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D.C.’s economy expects hit from defense cutbacks

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Lockheed Martin, the Pentagon’s top contractor, acknowledged a bit of the obvious in its earnings release today: it’s going to be a tough year for Pentagon contracts. Lockheed projected sales will go down, as did Raytheon. It sort of rhymes with a bleaker contracting scenario forecast yesterday by General Dynamics.

So, with federal and Department of Defense spending headed down, does that mean the air is going out of that recession-proof Washington D.C. economy?

Piggybacking on defense and other federal spending, D.C. has outpaced the national economy for a decade. It sure helps that government spending almost tripled over that period, from $29 billion to $82 billion.

“We are used to having a 2 percentage point margin between the Washington area and the national economy,” says Stephen Fuller of George Mason University’s Center for Regional Analysis. “We have been a high flier here the last 12 years.”

Now, though, the erosion starts. The debt ceiling deal two years ago whacked a trillion dollars in public spending, more than a third coming out of the Defense Department.

Today, Lockheed Martin and Raytheon both forecast that federal contracting will decline even more.

“There’s a consensus that it’s going to go down,” says defense analyst Byron Callan at Capital Alpha Partners. “The question is, is it going to go down taking the stairs or does it go down taking the elevator? Sequestration would be the equivalent of taking the express elevator down.”

There’s that word again: sequestration. Mandatory, across-the-board spending cuts will take effect if Congress and the White House can’t reach a spending deal. But even if they do, Michael Cassidy at the Commonwealth Institute for Fiscal Analysis think tank believes Pentagon contracting will shrink the way it did in the early ’90s.

“You had a significant drawdown in defense resources at the end of the Cold War,” Cassidy says. “Now we’re talking about a significant drawdown due to the ending of the wars in Iraq and Afghanistan.”

Fuller at George Mason thinks the D.C. metro economy’s growth will fall back from 4 percent, to a more pedestrian 2.5 or 3 percent, this year. That’s just a hair faster than the rest of the country.

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