Is MoCo in a Recession?

Recent attention to Montgomery County’s reduced, but still substantial budget deficit (now projected at $297 million) has caused many to pay closer attention to the state of the county’s economy. Simply put, is MoCo in a recession?

The classic definition of a recession is two or more consecutive quarters of negative growth in gross domestic product (GDP). At the national level, there are an excruciatingly large number of measures used to predict and track business cycle changes, many of which are tracked by the National Bureau of Economic Research. At the local level, fewer statistics are available. Survey sample sizes shrink, employer non-disclosure requirements become a problem and data in general are more scarce. But there is enough information to know, or at least speculate about on an informed basis, two questions: is the county’s economy growing now and will it grow in the near future?

Montgomery County’s Department of Finance is a good resource to start. It has a number of coincident indicators, or data that measure the state of the county’s economy right now. Through November 2007, the county’s labor force (the total number of civilians employed or looking for work) was 506,884, an increase of 0.5% from the year before. As a matter of fact, the county’s labor force has increased every year since 1997. Total payroll employment through June 2007 was 458,964, a drop of 0.7% from the year before. The local unemployment rate was 2.8% through November 2007, down only 0.1 from the year before. Sales taxes collected through October 2007 were up only 0.3% over the prior year, below the local rate of inflation (3.5%).

All of these figures point to a stagnant, but not shrinking economy. Jobs are stable, inflation is creeping up but unemployment is still low. (MoCo’s unemployment rate has not risen above 4% since at least 1992.) The Washington region’s employment base grew by 1.5% last year, faster than MoCo’s, which helped the county. MoCo’s tax collections are not growing as fast as government expenditures, but the private sector is not currently contracting.

However, there is more. To answer the question of whether the county’s economy will grow in the future, we have to examine leading indicators – data that correlate with future growth. At the local level, most leading indicators are related to the construction and real estate industries. These industries serve an important function because they channel economic growth from a handful of industries into a much broader range of industries. For example, in the Washington region, up to one-third of the local economy is associated with federal spending. When federal employees or contractors receive increases in compensation, they often spend them on new housing, housing upgrades or associated real estate. Those payments multiply through real estate agents, construction contractors and material supply industries, which then distribute them more widely through the economy. The construction and real estate industries therefore absorb current growth, magnify it and create future growth throughout the economy. When construction and real estate stop growing, it means that the future growth they promulgate throughout the economy will dissipate.

According to MoCo’s Department of Finance, residential construction starts totaled $485.9 million through November 2007, down 30% from the year before. Non-residential starts totaled $526.3 million, down 9% from the year before. Non-residential volume has declined every single year since 2004. Home sales through November 2007 totaled 9,348 – down 28% from the year before and 43% from 2004. And while the median price of a single-family home increased by 0.7% last year, average days on market has jumped from 26 in 2005 to 84 in 2007.

MoCo’s commercial office market is tight but beginning to slacken. According to Transwestern, the county’s office vacancy rate was 7.1% in the third quarter of 2007, a very low rate. But look at absorption – the amount of square footage newly leased minus the square footage vacated. That figure fell from 2.2 million SF in 2004 to 150,000 SF through the third quarter of 2007. That means the rate of demand for MoCo office space is rapidly cooling and may even turn negative.

So what’s the bottom line? Current economic growth throughout the county is flat. But the commercial real estate industry is slowing down, the commercial construction industry is contracting and the residential real estate and construction markets are in a steep downturn. MoCo is not in a recession right now. But if its real estate and construction industries do not bottom out this year, a recession later in 2008 or 2009 is not out of the question.