Washington, DC is synonymous with the federal government, and often, the size of its workforce is the measure of its impact on the District’s economy. However, as important as the people working for the government are to its economy, federal procurement spending – the act of the government buying goods and services from private companies – might be a more significant economic engine for the District than the federal workforce. Here's why:
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Bigger Multiplier Effect: When the government hires someone, that person spends their salary locally, boosting restaurants, shops, and landlords. Procurement spending, however, has an even larger ripple effect. The government contracts with a local company, which hires employees, buys supplies, etc. This creates a chain reaction of economic activity that can be much larger.
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Industry Diversity: Procurement spending stimulates economic activity across various industries, including IT, consulting, construction, and research, thus strengthening the resiliency of the D.C. economy.
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Local Hiring: While some federal contractors are large, national firms, many are smaller, local businesses. Procurement spending can act as a targeted investment, fostering the growth of D.C.'s unique business ecosystem.
Federal procurement spending in DC rose dramatically over the last three decades
Federal Procurement Spending: FY 1981-2023, $ billions
Source: US Census, Consolidated Federal Funds Report and USAspending.gov
Note: Y2K = Year 2000 software bug that threatened many critical systems when the year changed from 1999 to 2000; DHS = Department of Homeland Security; ARRA = American Recovery and Reinvestment Act; ACA = Affordable Care Act; CARES = Coronavirus Aid, Relief, and Economic Security; ARPA = American Rescue Plan Act
Chart 1 shows that federal procurement spending rose from $9.3 billion (in today’s dollars) in fiscal year 1981 to $33.8 billion in fiscal year 2023, an increase of more than three and a half times. The chart shows how changes in federal budget priorities, increased reliance on IT, and more outsourcing for services led to growth in procurement spending over the period. Federal procurement spending remained relatively stagnant for most of the two decades from 1980 to 2000. There was, however, a notable increase in federal procurement spending in the early 1990s during the "Reinventing Government" era of the Clinton Administration. This period saw a reduction in the federal workforce in favor of increased use of contracted services. After that initial jump, federal procurement spending remained flat for most of the 1990s.
In the late 1990s, federal procurement spending grew rapidly as the government contracted IT services to address the "Y2K bug" in federal government software. After the 9/11 terrorist attacks in 2001, federal contracting ramped up further to build the national security apparatus to fight the "War on Terror." The establishment of the Department of Homeland Security (DHS) in 2002 also led to increased contracting. Procurement spending decreased two successive years after the initial investments to create the necessary IT infrastructure to support the DHS and anti-terrorism efforts. Growth resumed as IT and related contracting became increasingly important for national security and the delivery of government services more broadly.
Procurement spending increased sharply again in 2009 with the enactment of the American Recovery and Reinvestment Act (ARRA), a massive fiscal stimulus enacted at the beginning of the Obama Administration. The fiscal stimulus was intended to boost the economy after the collapse of Lehman Brothers, which triggered a financial crisis and the Great Recession. There was another increase in procurement spending in 2012 to create the federal healthcare exchange as part of the Affordable Care Act (ACA). After these one-time spending increases, procurement spending fell. It decreased further with the implementation of the 2013 budget sequestration, automatic spending cuts that were a part of the budget agreement between the Obama Administration and the Republican House of Representatives. Steady growth resumed in the years following the budget sequestration.
Federal procurement spending rose sharply again after the unprecedented fiscal stimulus of the Coronavirus Aid, Relief, and Economic Security (CARES) Act (2020) and the American Rescue Plan Act (2021). These measures were enacted to relieve the financial burdens of households and businesses and prevent the economy from collapsing during the COVID-19 pandemic. It also included provisions for capital investments (personal protective equipment (PPE), testing kits, etc.). Procurement spending has decreased only slightly since these measures were implemented, partly because many programs were multi-year initiatives.
Federal procurement spending is an engine of job growth
Federal procurement spending in DC by sector: FY 2023 v. FY 2001
Percent of total
Source: USAspending.gov
As mentioned earlier, federal procurement spending in the District stimulates economic activity. Chart 2 shows federal procurement spending in DC by industry sectors that receive procurement dollars. The professional and business services sector receives, by far, the largest share of federal procurement spending, and its share increased from 56 percent to 80 percent between FY 2001 and FY 2023. Subsectors of professional and business services include computer systems design and related services, as well as technical consulting services. With the federal government's increased reliance on IT contracting to strengthen the national security apparatus after the 9/11 attacks and the modernization of federal IT systems in recent years, the rise in procurement spending share for the sector comes as no surprise. Businesses in the IT sector that secure federal contracts often need to expand their workforce and pay competitive wages. This boosts employment in the District and stimulates further economic activity, creating what economists call a multiplier effect.
Chart 3 compares monthly employment in the professional and business services sector to total nonfarm employment and the federal government from 2001 to 2024. Over this period, employment in the professional and business services sector grew by 27 percent, compared to 18 percent for total employment and 4 percent for the federal government. The high concentration of the professional and business services sector in federal procurement spending has led to rapid growth in employment within the sector, which is in line with the significant increase in federal procurement spending over the same period. Before the pandemic, the professional and business services sector experienced employment growth that was in line with the overall employment growth. However, since the pandemic, the sector has been growing at a faster rate than total employment. This is primarily due to slower growth or decline in employment in other sectors, particularly the federal sector, which accounts for about a quarter of total employment.
Employment in DC: January 2001 to August 2024
(January 2001 = 100)
Source: U.S. Bureau of Labor Statistics via FRED.
Conclusions
Federal procurement spending in DC has trended upward since the late 1990s, only falling intermittently following one-time initiatives. During this period, the federal government grew steadily. The creation of the Department of Homeland Security (DHS) and the enactment of the Affordable Care Act (ACA) vastly expanded the government. Along with this growth in the government, there was a strengthening of the IT infrastructure following the September 11 terrorist attacks, an increased reliance on IT for service delivery, often involving outsourcing, and a greater willingness to spend heavily to combat recessions. The resulting increase in procurement spending in DC boosted job growth. In particular, the professional and business services sector, which receives a substantial share of federal procurement spending, has experienced growth in line with the rapid increase in federal procurement spending. The United States is entering a new era of industrial policy and focusing on upgrading its physical infrastructure, as evidenced in the CHIPS and Science Act (2022) and the Inflation Reduction Act (2022). As a result, federal procurement spending in DC is likely to continue growing, which will benefit the District. This is not to understate the importance of federal employment in the District. Federal jobs continue to play a crucial role in the District's economy by providing a stable source of income for many residents and contributing to the city's cultural and social fabric. However, recognizing the significant impact of federal procurement spending on the economy allows us to better understand and gauge the federal government's influence on the District's economy.
What is this data?
USA Spending is a comprehensive database that provides detailed information about federal government spending in the United States. It offers transparency into how taxpayer dollars are allocated, making it a valuable resource for researchers, journalists, and citizens alike.
Key features of the USA Spending database include:
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Federal awards data: Information on contracts, grants, loans, and other forms of financial assistance provided by the federal government.
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Geographic breakdown: Data can be analyzed by state, congressional district, county, city, and zip code.
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Budget function and agency analysis: Insights into spending patterns across different government departments and areas of expenditure.
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Object class information: Details on specific types of goods and services purchased by the government.
By providing access to this data, USA Spending helps to promote accountability and informed decision-making regarding federal spending.