At last week’s Republican Convention the GOP platform was unveiled revealing the party’s plan to reduce the federal payroll by 10%, an effort we expect would be largely implemented through workforce reductions. This is nothing new. In fact conservatives in the legislative branch have already initiated a number of bills designed to cut both the federal workforce and federal pay. The Republicans are reacting to what, in their view, is an unprecedented increase in the federal workforce under the Obama Administration (they also note recent reports finding that federal workers are paid more than their private-sector counterparts).
As you can imagine, this issue is as politically charged as it gets, especially this year. On the one side of the aisle fiscal hawks see reducing the size and cost of the federal workforce as a logical place to trim the fat. On the other side of the aisle, Keynesian Democrats, with determined support from their union backers, regard the bureaucracy as integral to the health, safety and welfare of the nation. In the middle are any number of economists and pundits manipulating the same facts to suit their ideology–often purposely obscuring the difference between federal employment (which has grown in recent years) and state and local employment (which has declined). Our focus here is on federal sector employment because that has a direct impact on the demand for GSA-leased real estate.
Take a look at the graph above and one thing you’ll note is that over more than four decades the overall number of federal workers has remained largely the same. As we’ll see below, that figure is more striking when compared against the overall growth of private sector employment. What, you ask, are those big spikes every ten years? That is the employment surge required to tabulate the decennial census (so ignore those). And what is that small spike just prior to 2010? That and much of the growth behind it is your Stimulus dollars at work with maybe some TARP spending thrown in (if you want to get acquainted with some of the projects GSA spent its money on, click the “Stimulus” link on the column at right).
From Nixon through Bush (41), the number of federal workers grew on a modest, fairly constant trend. Clinton, as part of his “Reinventing Government” initiative then thinned the federal ranks substantially and under Bush (43) federal employment remained largely flat, save for a notable pop following 9/11 and another in the last year of his administration in an urgent effort to prop up the economy as the nation lapsed into recession. Yet, under Obama, the run-up has continued. Though it has tailed off this year the overall vector of federal employment growth has been steep, and this is the issue that is squarely in the GOP crosshairs, especially as the federal deficit in this past fiscal year was $1.1 trillion. Since President Obama took office in January 2009 (non-USPS) federal employment has increased by 142,000 workers, as measured to the most recent data for July 2012.
When we look at federal employment as a % of total employment, there is an interesting and counter-intuitive trend. For all our talk of Big Government, federal employment has become an ever-smaller segment of the total U.S. workforce. Where its proportion has spiked (both in 1974-1975 and in 2008-2009) it has been not just because of federal hiring but also because the private-sector workforce shrank rapidly in those deep recessions, increasing the ratio of federal workers.
How much smaller can the federal workforce get? Conservatives would argue that government must get smaller. Especially if Romney takes the Oval office and the Republicans control Congress, it is expected that recent federal employment gains will be clawed back. If the GOP pledge to reduce the federal payroll by 10% is manifest entirely through workforce reduction, and if it is to be limited to just the non-USPS civilian workforce, then we can expect to see as many as 220,000 jobs eliminated in as little as three years. More likely the actual reduction will be smaller and the time period stretched but the effect will be to hang a huge anchor from the government’s historically ever-increasing leased inventory. Further, assuming a private-sector recovery, federal employment under the Republicans will likely dip below 2% of total employment.
This, combined with other tightsizing initiatives to reduce real estate costs, does not bode well for leasing demand. Yet, with the federal inventory (as a proportion of private-sector leased properties) expected to decline we recognize that there will be more capital chasing relatively fewer properties and this will further drive down cap rates for those assets that meet the right physical, locational and mission profile.
If Obama prevails, expect continued spending growth and probably continued real federal employment growth (even if that doesn’t keep pace with the private sector). Though tightsizing and other real estate cost-cutting initiatives may blunt the corresponding inventory expansion we must consider that some growth is likely, if history is any guide.
To see an update of this trend, click here.