By Paul Kiernan and Rachel Louise Ensign | Photographs by Valerie Plesch for WSJ

WASHINGTON -- President Trump's federal government shake-up is taking a toll on the U.S. capital's economy.

Economists believe government layoffs and looming budget cuts will push the Washington, D.C., metro area into a recession, challenging its reputation for economic resilience. Cracks are already forming as federal workers pull back on spending, hotels and restaurants struggle and parents cancel plans for their kids' summer camps.

"We see this as potentially catastrophic for the region," said Julie Coons, president of the Northern Virginia Chamber of Commerce.

Washington risks being recast in the mold of another company town that has historically endured tougher economic hits, Coons said, adding, "This is our Detroit moment."

The nation's seventh-largest metro area -- which comprises the capital, northern Virginia and parts of Maryland -- has long enjoyed a steady flow of federal tax receipts and Treasury borrowing that buffered it from gyrations in the business cycle. Greater Washington, D.C., has had lower unemployment than the rest of the country every month since at least 1990, when the Labor Department's current data series began.

In the District of Columbia proper, the layoff rate has been below the national average for 281 of the past 290 months.

The Covid pandemic hurt, emptying office buildings and shrinking foot traffic, but city officials hoped the Trump administration would turn things around by ordering federal workers back to the office five days a week. They didn't fully anticipate that Elon Musk's Department of Government Efficiency would so quickly and broadly take aim at the local workforce.

In Arlington's Rosslyn neighborhood, bookings at the Residence Inn are 10% to 15% below target for the coming months, according to general manager Flavia Sampaio, who said local hotels rely heavily on business from government agencies. Across the Potomac River in D.C., Bluebird Sky Yoga co-owner Kristine Erickson has seen a slowdown in people seeking yearlong memberships.

"A lot of times they'll say, 'My spouse or I were just let go from jobs and we're cutting down on extra expenses and that means yoga,'" Erickson said.

Sales at Cork Wine Bar & Market, a restaurant on a bustling stretch of 14th Street, fell about 15% to 20% in February compared with the same month last year, said co-owner Diane Gross. March sales were helped by a "tariff sale" of bottles of wine but still ended down around 10%.

"Eating out is the first thing to go. We're really starting to see that, " Gross said.

The federal government employs around 17% of full-time workers in the Washington metro area, or around 400,000 people. An additional 500,000 or so are employed in "professional, scientific and technical services," a category that includes government contractors and consultants at firms such as Booz Allen Hamilton, Deloitte and Ernst & Young.

Nationally, officials have said around 75,000 government employees took a voluntary buyout in the early days of the Trump administration. Tens of thousands more federal workers have been laid off -- some were at least temporarily reinstated by court orders but are now in legal limbo -- and agencies are planning for deeper cuts in the coming months.

The Trump administration has also canceled contracts with vendors, consultants and grant recipients, causing additional layoffs in the Washington metro area. Deloitte has begun an unspecified number of layoffs; The Wall Street Journal reported in early April that the firm was planning to reduce its ranks of consulting employees.

Enrico Moretti, an economist at the University of California, Berkeley, said each federal job in the capital region likely creates 1.6 additional jobs in the local economy over a decade, an effect that would be reversed in the event of job cuts.

Oxford Economics projects gross domestic product in the Washington, D.C., metro area will fall 0.5% over the course of this year. This is the second-worst projected performance for any of the 50 largest U.S. metro areas after New Orleans, where tariffs are a significant risk, said Barbara Denham, lead economist for cities and regions.

The DOGE hit could be especially intense within the district's boundaries. Glen Lee, D.C.'s chief financial officer, estimated in late February that federal jobs there will fall by 40,000, or 21%, through the 2029 fiscal year. He slashed his prior forecast for D.C.'s economic output at the end of the 2028 fiscal year by 6%.

The Edlavitch Jewish Community Center of Washington, D.C., is used to its annual summer camp being in such high demand that parents sit at their computers refreshing the webpage on enrollment day. "It's like rock-concert tickets," said Jesse Bordwin, the center's chief experience officer. "As long as anyone remembers, we've had a wait list."

This year, dozens of families either declined to enroll or canceled before the deposit lockup in early February. Center staff reached out to understand why, and the parents of 24 campers cited either layoffs or financial uncertainty related to DOGE. Bordwin expects the camp to be at 70% capacity this summer, "which is just unheard of for us."

Despite these warning signs, the regional economy is showing some resilience. Metro ridership, office occupancy and foot traffic in downtown Washington have picked up in recent months, after Trump's return-to-office orders. Data from Zillow suggest rents in D.C. continued rising in March, outpacing the national average. Bank of America credit- and debit-card data show a drop in local spending in February but a rebound in March.

Sandra Lin, who owns a sandwich and ice-cream shop in the food court at the massive Ronald Reagan federal building, said business is up as some customers return for the first time in five years.

Still, unemployment claims in the area are starting to tick up. D.C. officials are increasingly worried about having to slash about $1.1 billion from the city's roughly $21 billion budget this year after the House of Representatives went on recess earlier this month without correcting an apparent mistake in a government-funding bill that would force the cuts.

If the funding isn't restored soon, the local government will have to furlough workers and suspend services, D.C. council member Christina Henderson said.

Meanwhile, laid-off workers, or those worried about their jobs, are cutting expenses to the bone.

Michael Matheke-Fischer, a former USAID contractor specializing in global health, was laid off in January when Musk abruptly dismantled the agency. His wife, Nandini Pillai, also worked in global health for a USAID grant recipient and was furloughed by her employer around the same time.

The family of four has cut their nanny's hours from 40 a week to 10 or 12, no longer orders in for dinner, is driving as little as possible and is eating less meat, Matheke-Fischer said. They also canceled plans to send their children to day camp this summer. Matheke-Fischer, 43 years old, expects to be able to cover mortgage and basic expenses for a few months but is worried about what comes next.

"We've gone from a double-income family to a no-income family," he said. "I lived in India for a long time and my wife is of Indian descent, so thankfully, we know what to do with vegetables."

Victor Udoewa and his wife, Bianca Flokstra, have opted to continue with cost-saving measures they adopted when Udoewa was laid off from his Centers for Disease Control and Prevention job in February, even though he was reinstated in March. This includes cutting back on an after-school program for their three children that cost a combined $1,600 each month.

They are worried Udoewa could be laid off again at any time. "We're trying to save as much as we can," said Flokstra, a lactation consultant.

Write to Paul Kiernan at paul.kiernan@wsj.com and Rachel Louise Ensign at Rachel.Ensign@wsj.com

(END) Dow Jones Newswires

April 19, 2025 05:30 ET (09:30 GMT)

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