DC economy may take unusual economic hit from the coronavirus

A National Park Service worker picks up trash along the drained Lincoln Memorial Reflecting Pool as the Washington Monument and the U.S. Capitol are seen in the distance in Washington, at sunrise Wednesday, March 18, 2020. (AP Photo/Carolyn Kaster)

The D.C. region has been disproportionately insulated from the negative effects of previous economic downturns, but that is not expected to be the case during the current slowdown caused by the coronavirus, according to a new report from the Stephen S. Fuller Institute at George Mason University.

The report predicts the coronavirus outbreak will lead to an “unprecedented” drop in tourism, and that workers in the area’s service industries will be the hardest hit.

Typically in a recession, the federal government acts like a stabilizer for the region. It provides income for local businesses and households, which then spend money at other local businesses.

But this is different.

“In this downturn, households and businesses will reduce expenditures at local businesses, even if their incomes are unchanged as households, businesses and governments implement strategies to flatten the curve of the pandemic,” according to the report.

Researchers said they expect to see a broad decline in productivity, and a decrease in demand from domestic and international consumers.

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“The effects will be most pronounced for service industries that rely on discretionary spending and those that have strong international ties, especially businesses that rely on international manufacturing,” according to the report.

About 23% of residents in the D.C. region work in service industries as their main job.

“If just 15% of this workforce is laid-off, an additional 114,000 workers will become unemployed, increasing the region’s unemployment rate to 6.4% from the 2019 average of 3.1%,” researchers said in the report. “If 30% of this workforce is laid-off, the additional 228,000 unemployed workers would increase the regional unemployment rate to 9.7%.”

A massive drop in consumer spending will likely be the main factor for the slowdown in the D.C. region, accounting for 65-75% of the gross regional product (GRP) that is lost.

“The domestic outbreak will reduce tourism to unprecedented levels,” researchers said in the report. “The most comparable recent event was the Sept. 11, 2001 attacks, although the total magnitude of the decrease resulting from the pandemic will likely be larger.”

In the 12 months after the Sept. 11 attacks, hotel revenue in the D.C. region dropped by nearly 14%.

“If hotel performance follows this path, the total 12-month loss in revenues at regional hotels would be $630 million,” according to the report. “The decreased spending from travelers, plus the indirect and induced effects of the lost earnings, would result in an additional $600 million of lost economic activity, for a total decrease of $1.2 billion” in the hotel and tourism industry, alone.

All of these changes are expected to cause the local economy to stall over the course of the year.

“The sharpest decline in the Washington region’s economy, as measured by gross regional product, will occur in the second quarter of 2020 (-3.8%),” researchers said. “GRP in the third quarter will decrease 1.2%.”

Assuming the coronavirus affects normal operations through May of this year, the D.C. region’s economy is expected to effectively come to a halt, increasing by 0.1% for the year, while the national economy is projected to contract 0.2%.

“If social distancing measures are in place past June 2020, the economic losses will be compounded,” researchers said.

Nick Iannelli

Nick Iannelli can be heard covering developing and breaking news stories on WTOP.

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