(Bloomberg) -- Many American cities have suffered after the disruption of a crucial hometown industry. The nation’s capital never has, until now.
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The swift and comprehensive campaign by President Donald Trump and his billionaire ally Elon Musk to rein in government spending is expected to throw a wrench into the economic engine that built modern Washington. Musk’s Department of Government Efficiency has fired thousands of federal employees, and wants to close agencies, abandon leases and tear up billions of dollars in government contracts.
The district is expected to lose as many as 40,000 federal jobs, the city has estimated, or 21% of its federal workforce. That has civic leaders bracing for a spending chill at local businesses, turmoil in office and housing markets and reduced tax collections that could upend city finances.
“I've been in this business a long time, more than three decades, and I’ve never seen a situation where our forecast has so much uncertainty,” Glen Lee, the chief financial officer for the District of Columbia, said in an interview. Adding to the pressure, the district is facing a major budget squeeze that could result in deep cuts to police, schools and other city services.
Workers caught up in the federal purge meanwhile are calculating how far their savings can stretch. Many are putting off big decisions about their careers or moving while waiting to see how bad things will get.
Jenny Carlson Donnelly, an entomologist who had been working on malaria issues at the US Agency for International Development, started to look for a new job after the Trump administration all but shut the agency. Donnelly isn’t sure whether she and her husband and two children will be able to stay in the home they bought in the Washington suburb of Laurel, Maryland, in 2023.
“Not knowing whether I’m going to find a job in a timely manner and if we can pay the mortgage and the bills is stressful,” Donnelly said. “We have to take things week by week, and we’re not the only ones.”
Legal battles over DOGE’s cutbacks have afforded a bit of short-term security to workers, as judges have in some cases forced the administration to bring workers back, even if temporarily. Other fired federal workers are falling back on severance or buyouts while they weigh their next step.
Still, the unemployment rate in the capital rose to 5.6% in March, the highest since January 2022, according to data from the Bureau of Labor Statistics. And there are signs of ripple effects spilling into the region’s private sector. In Maryland, where many contractors are based, WARN notices by private-sector companies planning to reduce staff have spiked since January.
Washington could fall into recession, albeit mild, by later this spring, according to Moody’s Analytics. On top of that, economists surveyed by Bloomberg put the probability of a US recession in the next 12 months at 30% — and some are putting even higher odds on a US downturn as a result of Trump’s tariffs. That has Lee preparing for lasting repercussions.
“This is not like a recession where you expect a couple years of retrenchment,” Lee said. “We don’t see that. We see this as a transformation.”
Stable Jobs
Washington tends to be a bastion of high salaries and stable jobs even in the worst of times, since the government often boosts spending to stimulate the wider US economy when it’s ailing.
Since 2000, Washington has had an average unemployment rate of 4.1%, trailing only Honolulu and Oklahoma City among 56 large metropolitan areas, according to Bureau of Labor Statistics data. Only Oklahoma City, another hub of federal workers, had less variation in its jobless rate over that span.
Thousands of government contractors and people holding grant-funded jobs are likely to be affected by DOGE’s cuts. The Brookings Institution in 2020 estimated there are around 5 million federal contractors nationwide, more than double the 2.2 million federal workers, excluding postal workers and the military.
For workers who’d assumed a federal job would bring security, the sudden change has been jarring.
“We have a stable bureaucracy for many reasons,” said Shaw Vallier, 31, who got an email announcing his termination from the federal housing agency job he’d gotten barely a year earlier. “We have union contracts for many reasons. We have courts for many reasons. And now, I’m like, ‘Obviously, none of it matters.’”
Vallier and other workers have had to endure additional uncertainty amid political fights over Musk’s moves. After initially being informed of his termination, Vallier got ready to move on.
“I packed up, told everyone bye,” said Vallier.
Then, Vallier was reinstated after a judge ordered the administration to rehire probationary workers, but was put on administrative leave and given no back pay. He canceled a surgery that had been scheduled for more than six months. After contemplating a job offer from a housing nonprofit in Washington, he ultimately opted into the administration’s deferred resignation program.
Some economists say Washington’s stability has come at the expense of dynamism that could have made the region more resilient. Moody’s Analytics ranks the district’s industrial diversity last compared with US states.
“The district is going to need to work more than they have in recent decades to restructure their economy,” said Terry Clower, director of the Center for Regional Analysis at George Mason University in Fairfax, Virginia. “You don’t put all of your eggs in one basket.”
Black residents, who account for around a quarter of all federal workers in the district itself and large shares in suburban Maryland and Virginia, are at particular risk if Washington’s economy suffers.
The average Black unemployment rate in the District of Columbia had improved in recent years, falling below 10% for the first time since the Great Recession, according to an Economic Policy Institute analysis of government data. Yet African Americans are overrepresented in federal government jobs, and could wind up bearing the brunt of Trump’s cutbacks.
Ripple Effects
Moody’s Ratings has put the District of Columbia’s bond rating on watch for possible downgrade, saying federal job cuts could have an “outsized impact” on its economy and finances.
On top of that, the district is facing hundreds of millions of dollars in budget cuts, the result of negotiations over the federal stopgap spending bill passed in March by Congress. Mayor Muriel Bowser has called for city officials to draft a list of furlough orders and facility closures by April 25, and local leaders are bracing for further cutbacks to next year’s budget.
“There will be dramatic cuts to all council initiatives,” said Brianne Nadeau, a member of the Council of the District of Columbia, including to human services, child care and education. “This is not going to be a pretty budget.”
Washington’s suburbs, where many federal workers live and numerous agencies and contractors have offices, could also face strain. Maryland and Virginia are each home to about 145,000 federal workers, according to the FedScope human-resources platform.
Monique Ashton, the mayor of Rockville, Maryland, said at a March meeting of the Metropolitan Washington Council of Governments that people aren’t “hearing all of what this means in terms of the ripple effects.”
Numerous federal agencies have offices and facilities close to Washington but outside the city itself. The Food and Drug Administration, for example, has thousands of workers in Maryland, including at its headquarters in Silver Spring. As many as 3,500 FDA workers are expected to lose their jobs as part of a broader restructuring of the US Department of Health and Human Services.
Some powerful nongovernment industry clusters have developed around Washington, including life-sciences companies in suburban Maryland and security and defense companies in northern Virginia, Clower, the George Mason professor, said. Arlington County, Virginia, was chosen as Nestle USA’s domestic headquarters in 2017. A year later, it landed Amazon’s HQ2, where 8,000 people now work.
Clower said the region has been less generous with development incentives than other areas, often out of confidence that companies would want to be close to the federal government. Yet local groups push back on the idea that Washington is little more than a government hub.
The Washington DC Economic Development Partnership said federal data show the metro area has more than 269,000 people working in health care and life sciences and over 210,000 in technology.
Some states are trying to help fired federal workers shift to other careers. Both Virginia and Maryland have advertised government job openings directed at workers affected by the DOGE cuts, as have more distant states, including New York.
Office Pain
When Trump returned to the Oval Office, he called for an end to pandemic-era remote work for federal employees. That led to a jump in activity in Washington’s core, with more commuters packing the rails and roads, buying lunch and lingering after work for dinners and drinks.
Over the longer term, however, Trump’s cost-cutting looks likely to pummel the district’s commercial real estate market. Along with the cuts in federal payrolls, DOGE has sought to jettison leases on many federal buildings.
“If all of these agencies are empty, that’s definitely going to impact the city,” said Donnelly, the former USAID worker. “It’s not going to be the same after all of this. I don’t understand the end goal. I think come June, we’re going to see a big exodus.”
Some developers said Washington officials have long been overly reliant on the city’s status as the US capital and haven’t done enough to encourage other kinds of business.
“The local government and the leadership there has relied extensively and almost exclusively on the federal government’s presence,” said Don Peebles, chairman and chief executive officer of the Peebles Corp., which owns offices and a hotel in Washington. “They’ve not had to be business-friendly, they’ve not had to be tax-friendly and they’ve decided not to focus on attracting other industries.”
In January, Michael Peters, commissioner of the Public Buildings Service in the General Services Administration, said at a public meeting the government could cut as much as 50% of its real estate portfolio in coming years. The federal government accounts for nearly 9% of the commercial real estate buildings in the Washington metro area in terms of square footage, according to real estate data firm Trepp.
A GSA spokesman said the agency continues to consider empty or underutilized properties for divestment.
Home Economics
So far, the DC area’s housing market has shown little sign of trouble. Around 8% of active listings in the Washington area cut their prices in the week ended April 20, a point lower than the same time a year ago, according to listings service Bright MLS. A recent upturn in listings is welcome, said Lisa Sturtevant, Bright MLS’s chief economist, because would-be buyers have been starved for homes to consider.
Allison Goodhart, a real estate agent in Alexandria, Virginia, said some clients who lost jobs in the government are having trouble finding work in the private sector and as a result may have to put their homes up for sale. But while listings have grown and bidding wars have died down, sales remain strong.
“Are there people moving because of DOGE? Yes,” she said. “But we’re not seeing an impact on the market as a whole.”
Claude Labbe, a realtor with Douglas Elliman in McLean, Virginia, said that a client who works for the federal government got a new job with his agency in Colorado. But he decided to rent out his house in Washington because of the softening sales market and is now leasing a place in Colorado because he’s not sure what will happen to his job.
“People are making decisions and then they continually have to reassess,” Labbe said.
Meanwhile, the high-end market for multimillion-dollar homes and luxury rentals is still booming. Meta Platforms Inc. founder Mark Zuckerberg paid $23 million in cash — the third most expensive sale in the city’s history — for a Washington mansion, Politico reported. And Labbe said a lawyer he worked with rented out a four-bedroom apartment in February for $20,000 a month.
“A lot of people want influence with the White House,” Labbe said.
--With assistance from Kriston Capps, Jarrell Dillard and Natalie Wong.
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