In this edition of Mo Co Economy Watch we take a look at: the D.C. area’s rate of growth relative to other major metropolitan economies; private sector employment relative to the beginning of the Elrich administration and pre-pandemic period; and look for signs of a booming economy in the local office market. In general, these numbers are consistent with other recent indications that the County’s economic decline is continuing and/or accelerating.
The Current regional Employment Picture
Let’s get started by looking at two recent releases from the Bureau of Labor Statistics. These releases indicate that the D.C. area is underperforming other metro areas, and that the D.C. area economy could be slowing much more quickly than its peers.
The good news from the August release of Metro Area employment numbers is that June 2022 employment in the D.C. region is up 3.1%, or 100,700 at place jobs, relative to June 2021. The bad news is that that rate is significantly below the growth rate in other major metropolitan labor markets.
The key takeaway is that during that period, among this sample of metro areas, the D.C. area economy was growing at a much slower rate than these other large metropolitan economies and in terms of pure numbers the closest large metro area was Detroit (a much smaller economy). Moving to the September release of July employment data, we still see the D.C. area “bringing up the rear” among these selected metros…and a much larger drop off from June to July in the D.C. area than is evident elsewhere.
Why is it important to keep an eye on metro area employment in major metro areas? These figures do indicate that the D.C. area is capturing a relatively small portion of the growth that is occurring nationally, that the economic dynamics (including local policies) are not supporting robust employment growth, and that the pace of growth in the D.C. area may be slowing to a degree that is not occurring in other major metros.
I’ll stipulate that this much employment change over a 12-month period is highly unusual and is a product of our highly unusual times – the re-opening of the economy is not something that can be repeated, so as you’ll see below, future year-over-year employment change is likely to come in well below these figures.
Looking back, and ahead, at metro area job growth
The D.C. area economy has underperformed most of the selected metropolitan office markets over the past decade. Oxford Economics expects the D.C. area economy to add jobs over the next 5 years at a slower pace than it did during the past decade. That said, Oxford Economics also expects the D.C. area economy to be more middle-of-the-pack than laggard when it comes to metropolitan area jobs growth over the next half-decade.
While I am not going to get into a lot of detail on the Oxford Economics projections for individual industries, it is worth pausing for a moment on the composition of the projected growth. The D.C. area is projected to significantly outperform the nation when it comes to employment growth in leisure and hospitality and is also projected to somewhat outperform the nation in categories such as education and health services, retail trade, and “other services.” These tend to be industries that are vulnerable to pandemic effects, labor shortages, and that pay relatively low wages.
Over the next 5 years, the D.C. area is expected to perform at or below the national growth rate in several key categories: government (+0.57% for the D.C. area market versus +0.54% for the nation…which doesn’t really scream “proximity to the federal government is a valuable competitive advantage”); professional and business services, a category including a lot of both bioscience and government contracting jobs (+0.39% for the D.C. area market versus +0.45% nationally); and information (-1.00% for the market, versus +0.48% nationally).
I’m going to separate out a couple of other industries that are worth keeping an eye on:
- Financial activities (+0.59% for the market, versus +0.24% for the nation): The degree to which the region (and specifically Montgomery County) has underperformed leads me to be somewhat skeptical of this particular projection.
- Manufacturing, (-0.20% for the region, versus +0.17% for the nation): a decline in manufacturing in Montgomery County would be significant because while it is a small industry in terms of employment, it is also one of a small number of industries performing well. The macro scenarios in which the drug manufacturing industry thrives are very different from the scenarios in which the leisure and hospitality industry thrives; this is because employment in this industry in the D.C. region is likely to be affected by the public health situation and demand for manufactured vaccines.
Cognitive dissonance: 4th quarter QCEW edition!
The voters recently re-elected Democratic Socialist County Executive Marc Elrich, and in a recent press release he referenced the “booming economic opportunities” in the County. As such, it seems like a good time to check in on the most recent data from the Quarterly Census of Employment and Wages. How booming is the Montgomery County economy? Well, that depends on your definition, which probably depends on your partisan lean. If you are a true believer, this is a really good economy. Only “the haters” care about the statistics.
Montgomery County has lost 3.62% of private sector jobs since the current County Executive took over and has lost 5.34% of private sector jobs since the last full quarter before the pandemic (despite being an area that prides itself on its vaccine research industry). Montgomery County is underperforming the nation on both timelines by a significant amount – by roughly 4.5% to 5.5%!
Clearly, this economic model is working really well. What is the economic model? You might want to take a look at this document that explains the County’s “high road economic development” model. I can’t tell you what the report cost County taxpayers without submitting a request under the Maryland Public Information Act (and who has the time?), but I can tell you what the report says about selecting bidders on public procurements: “Low-cost bids are the least likely to deliver on Montgomery County’s high road objectives.” These tax dollars aren’t going to spend themselves, so someone is going to have to go out and spend them on proposals submitted by the highest bidders. Fortunately, the economy is “booming” so there should be no concern about the availability of future resources.
Cognitive dissonance: Current office market statistics edition!
As noted above, the booming economy is evident to all those who truly believe. What evidence do those true believers see in the current office market?
Office net absorption has been negative in the last 4 quarters and 12 of the last 15. This means that more space has become newly vacant than has become newly occupied for almost the entire period Mr. Elrich has been County Executive. Net absorption has been negative so far in 2022, with 240,000 square feet of additional vacant space, or the equivalent to 1-2 newly vacant office buildings.
Compared to one year ago, market sale values of office buildings are down an estimated 4.4% with cap rates up an estimated 0.3% (reminder: that’s not a good thing). These figures imply that net operating incomes of office buildings in Mo Co are also declining, i.e., owning an office building generates less revenue than it did one year ago.
I hope to be back later this month with a Flotsam and Jetsam and expect to post regularly throughout the remainder of 2022. State and local economic data releases pick up somewhat in the fall, so there will be new data and/or trend confirmations every few weeks from now until 2023. Until next time…be well, stay safe, and shop local!