Economic Strengths Belie Area Weakness Sectors Without Government Ties Mirror U.S. Slump
By Neil Irwin Washington Post Staff Writer Saturday, June 21, 2003; Page A01 By many measures, the Washington area has the strongest economy in the nation. The region has the lowest unemployment rate of any major city, a lower proportion of empty office buildings than most and is gaining jobs at a steady clip even as the rest of the nation loses them. Yet many local businesses say conditions remain lousy, discouraging them from hiring and dampening their plans to expand. That's because the portion of the local economy tied to government agencies is booming, while the rest is suffering as badly as the rest of the nation and faring worse in some industries, according to economists, businesspeople and employment figures. Government spending appears to be almost solely responsible for keeping the region above water in the economic slump of the past three years. Hiring by governments and contractors is the main reason for the area's relatively low jobless rate of 3.4 percent, just over half the national rate in April, the most recent month for which data were available. "We've grown dramatically," said Robert Epstein, president of AboutWeb LLC, a Vienna firm that provides technology services mainly to government agencies. Epstein has doubled his staff in the past year to 40 workers. Meanwhile, local businesses without ties to government sound like they are in a different town. Only 7 percent of Washington area companies plan to hire more workers this summer, compared with 20 percent nationwide, according to a recent survey by Manpower Inc. Local employment offices report that the number of people filing for unemployment benefits at roughly at the same elevated level as a year ago. Conditions for many firms that market products to other businesses remain tough. Sales of office furniture and business equipment in Northern Virginia were down 13 percent in the first three months of the year, compared with the same period of 2002, according to sales tax records. "This is the worst I've ever seen it," said Charles Voith, chairman of District Lithograph Co. in Forestville, Md., and a commercial printer since 1947, voicing a sentiment echoed by businesspeople in a variety of industries. Local telecommunications employers, still suffering through a prolonged slump in demand, trimmed their payrolls by 9.5 percent in the year ended in April, according to the Labor Department. Telecom employment nationwide dropped by only 5.8 percent in that span. Area manufacturers cut their payrolls by 5 percent, compared with a 4.1 percent reduction nationally. Washington area accounting, tax-preparation and payroll-service firms cut 7.8 percent of their jobs, even as such companies expanded 5.8 percent nationwide. In contrast, jobs in industries tied to the government are multiplying much faster in Washington than elsewhere. Direct employment by government rose 2.1 percent in this area but only 0.4 percent nationally. Employment in computer system design and related services, a category that is dominated by the region's vast supply of federal computing systems contractors, grew 4.9 percent in the Washington area but shrank 1.7 percent nationally. Government contracting is also helping to prop up some parts of the local economy, such as commercial banking. SunTrust Bank has seen an increase in technology companies borrowing money to expand their staffs in order to fulfill government contracts, said Peter F. Nostrand, Washington area president of SunTrust Bank and chairman of the Greater Washington Board of Trade. "We haven't seen double-digit loan growth in this area for quite some time, but we're seeing it this year," he said. The commercial real estate business has also benefited from recent government spending. The local office vacancy rate of 12.8 percent, while higher than two years ago, is lower than the rate in many other metropolitan areas. In Northern Virginia, the glut of office space has been eased slightly by several big leases to government contractors in the past several months. BAE Systems, Unisys Corp. and Titan Corp. have leased a combined 723,000 square feet of office space in Reston since April. "Tenants are still being very cautious, but finally some demand is out there, especially from users that are driven by the government," said Joseph Stettinius Jr., director of brokerage at Trammell Crow Co. According to the George Mason University Center for Regional Analysis, federal spending in the region rose 10.4 percent last year, pumping an additional $8.4 billion into the local economy. Not surprisingly, spending on homeland security and wars in Afghanistan and Iraq is part of the reason for government-related businesses' gains. Much of that came through procurement, including an extra $1.8 billion in technology and professional services. But overall, the ripple effects of government spending have been disappointing for companies without direct ties to government. "Folks are pulling some projects off the back burner, and the best side of it for us has been the defense and government contractors," said David Guernsey, president of Guernsey Office Products in Chantilly. Guernsey is still selling fewer chairs, desks and file cabinets to businesses than he did during the boom that ended in early 2001. His business is picking up, but just slightly: He recently added four positions to his staff of about 200. The feds aren't the only ones keeping the job market alive. Hiring by state and local governments drove the strongest employment gains in the region over the past year: 8,500 state and local government jobs were added in the year ended in April, accounting for nearly a third of the region's overall gain of 27,100 jobs. Analysts said that growth was spurred by rapidly rising population, which has prompted the hiring of more schoolteachers, firefighters and other civil servants. However, they warned that budget pressures in Maryland, Virginia and the District could force cuts in public payrolls. Meanwhile, the same forces that have pummeled businesses nationwide in the past two years are being felt in Washington. Companies that overexpanded during the boom have seen their business fall off, forcing them to cut their spending in ways large and small -- such as by buying fewer desks, trimming employees' hours and holding off on big investments in new plants and equipment. Voith, of District Lithograph, said that companies and trade associations have held off printing advertising fliers and other publications to save cash. As a result, his 35-employee commercial-printing company has had to cut back hours for staff and lay a few people off; he estimates total hours worked at the firm is 10 to 15 percent less than three years ago. And while there are early hints of business conditions improving, Voith said, it hasn't yet translated into more business. "It would have to be at least a year before we would begin to think of buying any new equipment." Consumers continue to take advantage of low interest rates to increase spending on big-ticket items like cars, trucks and houses. But they are cutting back in other areas; spending in Northern Virginia on household appliances was down 5 percent in the first three months of the year, while spending on furniture, carpeting and the like was down 3 percent, according to the state's taxation department. Sales of building materials were down sharply, 26 percent, though that may have as much to do with the miserable weather in the first part of the year as the soft economy. "People who have jobs are feeling better about the economy," said Mark Vitner, senior economist of Wachovia Corp. "But folks looking for jobs haven't seen any sign of improvement." Temporary employment firm Manpower has grappled for two years with employers cutting back on short-term help, said Washington branch manager Terri Thomas. "Caution is the name of the game," she said. In the firm's survey, released Tuesday, of employers' expectations for the July-through-September period, 88 percent of local companies said they planned to maintain their current staff levels and 5 percent expected to cut back. Local businesses, though, do seem inclined to expand the degree they depend on the government purse. Epstein, of AboutWeb, is planning to open a second office in Maryland. Growth, he said, has come from contracts with defense-related agencies to do digital security work and integrate complicated computer systems. Last year, 45 percent of AboutWeb's business was from government clients; this year, 65 percent is. "The commercial side is still soft," Epstein said. "Government contracting is growing. It's not necessarily super hot, but it has the potential to be super hot."
