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Looming federal budget cuts dampen local economy

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Photo - UNDATED:  (FILE PHOTO)  A U.S. Air Force U-2 spy plane flies in this undated file photo. (Photo by USAF/Getty Images)
UNDATED: (FILE PHOTO) A U.S. Air Force U-2 spy plane flies in this undated file photo. (Photo by USAF/Getty Images)
Local,Maryland,Virginia,Brian Hughes

The Washington region is already feeling the impact of pending federal budget cuts as employers slow hiring and residents cut back on spending amid uncertainty about whether a lame-duck Congress will reach a deficit-driven deal this fall.

Local contractors, from defense industry titans to small-business owners, have altered the way they're doing business, saying they can ill afford to be caught off guard by a late round of mandated pink slips.

And though the slowdown may be a flesh wound compared with the potentially seismic impact of actual sequestration, analysts say the health of the local economy has taken a hit thanks to the whims of lawmakers with little appetite for compromise.

Sagging CEO confidence
A report released Wednesday by the D.C.-based Business Roundtable shows the threat of the fiscal cliff has caused a major drop in the number of larger companies that plan to hire more employees. Among the survey's findings:
• Just 29 percent of Roundtable's member CEOs expect to increase hiring over the next six months, compared with 36 percent in June and 52 percent in early 2011.
• 30 percent of CEOs anticipate increased spending on capital goods, for a 13 percent drop in just three months.
• 58 percent of CEOs expect sales to increase over the next six months, compared with 75 percent in June.
• The Roundtable's total CEO Economic Outlook Index dropped to 66 -- the lowest such measurement since the third quarter of 2009.

"The threat of sequestration has inflicted a slowdown on job growth in the region," said Daraius Irani, an economist at Towson University. "Companies aren't hiring because they don't know what's going to happen. Congress left town without making a decision, which only adds to all the uncertainty."

Under a deal made between President Obama's administration and Congress to raise the nation's borrowing capacity last year, leaders agreed to implement $1.2 trillion in automatic, across-the-board reductions over the next decade if a broader debt reduction solution is not achieved. Nearly half of those cuts would come from the defense budget, a cash cow for the Washington region, particularly Northern Virginia.

But it's the trickle-down effect that is most concerning locally, as the lack of a blueprint from Congress is forcing area businesses and residents to adjust their purchasing habits now.

"Quite frankly, the lack of a decision is becoming excruciating," said Wendy Maurer, who works in program management and business development at Technology Associates, an information technology firm in Stafford. "I've had employees and potential employees tell me, 'I want to buy a house but don't know if I can until we get out of this quagmire.' Everything is being saved."

Maurer added that with possible sequestration, stopgap funding measures to keep the government operating have limited the length of contracts and forced her company to hold back on major personnel and investment decisions.

Small businesses aren't alone on that business path.

Robert Stevens, chairman and CEO of Bethesda's Lockheed Martin, recently told lawmakers that the world's largest defense contractor had slowed employee recruitment, not wanting to bring on new hires if it just has to deliver them pink slips in a few months.

But even some in the defense industry concede that cutbacks are needed if the government wants to get serious about stemming the tide of red ink that has contributed to a more than $16 trillion deficit.

John S. Langford, president and CEO of Manassas-based Aurora Flight Sciences Corp., highlighted the U2, which is a decades-old aircraft still in place -- instead of a modern, unmanned plane -- because of cozy relations among contractors, the Pentagon and Congress.

"Any business, any enterprise that has had 10 years of unconstrained growth has some places to cut -- and that's a perfect example," he said.

But regardless of the extent of cuts, employers say they just want lawmakers to act so they can adapt accordingly.

"It all boils down to an environment of uncertainty," said Stephen Fuller, director of the George Mason University Center for Regional Analysis. "The contractors are being very careful, and it shows up in a very slow growth in professional and business services -- there's not enough job growth to fill the new office space."

Or as Gerald Gordon, president and CEO of the Fairfax County Economic Development Authority, put it: "The unemployment rate here is less than 4 percent, but the vacancy rate is about 16 percent. Usually, it's about 6 to 10 percent. Nobody's moving; nobody's expanding."

Staff Writer Steve Contorno contributed to this report.

bhughes@washingtonexaminer.com

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Brian Hughes

White House Correspondent
The Washington Examiner