Impact of Federal Gov Shrinking

The Real Estate Espresso Podcast

Impact of Federal Gov Shrinking

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Impact of Federal Government Shrinking

Welcome to the Real Estate Espresso Podcast, your morning shot at what’s new in the world of real estate investing. I’m your host, Victor Menasce.

On today’s show, we’re looking at the impact of the changes announced in Washington over the last two weeks. The offer to 2.2 million Federal employees who choose to resign in exchange for an eight-month severance is making headlines. There’s a court injunction to extend the deadline to allow more people to join the program. 40,000 people had signed up as of Thursday last week, and we’ll see ultimately how many people take up the offer.

I’ve been trying to think a couple of moves ahead of the superficial headlines. One thing I’ve learned about Donald Trump is that the real motive is rarely the opening statement. The changes that are being proposed to save taxpayer dollars are focused for the moment on full-time employees. But estimating the exact number of people in the US Federal Government is challenging due to the decentralized nature of contracting, and of course, variations in reporting.

There’ve been several studies providing insights into the scale of contractor employment. In 2015, a study by Paul Leicht showed the federal workforce at about 9.1 million people at the time. That was made up of 2 million federal employees, 3.7 million contractors, 1.6 million grant employees, 1.3 million active-duty military personnel, and 492,000 Postal Service workers. In the breakdown of contracts, employees represented about 40% of the total federal workforce.

In 2017, the Project on Government Oversight highlighted 4 out of 10 individuals working in the U.S. Government were private contractors, and that aligned with the 2015 findings. Now those figures provide a snapshot from the mid-2010s. It’s important to note the number of federal contractors does fluctuate based on a lot of different factors—policy changes, budget allocations, program needs, and so on.

In FY 2023, the federal government committed $759 billion to contracts—an increase from the previous years. It includes a potential rise in contractor engagement—Maybe there are 4 million government contractors. Maybe more—we don’t know. Given these dynamics, obtaining a precise and current count of federal contractors is complex. But it is evident that contractors constitute a significant portion of the workforce and significantly outnumber direct federal employees.

I’ve read through US federal contractors before. They have a lot of provisions that vastly favor the government’s unilateral ability to alter the contract at their discretion for a wide variety of reasons. What that means is that most government contracts offer very little real security for government contractors. What are the chances that the president will aim to shrink the size, targeting full-time employees and leave a large number of employees untouched? That seems unlikely.

In the short term, there will almost certainly be large-scale terminations of contracts in order to reduce the size of government. Contract terminations are unlikely to come with a generous eight-month termination clause, the same that is being offered to full-time employees. Those generous severance terms that will leave public service voluntarily will have eight months to find another job. Maybe they’ll scale back their spending to stretch out that eight months to ten or twelve, on the off chance that it takes them a long time to find a new job.

But what that means is that economic models used by the Fed to examine the relationship between price stability and employment should be thrown out the window. The Fed has relied on the so-called Phillips Curve to describe the relationship between income growth and demand in the economy. These economic models are developed to describe what happens in a normal free market. And I can promise you those economic models don’t have an Elon Musk variable in their equations.

The establishment survey will not be tracking the termination of contractors, but it will show up in the household survey. In fact, paradoxically, those people who were self-employed contractors by the US government may now have to go out and find a job. It’s possible we see a spike in hiring, assuming, of course, the job openings exist on the heels of those terminations. The outcome is hard to predict.

If the reported $100 billion of waste and corruption in Medicare and Medicaid in that segment of the budget are true, how do you model taking $100 billion of fraud out of the economy? Do the economic models actually show how money that was fraudulently obtained stimulates the economy? Do these black-market funds just end up in a secret offshore bank account? What percentage of the fraud contributes to the productive economy? After all, $100 billion is not a small sum. It is not a rounding error on the total economic activity within the nation.

A systematic line-by-line examination of the government spending seems like a daunting task after all those billions in transactions. You have to remember Elon is a tech guy and the team of folks he’s brought to the table are also software people who are highly skilled in machine learning. You can get through a lot of data in a short time when you throw an AI algorithm at the problem. It’s not that hard to search through the records looking to correlate payments to other records. Is the recipient deceased, and if so where is all the money going?

The big question for real estate investors is: If you pull half a trillion or a trillion out of the economy, how will the real estate be affected? Which real estate? Not too hard to imagine that property values in Washington might be affected, but what about the rest of the country? Will the impact be confined to office space? What about rental housing, maybe single-family homes, retail? What will be the impact?

See, my definition of risk is any change that’s not already in your plan. And it’s not whether something happens or not, that’s the problem. The question is whether you took it into account in your plan. Say, if your plan calls for 10 days of loss to illness in a given year, only illness in excess of those 10 days would be a problem. Applying that thinking to vacancies, collection of accounts receivable, rates of bankruptcies, tenant defaults, and so on. There’s no normal in the current environment, and your financial models should be scrutinized to determine the level of risk in your existing models.

As you think about that, have an awesome rest of your day. Go make some great things happen. We’ll talk to you again tomorrow.

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