Dr. Stephen Fuller on Federal Spending, Sequestration and the DC Regional Economy

Dr. Stephen Fuller, director of the George Mason University Center for Regional Analysis, recently caught up with Executive Mosaic, parent company of this website and the Potomac Officers Club, to offer his insights and analysis on the impact of federal spending and sequestration on the Washington regional economy.

Fuller will expand upon this perspective as a speaker at the POC’s “Post-Sequestration Summit” on Tuesday, May 14, alongside nine other government, academic and industry thought leaders.

The POC brought the Summit together to catalyze a high-level discussion on the government, industry and economy’s trajectory that will extend well beyond Tuesday’s event.

In this segment, Fuller examines the recent and near-term impacts of federal spending reductions and how private sector activity may redefine economic activity in the Washington metro area.

Click here to head to ExecutiveBiz to read the second part of Fuller’s analysis, where he extends his perspective to the longer-term.

 

Federal spending and federal functions have always dominated the Washington region since becoming a capital 200 years ago. Since 1990, federal spending has been outperforming the rest of the regional economy and it has been the driving force certainly since 1995.  Federal contracting employment is largest regional source of jobs and federal employment is second largest. The decrease in federal payroll will be about $2 billion this year and federal procurement spending will fall about $3 or $4 billion. Federal contracting is down $6.9 billion from two years ago. It’s still a really big number, but it’s smaller than it was in 2010. We’ve lost about 9,000 federal workers since the peak in August 2010, with 3,000 of those coming this year. That’s on the base of 385,000, so it’s not an enormous number, but it’s erosion by design through retirements, foregoing backfills, and other measures.  2013 will have a decrease in payroll and procurement spending and its looking to be pretty flat and at best grow at the rate of inflation after that.

Dr. Stephen Fuller, On the Numbers  Federal spending & federal functions have always dominated the Washington region since becoming a capital 200 years ago.     
                                                                     Since 1990, federal spending has been outperforming the rest of the regional economy and it has been the driving force certainly since 1995.                   
                                                                 Federal contracting employment is largest regional source of jobs and federal employment is second largest.
                                                                        The decrease in federal payroll will be about $2 billion this year and federal procurement spending will fall about $3 or $4 billion.
                                                                 Federal contracting is down $6.9 billion from two years ago. It’s still a really big number, but it’s smaller than it was in 2010.
                                                                    We’ve lost about 9,000 federal workers since the peak in August 2010, with 3,000 of those coming this year. That’s on the base of 385,000, so it’s not an enormous number, but it’s erosion by design through retirements, foregoing backfills, and other measures.
                                                                      2013 will have a decrease in payroll and procurement spending and its looking to be pretty flat and at best grow at the rate of inflation after that.

Federal Spending Only Part of the Story

The actuality of the sequester probably isn’t as significant a force in the economy as most people had expected. In fact, the cutbacks in federal spending in 2012 will be greater than the cutbacks in 2013, so we already have a sense of what it looks like and what kind of effects it has.

Federal spending was down almost $5 billion last year and it wasn’t called a sequester then.

Those are important lessons. Very few people were thinking about federal spending reductions and federal workforce reductions over 2011 and 2012, but they were occurring.

By the time the data confirmed that, the effects had already been absorbed by the economy, but in real time, people didn’t know it.

So, we sort’ve know what the consequence is. What we don’t know is what the offset is. Not all of the spending comes from the federal spicket. There is an increase flow in other sectors.

So, there’s more here. There’s a strong foundation already looking forward.

And I think that’s going to be the lesson. While there are reductions and changes going on in the economy, they get moderated by other events that to make it hard to see a specific singular episode.

It’s much more subtle. It will reshape the economy dramatically over the next 20 years, but in a way that perhaps was going to happen anyway, its now just been forced to happen a little bit sooner.

 

The Emergence of the “Rest” of the Economy

In the Washington area, we are going to be increasingly less dependent on federal spending as the driver of job growth and income generation in the local economy.

The federal workforce is projected to continue to contract slowly over the rest of this decade and federal procurement spending is projected to not increase and will shrink a little bit.

So, the rest of the economy is going to emerge.

Over the least two years, the economy has continued to grow and sectors that hadn’t been as noticeable are being revealed as having some independence from federal spending.

We added 37,000 jobs in the last twelve months and none of those were federal and none of them were federal contractors.

The federal part of that will still be important; it just won’t be the same source of growth it has been over the last 15 or 20 years.

Now we examine what is driving area growth and begin to identify those segments, how much of those are international, which of those have regional, national, North American or European markets.

You can kind of sense the kind of growth, what’s driving it, where it’s going to be located in the region, what kind of jobs that’s going to generate and what salaries those will carry.

Health and education will be a very important piece of that, especially with applications of technology to help care, health services and educational services.

Financial services is another small, but strong, sector in the Washington area with substantial growth potential. Washington is becoming much more prominent for electronic trading, electronic financial services and venture capital activities.

 

Human Capital and Technology

There will certainly be more innovation and entrepreneurial activity. A lot of companies that aren’t here now will want to have an office or presence here. More of their competitors are here and the national government continues to be an important source of information and influence on the world economy.

There’s a growth cycle ahead of us towards the end of this decade. It’s hard to look out further beyond that point, but the longer-range view is that this is going to be a very good place to do business.

We have intelligent workers with a technologically intensive background. It’s the kind of workforce that’s positioned for the types of growth the world economy is projecting and we are specialized in growing sectors.

Our physical capital is very adaptable. We work in spaces that one could do lots of different jobs in; offices, not manufacturing plants or warehouses.

 

Forecasting Ahead

The job forecasts in the area for the next five years aren’t as strong as they have been in the past, but those were subsidized by federal spending, by borrowed money.

The forecasts are quite strong and they are real. They’re non-government financed, so they point towards the future and are largely jumps in professional business services.

Half of the new jobs projected over the next five years are what we used to think of as white-collar jobs. Now they are knowledge-based and tech-intensive workers that work in office space.

That’s what we’re good at.

I think we’re probably going to lose half-a-percentage point of growth, maybe 4/10 of percentage growth of local GDP this year because of slower federal spending.

It would have been a better year if they had kept spending at the rate they were last year, or the rate they were two years ago. It would have been a stronger economy.

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