Federal Spending vs. Inventory

Riddle: “What goes up and never comes down?”

Answer: “Federal spending”

Federal spending – especially if you measure it in constant dollars – hasn’t ALWAYS increased.  But, let’s face it, it mostly has. As Washingtonians, we’ve grown comfortable in the warm blanket the federal government provides.  Year after year demand, fueled through federal direct spending and contracting, has been the cornerstone of the region’s economy. Now, faced with the prospect of real budget cuts, how will the government’s demand for space respond?

The graph above charts the federal leased inventory in the Washington, DC area superimposed with trend lines for total federal outlays and discretionary spending. The forecast component of the spending trend lines is based upon Congressional Budget Office estimates.

Predicting the future of federal real estate inventory growth is an issue we’ll spend a lot of time on for the remainder of this year and we’ll attempt some more sophisticated analysis than this, but the graph above does provide clues as to where we are headed. Here are a few initial observations:

1. The Department of Defense accounts for more than half of the federal discretionary budget. We know that the DoD budget is forecast to decrease substantially due to sequestration and other cutbacks. In fact, anticipated Defense cutbacks largely explain the dip in discretionary spending that is forecast through 2017.

2. Budget cuts will probably affect the contractor community worse than the government itself, especially so long as the Obama Administration stays in office and “insourcing” continues. The Department of Defense, in particular, fuels much of the region’s contractor community and the steep decline in discretionary defense spending is likely to have a significant impact.

3. Austerity measures – which have bi-partisan support – will put tremendous pressure on the government to downsize. President Obama issued a directive in June 2010 to cut $3 billion in real estate costs (in addition to BRAC-related savings) by the end of this fiscal year; OMB has issued a directive that freezes agencies’ real estate inventories, and; GSA’s oversight committee in the House of Representatives is only approving prospectuses with improved space utilization. Both the Executive and Legislative branches have concluded that federal real estate costs will need to decrease to prepare for a period of intense budget pressure.

4. Federal inventory growth appears to correlate better with total outlays than with discretionary spending. On the face of it, this seems unlikely since most mandatory spending is comprised of entitlement programs (medicare/medicaid  and social security) and interest on the national debt. These things are loosely connected to office space needs. Nonetheless, if we view total spending as an indicator of federal inventory growth (or decline) it looks like we could be headed into a period similar to that of the Clinton Administration when the GSA’s inventory growth was nearly stagnant.