Written by Patrick Clapp and Chris Chmura.
The impact of shutting down the U.S. government is much larger than the 800,000 federal workers who are staying at home and not spending money on commuting and lunch. Even though Congress has agreed to pay these workers, the reduction and shutdown of certain services is rippling through the economy.
The Wall Street Journal cites an estimate from J.P Morgan Chase economists that “each week of a shutdown would reduce the annualized pace of fourth-quarter economic growth by 0.12 percentage point.” However, the forecast only looks at effects on government workers, not the private sector or consumer confidence.
One question missing from the various lists of FAQs about the shutdown is whether any private sector industries could be affected. Fewer people are making retail purchases, going out to eat, enjoying arts or entertainment, and/or traveling and staying at hotels when tourist attractions like the Grand Canyon or Smithsonian museums are closed. They might also delay big purchases, like a new house, even if they could get a loan from an understaffed Federal Housing Administration. That gives us four North American Industrial Classification System (NAICS) sectors for closer inspection: retail trade (NAICS code 44), real estate and rental and leasing (53), arts, entertainment and recreation (71), and accommodation and food services (72).
Next, we need to look at a comparable period. The last time the government shut down was between December 16, 1995 and January 6, 1996, a total of 21 days. We consider the effects on our selected sectors around that period for metropolitan statistical areas (MSAs). We also consider the percentage of federal employees in the area during that time period—areas with a higher percentage of federal workers implies those areas would have more furloughed workers, and likely larger impacts on local industries. Data are obtained from Chmura’s database powering the EQSuite®.
For each of the four sector categories in every MSA, we first calculated the year-over-year percent change in employment by month and wages by quarter to filter out some seasonal fluctuations. The graphs later in this post shows the percentage point changes in growth rates month to month or quarter to quarter relative to the number of people employed by the federal government in each region as a percent of total regional employment. With less demand during the shutdown, we would expect firms in these industries to cut back employees’ hours, which would show as a decrease in the growth rate of wages. To a lesser extent, they might cut their staff size, which would appear as a negative growth rate in employment.
Now for some results: The clearest story is in the retail sector, where there was a strong negative relationship between the percentage of federal employees in a region and changes in the growth rate of wages quarter to quarter in the time periods surrounding the last government shutdown. Employment in the retail sector also declined, but not as dramatically as wages, implying that businesses cut hours, rather than laying off workers to cope with the government shutdown.
The Washington, D.C. metro area ranked fifth of 353 MSAs in the percentage of federal employees in the workforce. The year-over-year growth rate in wages in the retail sector slowed 0.6 percentage points between the last quarter of 1995 and the first quarter of 1996. In the metro area with the largest percentage of federal workers, Warner Robins, Georgia, the year-over-year growth rate of retail wages fell 4.5 percentage points over that time.
Tourist areas such as national parks and museums also suffered. The year-over-year growth rate of retail wages in the Flagstaff, Arizona MSA, near the Grand Canyon, fell 1.7 percentage points between the last quarter of 1995 and the first quarter of 1996.
The effects of furloughed workers rippled through the arts, entertainment, and recreation sector as well. As federal employees were unsure if they would get paid, metro areas with a large percentage of federal employees experienced sharper drops in wages for this sector over the shutdown period and a similar drop in employment. In the Jacksonville, North Carolina MSA, home of Marine Corps Base Camp Lejeune, the year-over-year employment growth rate in the arts, entertainment, and recreation sector fell over 16 percentage points between December and January.
The year-over-year growth rate of employment and wages in the real estate sector and accommodation and food services sector were not negatively affected, suggesting they are more resistant to uncertainty caused by a government shutdown. This makes intuitive sense for the real estate sector in particular—if the only thing keeping someone from purchasing a house is delayed paperwork at the FHA, they are still going to buy a house, just somewhat later than expected.
Warner Robins, GA MSA
Bremerton-Silverdale, WA MSA
Washington-Arlington-Alexandria, DC-VA-MD-WV MSA
Jacksonville, NC MSA
Lawton, OK MSA
Fairbanks, AK MSA
Fort Walton Beach-Crestview-Destin, FL MSA
Huntsville, AL MSA
Anniston-Oxford, AL MSA
Clarksville, TN-KY MSA
Anchorage, AK MSA
Cheyenne, WY MSA
Honolulu, HI MSA
Las Cruces, NM MSA
Lebanon, PA MSA
Bakersfield, CA MSA
Texarkana, TX-Texarkana, AR MSA
* Data for the real estate sector of the Washington, DC metro area is unavailable prior to 2001
Similar to the last shutdown, Congress said it will pay the furloughed employees even though they did not work, and employment and wages in these industries quickly bounced back—and we would expect the same when the current shutdown ends. Continuing to look at the retail sector, year-over-year growth in wages in the quarter following the shutdown was positively correlated with the percentage of federal workers in a region, implying renewed demand from now-working government employees rippled out to more hours in the retail sector.
However, that quick return to growth took place in a strong mid-1990s economy. In the midst of our current slow recovery, a similarly long shutdown could be a much larger and longer setback for workers in both the public and private sectors.
The above chart shows the MSAs most likely to be impacted by the federal shutdown based on the most recent data available. The size of each bubble represents total MSA employment, and the color of a bubble indicates the political party affiliations of the senators representing that state. MSAs closer to the top right of the chart have higher unemployment rates and a larger percentage of federal workers in their local workforce, and are expected to be hit harder by the shutdown.
Nearly three years of continuous budget wrangling in Congress has left the fragile U.S. economic recovery limping along, in many respects, instead of galloping. Sequestration and the Budget Control Act have put the squeeze on both defense and non-defense spending. In this environment, Chmura has spent a great deal of time helping state lawmakers, city officials, and other civic stakeholders understand the economic impact of these defense cuts at the community level. What does it mean to your community if a specific defense contract gets cut back or cancelled altogether? To answer these questions, Chmura mapped the supply chain of defense contractors in the nation and analyzed defense spending contract data over the past thirteen years.
First, defense spending is by design a bit opaque as credible and specific national security considerations oftentimes keep U.S. policy makers from telegraphing openly the true nature or extent of specific programs. Second, many defense contracts are multiyear projects, but public documents, such as contract award notices, make it difficult to see how payments to contractors are set to be dispersed or spent in detail. Third, many government contractors, who competitively bid and win large contracts, subcontract many aspects of the work to other firms. Thus, a single contract can impact several disparate communities at different times with different intensities over the life of the contract. Chmura has dealt with these issues by analyzing typical contract payouts and by adjusting these figures to more accurately model the flow of funds to contractors and subcontractors.
To begin answering questions regarding the previous and looming defense cuts, one must first determine how much of the budget is being cut by region. The defense industry is big, and as President Eisenhower famously noted in 1961, the military industrial complex has political momentum all its own that can alter spending based upon the peculiarities of power and influence. The Department of Defense’s spending has declined substantially from its peak in 2010. By 2012, defense spending was already cut by close to 6% (without adjusting for inflation). While these cuts are large and further cuts are expected in 2013 and 2014, they are not unprecedented. In a recent study, the Center for Strategic and International Studies examined real (adjusted for inflation) defense spending cuts since World War II and found that in the aftermath of the Korean and Vietnam wars, and at the end of the Cold War, defense spending cuts were more severe in each case than in the current environment. (For more see the full CSIS report here:
While the cuts in defense spending are real, they vary greatly across the military by branch and function. For instance, from 2013 to 2014, Army procurement is being cut 3% and Marine procurement will be down 14% while Navy procurement spending is set to rise to $39 billion—a 13% increase from the year before—and Air Force procurement spending is set to increase by 1%. Moreover, the Army’s and the Navy’s Operation and Maintenance budgets will both be cut by 4%, while the Marine’s Operation and Maintenance budget is set to expand by 4% and the Air Force’s by 5%. A public advocacy infographic shop, Timeplots, assembled an impressive infographic depicting the size and scale of the changes in government spending from 2013 through 2014, including defense spending by spending category. See the full infographic here:
In order to help make sense of the community impact of the recent pending defense cuts, Chmura created the following analysis to see which metropolitan statistical areas (MSAs) have been most impacted by the recent defense spending cuts. At the aggregate level, some of the largest MSAs have seen the most dramatic cuts in the period from fiscal year 2010 to fiscal year 2012. However, after adjusting for the size of the MSA, several much smaller areas stand out for the level of cuts they have experienced over this period. Similarly, by aggregate dollar figure, a few of the largest MSAs have gained the largest increases in government contracts over this period, but after adjusting for the size of the labor market in these metro areas, several much smaller U.S. metros stand out in terms of the contractual gains.
New Orleans-Metairie-Kenner, LA MSA
Oshkosh-Neenah, WI MSA
St. Louis, MO-IL MSA
Tucson, AZ MSA
Memphis, TN-MS-AR MSA
San Antonio, TX MSA
New York-Northern New Jersey-Long Island,NY-NJ-PA MSA
Riverside-San Bernardino-Ontario, CA MSA
Hartford-West Hartford-East Hartford, CT MSA
Johnstown, PA MSA
Hinesville-Fort Stewart, GA MSA
Manhattan, KS MSA
Crestview-Fort Walton Beach-Destin, FL MSA
Columbus, GA-AL MSA
York-Hanover, PA MSA
Binghamton, NY MSA
Seattle-Tacoma-Bellevue, WA MSA
Portland-South Portland-Biddeford, ME MSA
Phoenix-Mesa-Scottsdale, AZ MSA
Amarillo, TX MSA
Norwich-New London, CT MSA
Bellingham, WA MSA
The labor market impact of these spending cuts can vary widely depending on the type and nature of the defense spending. Every industry in the area will have a different economic impact based on the size of its local supply chain and the spending spillover from its directly employed workers. However, it stands to reason that these spending cuts, as steep as they are, can be a driving force to upset labor markets in many of the nation’s MSAs, both big and small. To learn more about Chmura’s expertise and research regarding defense spending and supply chain mapping,
contact us here.
Originally published on July 8, 2013 in the Richmond Times Dispatch.
Many high school graduates and rising high school seniors are making plans that will impact their work-related opportunities when they graduate from college.
While interest is certainly an important component of career choice, it should be balanced with job opportunities.
Photographers and actors are two careers that high school students think about, but job opportunities are scarce in those fields.
Based on estimates from Chmura Economics & Analytics, 215 photographers work for firms in the Richmond area along with another 363 who are sole proprietors.
On the other hand, an average 538 registered nurses are needed each year in the metro area to fill new jobs or those vacated by retirees or people moving to another occupation.
Along with nurses, accountants and bookkeepers are among the top 10 occupations needed by businesses in the Richmond metropolitan area over the next decade.
Another factor that might help students narrow their career choice is potential earnings.
The State Council of Higher Education for Virginia recently started providing the average first-year earnings (based on the last five years) by degree level along with the earnings by institution where the degree was awarded.
This database consists of graduates employed in Virginia and is not adjusted for the regional cost of living.
There is significant variation by degree and even for the same degree awarded at different institutions.
Registered nurses with a bachelor’s degree earned an average $48,959 for their first year working in the state. Graduates from the University of Virginia at Wise earned $37,492 – at the low end of the scale – compared with $54,765 for Jefferson College of Health Sciences graduates.
In some cases, the skills acquired with a two-year degree earned more than those with a four-year degree.
A graduate with an associate accounting degree made $30,964 for the first year and an electrician with two years of education commanded $36,734.
In contrast, graduates with a photography bachelor’s degree earned $23,035 in the first year while general English majors earned $23,423.
Virginia is only one of a handful of states that compiles earnings by degree and institution. CollegeMeasures.org has packaged the information and made it available in an easy-to-navigate website for students who are trying to decide on a career.
Later this summer, State Council of Higher Education for Virginia plans to make even more information available to the public: average student debts of graduates by program and institution.
With this information in hand, students can consider the debt-to-earnings ratio they may face when they are handed their degree.
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