Sequestration would have 'devastating impact' locally

The first contraction in the U.S. economy in almost four years sent a sobering message to local contractors and federal agencies Wednesday as the threat of sequestration bears down on the Washington area.

Gross domestic product fell 0.1 percent in the fourth quarter of 2012 -- a surprising downturn after a 3.1 percent increase the quarter before. The decline is thanks in large part to a 22.2 percent plunge in defense spending, the biggest drop since the end of the Vietnam War in 1972.

Spending will drop even further if Congress fails to reach a fiscal agreement by March 1. Sequestration -- $1 trillion in automatic spending cuts over the next decade, half from defense -- was slated to take effect on Jan. 1 but was delayed two months under a stopgap measure.

"Defense spending will go down sharply -- this is sort of a preview of it," said Barry Bosworth, a senior fellow at the Brookings Institution. "It really doesn't look like anything's going to change between now and March."

Federal procurement dropped $4.5 billion in 2012, while this year's payroll tax increase took an additional $4 billion out of the local economy, said Stephen Fuller, director of George Mason University's Center for Regional Analysis. Sequestration's effects on federal payroll would remove an additional $3 billion to $4 billion locally. Every $4 billion is worth about seven-tenths of a percentage point in regional GDP, Fuller said.

"It's big bucks," he said. "We can't afford to give up too much."

He added that drops in federal spending would be felt across the region, from services like restaurants and retailers to the local housing market.

"It's not going to kill us," Fuller said. "But you can die of a thousand cuts."

Spending cuts could immediately put 450,000 jobs in the Washington area at risk, said Karen Young, chairwoman of the Metropolitan Washington Council of Governments.

"It would have a disproportionate if not devastating impact on our region," Young said. "We understand that it's not sustainable with the federal downsizing, but that makes for a lot of re-engineering."

Defense Secretary Leon Panetta announced a civilian hiring freeze earlier this month, along with a delay in contract awards and a drawdown in maintenance, in preparation for sequestration. Other agencies have followed suit.

Last week, local defense contractor General Dynamics said it lost $2 billion in the fourth quarter, blaming defense cuts. Contractors are lobbying Congress to make a deal before automatic cuts kick in.

"While we recognize that both parties are strongly opposed to allowing sequestration to happen, we remain deeply concerned that sequestration could occur as the default outcome," Lockheed Martin Corp. CEO Marillyn Hewson said in a conference call with stockholders. "Sequestration not only puts at risk our defense industrial base, it also harms military readiness and would hollow out our military forces."

Those in Washington with their sights set firmly on that March 1 deadline may end up being sorely disappointed.

"It sees to me that there's little likelihood that Congress will reach a compromise," Bosworth said. "I think we should be expecting that the sequestration cuts, at least for some time, will go into effect."