capital Management, says Washington's many advantages from the federal presence to the growth industry of associations and law firms lobbying Congress and the executive branch should enable the local economy to stay ahead of the rest of the country.
Washington is the only major city that has experienced only one recession in the latter half of the 20th century. While the rest of the nation fell into recession six times after the 1953 recession, the Washington area did not face major job losses again until the 1990-91 recession, which was led locally by a real estate decline, credit crunch and massive downsizing of the Defense Department.
Mr. Carpenter expects the effects of the current recession to linger before the economy skyrockets sometime next year. This will be fueled by increased federal spending and tax cuts, and dramatic interest-rate cuts by the Federal Reserve in the past year.
"Washington will prosper as it did in the Cold War period" as a result of the pickup in spending on specialized defense operations such as the high-tech hardware used by special-operations forces like those on the ground now in Afghanistan, he says.
"The housing market will benefit" as the Pentagon, the CIA, Defense Intelligence and other agencies hire more of these highly skilled workers and they locate their families here, he says. "But that will be offset some by the decline of the tourist industry and general services industry," he says. "I haven't seen any snapback there.

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