In his reporter’s notebook several months ago, NBC4 reporter and dean of the local press corps, Tom Sherwood, wrote that the District’s economy is “firing on all cylinders.” Unfortunately, that statement is somewhat unsupported by the facts and the reality is somewhat more complicated.

All the shiny new restaurants and the plethora of construction cranes have distracted us from what are some fundamental problems with the DC economy.

One serious impediment to taking action is that the economic forces at work in the District have created the illusion of broad-based prosperity, which has bred a fair amount of complacency. The sad truth is thousands and thousands of District residents have not benefited at all from the economic boom of the last 15 years. This reality is reflected in, among other things, a 39% poverty rate for African-Americans living in the District.

Here’s a snapshot of some of the economic and demographic factors driving the District’s economy:

  1. Population — The District’s’ population has grown from 601,767 in 2010 to 646,449 in 2013, which represents an increase of almost 15,000 new residents per year.  There is no doubt that is good news, but according to the Office of the Chief Financial Officer, the boom is expected to decrease markedly from 13,400 new residents annually to 5,400 by 2017. Why is this the case? The CFO points to a slowdown in the construction of new housing units and a slowdown in job growth. The spiraling cost of housing, driven by the lack of supply, is another deterrent to moving to the District that grows every day.
  2. Population by Age — With a median age of 33.7 years, the District is younger than many other states, but the fastest growing segment of its population is residents over 60. As this group continues to age, they’ll put a strain on the healthcare system. Spending more money on health and less on things like innovation will be a drag on growth.
  3. Economic Growth –After growing at a rate of about 2.2% annually for a decade, the growth of the District’s economy slowed to the point that it tipped into what is technically a recession in 2013. The economy declined from $105.99 to $105.47 billion. The rate of growth of the District’s economy needs to accelerate significantly to give us a chance to resolve the broader issues affecting our economy.
  4. Wages – Wage growth in the District has been flat to negative in real terms in recent years for anyone lacking a college degree. Only an economy that grows considerably faster will create the number and kinds of jobs that are necessary to take the slack out of the labor market and put upward pressure on wages.
  5. Diversification – The District derives almost 35% of its economy from federal and local government spending. The national average for the 50 states is 11.5%. Reorienting our economy away from government spending — through the growth of new technologies like additive manufacturing — is a strategic imperative. The federal budget will be under pressure for at least the next generation. The District cannot expect the federal government to continue to carrry us through difficult times.
  6. Unemployment – The headline unemployment rate has decreased slowly but steadily since 2010, when it reached 11.5%. It currently sits at 7.4%, but that number is not representative of the true unemployment picture in the District. The U6 unemployment rate (a broader measure of unemployment that includes people working part-time involuntarily and those who’ve given up looking for a job altogether) is 13.9%. That’s 82% higher that the headline unemployment rate.  When you extrapolate that figure by wards, you arrive at a true unemployment  picture east of the Anacostia river, in the 30% range. The only real chance the District has to push the U6 rate down to a more reasonable number is through faster growth and a vastly improved job training system. If you’re interested in learning more about the true unemployment picture in the District, see this post.
  7. Commercial Real Estate – The District raises the largest percentage of its local tax revenue from commercial real estate. That market is slowing as described in this report from the Downtown Business Improvement District 2013 State of Downtown – All Sections. Among other things, it projects the District will need 7 million less square feet of office space than it has today. This will have wide ranging implications if we are not able to successfully convert commercial space into residential.
  8. Education – Decades of poor educational outcomes and the slow pace of reform also act as a drag on economic growth. When DC residents are ready to enter the workforce, but don’t have the basic skills required to perform their duties, it slows hiring by reducing the pool of available workers. Poor education also lowers productivity gains and productivity is highly correlated with economic growth.
  9. Housing Affordability – Housing in the District has become increasingly less affordable. Businesses that might want to move here sometimes don’t because they want their employees to be close by and if most of their employees can’t afford District housing, they less likely to be based here. Only a significant increase in the supply of housing will fix this issue. For more information on the effects of housing unaffordability, click here.