D. C. Area Economy in a Holding Pattern

Consider these strains on the Washington area economy in the past 19 months:

Terrorists piloted an airliner into the Pentagon; someone mailed anthrax to Capitol Hill; federal officials warned of possible imminent terrorist attacks; big local employers WorldCom Inc. and Arthur Andersen LLP laid off thousands of workers amid accounting scandals; globalization protesters tried to paralyze downtown Washington; snipers picked off more than a dozen people in the suburbs; federal officials warned of possible terrorist attacks again; a blizzard shut down the region for days; a guy on a John Deere tractor brought downtown traffic to a standstill for 48 hours; and, last week, the nation invaded Iraq.

But the economy is growing anyway.

Late last week, while troops sped across the Iraqi desert, the Labor Department issued revised data that show the Washington area had a net gain of 9,000 jobs in 2002, contrary to earlier estimates of big job losses and shrinking employment almost everywhere else in the country.

While the job numbers are good news, economists and local executives say that all the disruptions to business as usual have created a business paradox. Local firms are persevering, and many are eking out profits. But they are utterly unwilling to expand: Few are adding staff in significant numbers, buying new equipment or taking on more real estate. And much of that reluctance is attributable to the string of disruptive events that culminated with the onset of war last week.

"We have a lot of people who say they really need to do something with their marketing or strategy but can't pull the trigger yet," said Jim Wolfe, chief executive of the marketing firm J Street Consulting in Reston, which has had steady business but been unable to grow in the past six months. "Businesses have been holding up their spending decisions and sitting on their hands in hiring decisions."

Thus, by many measures, the local economy looks to be in good shape: The area's unemployment rate was 3.1 percent in December, among the lowest of major cities. Bankers report that fewer business loans are delinquent. But to firms trying to increase sales and people who are looking for jobs, economic conditions seem decidedly inhospitable. Those conditions will improve only after businesses regain their confidence, something that depends in large part on how long and disruptive the war with Iraq turns out to be.

"How do you expand when everyone's asking you how you will evacuate your employees and whether you have a safe place established for them?" said Kathleen W. Carr, chief executive of Adams National Bank in the District.

Besides general worries, some businesses report dropping sales tied directly to the war in Iraq, particularly those in the tourism and retail industries, both areas of high employment in the Washington area.

"We've taken a lot of cancellations in the last few weeks from school groups," said Mike Dickens, president of Hospitality Partners, which owns and operates several local hotels. He said that individual travelers seem to be continuing to come.

Business has been nearly dead lately at Smithsonian Journeys, an unit of the museum that helps people line up educational trips around the world. "Some days we get more cancellations than bookings," spokeswoman Christine Cimino said.

Retailers report mostly empty stores in recent days, in what some analysts call the "CNN Effect," named for people's tendency to hole up and watch the news during times of crisis. But if past conflicts are a guide, consumers will return to stores within a week or two, even buying enough goods to help make up for the days of lost sales.

"I hear almost a sense of relief that it has started," said Art Eisenstein, owner of Time Piece Jewelers in Bowie, adding that the anticipation of war had already made customers antsy.

The more significant impact of the war on the region's economy, then, probably involves not the handful of businesses directly affected, but the halting of new investment that could help the economy grow.

In recent weeks, for example, lenders have tightened their standards for underwriting purchases of commercial real estate because of the difficulty in measuring the risk to real estate markets in the months after the war, Richmond real estate investment banker John B. Levy said.

The same is true of local businesses broadly, say those who deal with them.

"Businesses want to see more forward momentum in the economy; they want to make sure that they're stepping on a conveyor belt that will move them up, not down," said William Couper, president of Bank of America Corp. in the Greater Washington area. As a result, demand remains soft for business loans, which is the fuel of much new business investment and, by extension, the economy as a whole.

"People are not in terrible shape," Couper said. "But they're being very cautious to avoid taking a step that might put them in a tougher situation."

Less clear is what will happen once the war is over. Underlying factors unrelated to world politics have kept economic conditions soft for over two years, with an overcapacity of office space and airplanes, for example. And consumers, who have kept the economy afloat by spending, may be tapped out.

Some economists argue that once the war is over, assuming no other unexpected shocks, businesses are poised to resume investing.

"What's nice is the reasons businesses have been waiting on spending have been non-economic," said Anirban Basu, chief executive of economic consultancy Optimal Solutions Group in Baltimore. "They have been waiting to invest and expand capacity because of geopolitical reasons, accounting scandals and things that are not necessarily a function of the underlying economy." But even if the weakness remains, job numbers increasingly suggest that in Washington, where political crisis can mean economic gain is weathering the storm. The region added 42,900 jobs in the 12 months that ended in January, according to a preliminary release of data last week by the Labor Department, although some economists think the data will be revised downward. About a quarter of that gain was in government jobs, and anecdotal evidence suggests much more was in government contracting and the like.

"Businesses that closed offices because the economy was down are going to open back up. Think of all the masks, uniforms and munitions that are going to be used," said Legusta Floyd Jr., senior operations manager of Centennial One, a commercial cleaning company in Landover that is counting on such activity to create more demand for its janitorial services.

But for now, many local firms are spending their days watching the news, and hoping.

"We're holding back on our expenses because of the war," said John Emery, president of Interstate Hotels & Resorts Inc., a Washington-based hotel management company that is now filling only half its empty positions. "Once the war happens and it's over, you're just dealing with a recession. Having one of the two big issues cleared up is going to be huge for us."

Staff writers Dana Hedgpeth, Amy Joyce and Krissah Williams contributed to this report.

© 2003 The Washington Post Company