Amid Federal Cuts, the D.C. Area Braces for a Downturn

What’s the best way to face down a recession? For Washington, D.C., Mayor Muriel Bowser, the answer is investing in growth.

Bowser delivered her annual budget proposal on Tuesday amid a period of uncommon economic uncertainty for the D.C. area. In the first few months of the second Trump administration, the federal government has cut thousands of jobs, with disproportionate impacts on Washington and surrounding counties. Congress is currently negotiating a budget that could cut federal spending, after passing a continuing resolution that will force major cuts to the district budget in the short term. Changing signals about tariff policy have also led some businesses to hold off on making big decisions about the future, area leaders say. For Washington, the economic outlook is suddenly much gloomier after several decades of sustained growth.

“Our challenge as a city is to turn the potential loss of 40,000 federal jobs, associated local jobs, and one billion dollars of revenue over four years, into a gain of new jobs and new revenues,” Bowser said in a budget letter outlining her “growth agenda” to the D.C. Council. “To do that, we must focus investments — in both capital and operating budgets — on opportunities that lead to more economic activity.”

Like so much else that’s happened in the last few months, the real impacts of federal policy decisions seem to lurk always just beyond the horizon. But for the Washington metro area, the telltale signs of a downturn are starting to emerge. Area economists and business leaders are watching a hodgepodge of direct and indirect indicators to get a handle on the direction of the economy, and many of them are flashing gentle warning signs.

Unemployment rates in the district and surrounding counties have inched up slightly but gradually for most of the year. There are lots of people behind the numbers: Arlington County, Va., for instance, saw a 60 percent increase in the number of unemployed residents in March compared to the prior year. Unemployment claims from federal employees are slowly increasing. Office occupancy is up with federal return-to-work policies, but consumers are spending less on their credit cards and at district restaurants than they were in recent months. Local banks are anticipating a recession. There was a “dramatic” increase in homes listed for sale in some parts of the region in April, according to the Northern Virginia Association of Realtors. And new housing permits in the district have recently declined.

“Investors are very leery about D.C. right now,” says Yesim Sayin, executive director of the D.C. Policy Center. “They have a million places they can send their money, and D.C., which was at the top of their list for the longest time, is no longer at the top.”

Sentiment among business leaders in Northern Virginia has shifted as well. A survey of CEOs released in April showed most — about 59 percent — expected the economy to decline in the next six months. That’s a reversal from the end of last year, when a similar portion of area leaders expected the economy to grow. Still, it will take time for the range of impacts to become clear, as apartment leases gradually expire, students leave town and decide whether or not to return, and federal employees who took buyouts start to show up on the unemployment rolls.

“It’s like walking in a haze right now,” Sayin says. “I think the effects will be spread into the future.”

Not every part of the Washington metro area will feel the effects of the shift in the same way. Parts of Northern Virginia with high concentrations of federal contractors could suffer especially acutely depending on how federal spending changes. Montgomery County, Md., could be hit particularly hard by cuts affecting the National Institutes of Health. The state of Maryland recently saw its credit rating downgraded by Moody’s amid tight fiscal projections and a worsening economy. (Other rating agencies have reaffirmed the state’s creditworthiness, though: “To hell with Moody’s,” state Treasurer Dereck Davis said recently.) Loudoun County, Va., is in good shape in terms of public finances partly due to the recent explosion of data center developments. But regional business leaders are operating in a “fog,” says Tony Howard, president and CEO of the Loudoun County Chamber of Commerce.

“Folks are starting to use the R word,” Howard says.

These conditions make an interesting environment for Bowser to go all in on economic growth. Sayin, of the D.C. Policy Center, says her “growth agenda” budget makes a bet that cutting back regulations and promoting business growth will save the district from some of the most painful cuts in future budget years. It’s a decent bet, Sayin says, but the budget proposal also acknowledges that it may not work, and that cuts may occur one way or the other. The budget proposal has landed amid a local debate about how much public money should be used to support private economic ventures like the proposed redevelopment of RFK Stadium for a future home for the Washington Commanders, a plan backed by Bowser. Some other local leaders are already decrying some of the cuts proposed in the budget. It’s “a budget that’s going to be very hard on folks with the least,” one district councilmember told the Washington Post.

What happens in Washington has an outsize impact on the region, not only as the center of employment but also as a cultural and tourism center and a partner in funding shared regional amenities, like the Metrorail system. For a long time, federal spending and the federal workforce have been primary drivers of the region’s growth. Many regional business leaders are now thinking about how to shore up the economy for an era of government contraction.

“An employer in Northern Virginia or Bethesda [Md.] or Rockville [Md.] attracts and retains its employees as a function of the District of Columbia being an exciting, vibrant, capital city,” says Julie Coons, the president and CEO of the Northern Virginia Chamber of Commerce. “We believe we need to seek and create a new economy. We are in the process right now of trying to better define that.”