DC’s exposure to negative impacts from a US recession is probably growing

DC’s private sector is now a larger share of the economy, and the City cannot count on increased federal spending to offset negative impacts

The U.S. economy is about to enter the longest period of economic expansion in its history as it passes the 10-year mark in June. Although a possible recession is not evident at this time, at some point a recession it is likely. When that happens, the negative impact on DC’s economy would depend on the nature and severity of the recession. However, as explained below, DC’s economy is not insulated from recessions, and exposure to the negative impacts from a recession is probably growing.

  • The negative impacts on jobs and wages in DC’s private sector in the past two recessions were similar to, although somewhat less severe, than the impact on the private sector nationally when manufacturing and mining are excluded from the calculation. (See graph of wages below.) There is no obvious reason to expect this to relationship to be significantly different in a future recession.
  • Federal spending gave a disproportionate boost to DC’s economy in the past two recessions, mitigating some of the negative factors confronting DC’s private sector. Current federal fiscal policy makes it less likely that such increases in federal spending can be counted on in the future.
  • The share of DC’s economy represented by the private sector has been rising, increasing the economy’s exposure to a downturn.
  • Jobs and incomes of DC residents were harder hit than those associated with jobs located in DC in the last two recessions. Being hit harder may not necessarily be true in another recession because DC’s economy has become stronger, but a substantial negative impact on residents would still be expected.
  • The negative impacts of the 2007 recession in DC’s suburbs were generally similar to those that occurred in the District of Columbia. Private sector jobs fell a little more sharply in the suburbs,  wages and salaries fell more sharply in DC, and the percentage drop in resident employment was about the same in both locations.

chart 1

Recession and DC’s private sector. In the 2001 and 2007 recessions, the manufacturing and mining sectors of the U.S. economy, which comprise around 15% of the U.S private sector, were hit very hard. In the 2007 recession, for example, wages and salaries in the manufacturing sector declined 13.9% from 2007.2 to 2009.3. The very large remaining part of the U.S. private sector was also adversely impacted by the recession, but not nearly as much, with wages and salaries falling 2.9% over the same nine-quarter period. The recession’s impact on DC’s economy was nothing like that on places with a lot of manufacturing and mining.  However, neither was DC insulated from adverse effects. This is evident by comparing what happened in DC with the experience of the part of the U.S. private sector that does not include manufacturing and mining.

The graphs of changes in both jobs and wages in DC’s private sector during the 2001 and 2007 downturn show a similar pattern to the US private sector with manufacturing and mining left out. The extent of the downturn in DC’s private sector is somewhat less, however. For example, a one year decline of 3.2% in private sector jobs in DC in the 2009.3 quarter compared to 4.8% in the private sector nationally (with manufacturing and mining excluded). Similarly, the one year drop in wages in DC’s private sector in the 2009.1 quarter was 4.1% compared to 6.0% in the US.

In a future recession, it would be reasonable to assume that the exposure of DC’s private sector would again at least be similar to that in the US as a whole (excluding manufacturing and mining sectors). However, one reason the private sector impact was lower in DC than for the similar sectors in the US in the last two recessions was the relatively large boost in federal spending that benefitted DC’s economy as the recession unfolded.

Chart 2Table 1.PNG

Federal spending. In the 2001 and 2007 recessions, federal spending increased, providing a counter-cyclical boost to the economy. Because the federal government accounts for such a relatively large portion of DC’s economy, this spending has provided a much more substantial boost to DC’s economy than was true nationally. (Federal jobs account for 25% of the jobs in DC compared to 2% nationally, and federal wages and salaries account for 31% of the total earned in DC compared to 3% nationally. Looked at another way, DC accounts for about 7% of all federal jobs and about 9% of all federal wages and salaries.

The proportionately greater boost that DC received from federal spending is evident in the change in wages and salaries that occurred in DC and the US from 2008.1 to 2009.1, a year right in the middle of the Great Recession. Federal wages and salaries in DC increased by $1.02 billion in that year, equivalent to 75% of the loss in private sector wages. For the US, the increase in federal wages was equivalent to only 2.3% of the private sector decline. The increase in federal wages and salaries in DC was 15.8% of the US total.

In a new recession it would appear that DC cannot count on receiving such a relatively large boost from federal spending. Under current federal fiscal policies, debt is increasing even as the economy expands. If controlling the level of federal debt is a policy concern at the time another recession occurs, counter-cyclical spending is likely to be much more moderate, if it happens at all, and the proportion spent in DC may be less.

table 2

chart 3.PNG

Private sector share of the economy. In the years since the 2007 recession the private sector share of DC employment and wages has been rising. In 2009.2, the recession’s last quarter, DC’s private sector accounted for 66.1% of all jobs in DC and 59.9% of all wages in the economy. By the 2018.4 quarter, these shares had risen to 70.2% and 64.6%, respectively. With this rise in the private sector’s share of the economy, it is reasonable to expect the potential for negative impacts on the DC economy from a US recession also to rise.

chart 4

Recession impact on DC residents. In the 2001 and 2007 recessions the jobs and earnings of DC residents (some of whom worked outside of DC) were more adversely affected than were the jobs and earnings related to all the jobs located in DC. In the 2001 recession, resident jobs and wages fell more quickly in the first quarter of 2001 when the recession began. The consequences for DC residents then lingered, which is likely related more to the shock of 9/11 than to the recession itself (9/11 occurred before the recession ended).

In the 2007 recession, neither the jobs located in DC or those for DC residents fell right away when the recession began. By the second quarter of 2009, however, resident jobs were 2.3% lower than a year earlier compared to 0.9% lower for all jobs located in DC. One year into the recession, the earnings of DC residents went from growing at a very fast 7.6% rate in the 2017.4 quarter to –1.0% in the 2018.4 quarter. Earnings of all those working in DC also fell, but not quite as much—from a 6.1% growth rate in 2017.4 to 2.5% in 2018.4.

The jobs and earnings of DC residents surely would be adversely affected by a new recession, but there have been changes in the economy that might mean the impact would be more like —or even less than— that affecting jobs and earnings for all working in DC. For example, DC’s population began to grow in 2005 and it is now 128,051 (22.3%) higher than it was in 2007 when the recession began. From calendar year 2009 to calendar year 2018, DC resident jobs grew faster than jobs located in DC (25.5% versus 12.9%), and the growth in amounts earned by DC residents also well outpaced the amounts earned in DC (64.5% versus 42.4%). Also, DC resident jobs and earnings recovered faster from the 2007 recession, and the growth of resident jobs and earnings also generally remained above jobs and earnings for all persons working in DC for the period of the sequester (FY 2013) and subsequent years.

chart 5

chart 6

 

DC and the Washington area suburbs. The negative impacts of the recessions were generally similar for DC and for the Washington suburban area, but there were a few differences. In the 2001 recession (which included the 9/11 attack), private sector jobs located in DC fell more sharply than those located in the suburbs, but suburban private sector wages fell more than amounts earned in DC. In the 2007 recession, the differences were reversed: the suburbs experienced more private sector job decline and less decline in private sector wages and salaries. In the 2007 recession, the percentage declines in resident employment in DC and the suburbs were about the same.

The appendix charts show changes in private sector jobs, private sector wages and salaries, and resident employment for DC, the Washington area suburbs, and the US.

 

chart 7

chart 8

 

Chart 11

 

About the data: The wage and salary employment data for DC, the Washington area suburbs, and the US is from the US Bureau of Labor Statistics (BLS), as is the data on resident employment in all locations. Most of the data shown here are based on quarterly data calculated from data that is not seasonally adjusted. Washington suburban area data is calculated by subtracting the amounts for the District of Columbia from metropolitan area totals.

Data on earnings and wages and salaries in DC and the US are from the quarterly Personal Income accounts compiled for states and the US by the US Bureau of Economic Analysis.

Data comparing jobs and wages and salaries in DC, the Washington area suburbs, and the US were accessed through Moody’s Analytics. The data are all seasonally adjusted.

All of the data are subject to further revision next year.

US business cycle expansions and contractions are officially designated by the National Bureau of Economic Research (NBER). According to NBER, the 2001 recession was a brief one, extending only from March 2001 (the first quarter) to November 2001 (the fourth quarter). Particularly for DC, the occurrence of the 9/11 attacks in the midst of the recession makes it more complicated to discern only the recession’s impact on DC.

NBER defines the Great Recession of 2007 as running from December 2007 (the fourth quarter) to June 2009 (the second quarter).

An earlier version of this blog appeared in the April 2019 District of Columbia Economic and Revenue Trends issued by the DC Office of Revenue Analysis of the DC Office of the Chief Financial Officer.

Appendix. 

Charts of (1) private sector jobs,  (2) private sector wages and salaries, and (3) resident employment for DC, the Washington area suburbs, and the US.

chart 10.PNG

 

Chart 11

 

Chart 12

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