REPUBLICANS VS. DEMOCRATS:

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Elfrieda Shanna Phelps
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The upcoming 2016 presidential election has spurred several questions from our clients, such as which political party is better for the economy, particularly here in the Washington metro area, the

1 The upcoming 2016 presidential election has spurred several questions from our clients, such as which political party is better for the economy, particularly here in the Washington metro area, the seat of the federal government. Looking at just the numbers, the economy historically performs better under a Democratic president. However, looking at just the numbers tells only part of the story, as it does not take into account the cause. In addition, broader analysis is needed to explore how the economy performs based on which party controls Congress, as this tells a different story. This report answers these questions by analyzing 17 indicators based on historical annual 1 change during both presidential and congressional terms covering the past 71 years 2, as detailed in the first section of this report. The indicators analyzed include, but are not limited to, gross domestic product, corporate profits, household net worth, and job growth. This paper also investigates other questions raised by our clients, such as if political party influences federal government versus professional/business services job growth and if party affiliation impacts defense versus health procurement spending. Since economic progress effects office demand, this report also investigates performance of net absorption by political party. Following the summary of data findings, this report delves into events that could have impacted the results. Detailing the cause shifts the interpretation of the data. The results are not completely due to policy choices, as events play a notable role and are sometimes beyond the federal government s control as presidents and members of Congress are subjected to the highs and lows of business cycles and global events. The report concludes with an outlook, exploring the potential impact of the 2016 election. SUMMARY OF DATA FINDINGS The majority of indicators analyzed showed the economy historically performed better with a Democratic president. However, when looking at which party controlled Congress, the majority of indicators showed the economy performed better under Republicans. Notably, in most cases the economy performed above the long-term average under total party control, when one party controlled both the presidency and Congress 3. Roughly half of the indicators showed economic performance was below the long-term average when Congress was divided by party. Looking at the data by party control of Congress in addition to the presidency regardless if the opposing party controls the opposite, the results were equally split between Democrats and Republicans. Provided in this section are select graphs, but for more detail see the table on page 5. 1 Annual change was used as each presidential term varied. 2 Start dates vary on select indicators. Please see the table on page 5 for specific dates. 3 For this indicator, both Democrats and Republicans were analyzed together due to limited historical sample. July 2016 Republicans vs. Democrats 1

2 GROSS DOMESTIC PRODUCT (GDP) ANNUAL CHANGE DURING TERM 3.5% 3.0% 2.5% 2.0% 2.9% Note: Since 1945; inflation adjusted. Source: Bureau of Economic Analysis, Transwestern. PAYROLL JOB GROWTH ANNUAL CHANGE DURING TERM 2.5% 2.0% Note: Since Source: Bureau of Labor Statistics, Transwestern. 1.8% DOW JONES INDUSTRIAL AVERAGE A N N U A L C H A N G E D U R I N G T E R M 14% 12% 10% 8% 6% 4% 2% Long -Term 8.1% 0% Note: Since Source: WSJ, Transwestern. CONSUMER SPENDING ANNUAL CHANGE DURING TERM 4.0% 3.5% 3.0% 2.5% 2.0% 3.1% Note: Since 1945; inflation adjusted. Source: Bureau of Economic Analysis, Transwestern. JOB GROWTH BY SECTOR Looking at job growth by sector, both Republican and Democratic presidents have historically reduced, albeit slightly, federal government jobs over the past 71 years. Federal jobs grew when Democrats controlled Congress, compared to sharply declining when Republicans had control. Professional/business services jobs, which has a notable impact to office demand, grew at a faster rate when a Democrat was president, but grew at a faster rate when Republicans controlled Congress. July 2016 Republicans vs. Democrats 2

3 FEDERAL GOVERNMENT JOB GROWTH PROFESSIONAL/BUSINESS JOB GROWTH A N N U A L C H A N G E D U R I N G T E R M % -2.5% -3.0% 0.1% % ANNUAL CHANGE DURING TERM 4.0% 3.5% 3.0% 2.5% 2.0% 3.0% Note: Since 1945, excludes post office. Source: Bureau of Labor Statistics,Transwestern. Note: Since Source: Bureau of Labor Statistics,Transwestern. PROCUREMENT SPENDING BY AGENCY Federal procurement spending feeds government contractors in the Washington metro area, as $70.5 billion, or 17%, of the U.S. total is allocated to the metro area. This is particularly true with defense and health spending, of which $27.8 billion, or 10%, and $7.2 billion, or 38%, of the U.S. total is allocated to the metro area, respectively. For more information on how federal contractors impact the Washington metro area click here for our March 2016 report. With the tightening of the federal budget, our clients naturally ask if one party spends more on defense versus health, as this spending impacts the Northern Virginia office market for defense, where defense contractors are located due to the Pentagon, and Suburban Maryland for health, where health-related contractors are located due to the National Institutes of Health. In the Washington/Baltimore region, Department of Defense (DOD) procurement spending 4 grew at a faster pace under a Republican president and a Republican-controlled Congress, but sharply increased under total party control. Health and Human Services (HHS) spending grew at a faster pace under a Republican president, but at a faster pace when Democrats controlled Congress. DEFENSE PROCUREMENT SPENDING Washington/Baltimore Region HEALTH/HUMAN SERVICES PROCUREMENT SPENDING Washington/Baltimore Region A N N U A L C H A N G E D U R I N G T E R M 12% 10% 8% 6% 4% 2% Long -Term 4.6% 0% A N N U A L C H A N G E D U R I N G T E R M 25% 20% 15% 10% 5% 0% -5% -10% 9.2% Note: Since 1981; inflation adjusted. Source: FPDS.gov, Transwestern. Note: Since 1981; inflation adjusted. Source: FPDS.gov, Transwestern. 4 Federal procurement spending data dates back to 1981 due to data availability. July 2016 Republicans vs. Democrats 3

4 OFFICE DEMAND Since economic performance and procurement spending impacts office demand, what follows is an analysis on net absorption 5 by political party. Washington metro area office demand historically performed better with a Republican president and when Republicans controlled Congress. OFFICE NET ABSORBTION Washington Metro Area A N N U A L AVE R A G E D U R I N G TERM (IN MILLIONS SF) Annual Average = 6.3 Million SF Total Party Control Republican Democrat Republican Control Democrat Control Split Control Note: Since Source: CoStar, Transwestern. POTENTIAL DRIVERS OF THE RESULTS This section focuses on major events and fluctuations in the data that could influence the results discussed in the previous section. Of note, it is impossible to respond to every potential variance due to a plethora of factors that occur in the world economy. What follows is a look at each data point and the major drivers behind the data. The data indicates the economy historically performed better with a Democrat as president, but better with a Republican-controlled Congress. In addition, total party control of both the presidency and Congress performed above the long-term average. This can be partly attributed to the timing of recessions and when each party was in power. Of note, presidents and members of Congress are subjected to the highs and lows of the business cycle, with some of the lows inherited without enough time to take preventive measures. Of the 11.6 years the U.S. was in a recession, as classified by the National Bureau of Economic Research (NBER), only 2.9 years occurred under a Democratic president versus 8.7 years under a Republican president. Comparatively, only 1.1 years of recession occurred under a Republican-controlled Congress versus 8.4 years under Democratic control, and 2.2 years when Congress was divided. Only 3.7 years of recession was experienced under total party control. For more detail see the timeline table on page 7. 5 Office net absorption data dates back to 1970 due to data availability. July 2016 Republicans vs. Democrats 4

5 Indicator - Annual Average Change Since 1945 SUMMARY OF SELECT OF ECONOMIC AND OFFICE MARKET INDICATORS Average 1 Total Party STATE OF ECONOMY WAR/PEACE TIME 3 Control 2 Republican Democrat Republican Democrat Divided Recession 1 Recovery 1 War Time Peace Time UNITED STATES GDP 4 2.9% 3.0% 2.8% 3.0% 3.1% 2.9% 2.6% 3.8% 3.1% 2.6% GDP Per Capita 4 1.7% 1.7% 1.6% 1.7% 1.8% 1.6% 1.7% -0.2% 2.6% 1.9% 1.4% Gross Output 4 2.8% 3.6% 2.4% 3.2% 3.1% 3.0% 4.1% 2.9% 2.6% Dow Jones Industrial Average 8.1% 9.0% 6.8% 9.4% 13.3% 6.2% 8.3% 5.1% 9.5% 5.4% 12.0% Corporate Profits 4 3.2% 4.4% 2.8% 3.6% 6.2% 2.3% 2.8% -5.2% 7.2% 4.0% 2.1% Household Net Worth 4 3.2% 4.5% 2.4% 4.0% 4.9% 2.5% 3.3% -0.2% 4.7% 3.0% 3.4% Consumer Spending 4 3.1% 3.6% 3.0% 3.2% 2.8% 3.2% 2.8% 3.8% 2.9% 3.3% Consumer Sentiment Inflation 3.8% 3.4% 3.9% 3.7% 3.4% 4.0% 3.5% 4.6% 3.4% 3.0% 4.9% Personal Income 4 2.8% 2.9% 2.8% 2.7% 2.5% 2.9% 2.4% 1.3% 3.5% 3.2% 2.1% Federal Deficit - % of GDP 5 2.7% 3.6% 2.4% 3.1% 1.1% 3.0% 4.0% 3.0% 2.6% 2.3% 3.4% Payroll Jobs 1.8% 1.8% 1.4% 2.1% 1.9% 1.8% 1.3% 0.1% 2.6% 1.6% 1.9% Professional/Business Services 3.0% 2.8% 2.4% 3.5% 3.7% 2.8% 2.5% 1.1% 3.9% 2.3% 4.0% Federal Government -0.1% -0.2% -0.1% -2.9% 1.1% -1.2% -0.7% 0.1% 1.4% -2.4% Unemployment 5 5.8% 5.5% 5.9% 5.7% 4.8% 5.7% 7.5% 5.9% 5.8% 5.5% 6.3% Procurement Spending 6 1.4% 4.1% 3.6% -1.6% 3.8% -1.2% 1.8% 3.0% 0.9% 3.3% -0.4% Department of Defense 5.3% 3.2% -2.1% 4.9% -3.4% 1.7% 2.2% 0.6% 3.1% - Health and Human Services 7.6% 8.3% 9.1% 5.7% 10.2% 15.6% -2.7% 7.6% 7.6% 1 4.0% WASHINGTON METRO AREA Procurement Spending 6,7 4.7% 6.5% 6.3% 2.5% 4.1% 5.4% 4.4% 9.7% 3.2% 4.2% 5.1% Department of Defense 4.6% 10.6% 6.9% 5.0% 3.1% 5.6% 11.3% 2.6% 3.0% 6.1% Health and Human Services 9.2% 6.1% 10.3% 7.9% 11.6% 20.1% -3.8% 18.6% 6.5% 14.6% 4.1% Net Absorption (in millions SF) 5, Northern Virginia Suburban Maryland District of Columbia Source: Bureau of Economic Analysis, WSJ, University of Michigan, Bureau of Labor Statistics, FPDS.gov, CoStar, Transwestern. 1 Includes all data, regardless of party affilication. 2 Includes data only when Republicans or Democrats had control of both the presidency and Congress. 3 Major wars only. 4 Inflation adjusted. 5 Annual average during term. 6 Data dating back to Includes data on Washington/Baltimore region. 8 Data dating back to 1970 July 2016 Republicans vs. Democrats 5

6 Roughly half of the indicators showed economic performance below the long-term average when Congress was divided by party. This is less likely due to recessions, as only 2.2 years of recession occurred under divided control. For this data point, it is important to note that Congress was divided only 12 years out of 71 years analyzed. Coupled with the 2.2 years of recession, four of 12 years occurred during 2011 to 2014 when the economy was in a slow economic recovery and market conditions were soft compared to past recovery cycles. Looking at the performance of industry job sectors, federal jobs grew when Democrats controlled Congress. This was likely due to the ramp up of civilian employees in the Department of Defense, particularly during the Korean War in 1951 when defense employees grew by 49.4%. This boosted the overall average growth for a Democratic-controlled Congress. Federal jobs likely declined when Republicans controlled Congress, as the Department of Defense was still shedding civilian jobs following the aftermath of World War II, with a decline of 33.1% in 1947 and the aftermath of the Korean War in 1953 and 1954 with an average decline of 6.1%. The reason behind professional/business services jobs growing at a faster rate under a Democratic president was likely due to select presidents not encountering recessions during their term, such as Johnson, Carter, and Clinton, who averaged a 4.9% growth rate, above the 3% long-term average. Job growth in this sector likely grew at a faster rate when Republicans controlled Congress for the same reason, most of these terms occurred during recovery periods and not recessions. Notably, this sector grew 5.4% between 1995 and 2000 when Republicans controlled Congress and when Clinton was president. When reviewing economic indicators against periods of recession, it is clear the majority indicators rise at a faster pace during recovery periods compared to recessionary periods and therefore impact whatever political party is in power at the time. See the table on page 5 for more detail. SELECT ECONOMIC INDICATORS AND RECESSIONS 15% Gross Domestic Product Job Growth Prof/Bus Services Job Growth Consumer Spending ANNUAL % CHANGE 10% 5% 0% % -10% -15% Note: GDP and Consumer Spending are inflation adjusted; red bars represent recessions. Source: Bureau of Economic Analysis, Bureau of Labor Statistics, Transwestern. July 2016 Republicans vs. Democrats 6

7 How Political Party Influences the Economy and Office Demand Department of Defense procurement spending grew at a faster pace during Republican presidencies due in large part to global events. The majority of this growth occurred during the terms of Ronald Reagan and George W. Bush, as spending increased at a 10.7% and 12.4% rate, respectively, which is well above the 4.6% long-term average. Reagan significantly increased defense spending due to the wars in Iraq and Afghanistan after the 9/11 attack. The same theory can be applied to the spending that occurred when Republicans held Congress and under total party control, as most of this growth, at 12.2%, occurred between 2003 and 2006 due to the wars in Iraq and Afghanistan. Health and Human Services procurement spending grew at a faster pace under a Republican president and a Democratic-controlled Congress. Most of this growth occurred between 1987 and 1992, when George H.W. Bush controlled the White House and Democrats controlled Congress. During this period, procurement spending sharply increased for medical programs. Specifically, procurement spending for the Centers for Medicare and Medicaid Services and Centers for Abuse and Mental Health Services Administration increased from a combined $21.5 million in 1987 to $127.2 million in Government health care programs experience rapid growth due in part to several laws such as the Omnibus Budget Reconciliation Act of 1986, the Family Support Act of 1988, and the Omnibus Budget Reconciliation Act of These laws further expanded Medicaid eligibility to pregnant women, infants, and children, provided emergency treatment to illegal immigrants who would otherwise qualify for Medicaid, and provided transitional assistance for families losing assistance under the Aid to Families with Dependent Children program, according to the Centers for Medicare and Medicaid Services. This in turn increased procurement funding to government contractors to help service this need. PARTY POWER AND MAJOR EVENT TIMELINE YEAR STATE OF ECONOMY HARRY TRUMAN DWIGHT EISENHOWER 1961 JOHN F KENNEDY LYNDON B. JOHNSON RICHARD NIXON 1975 GERALD 1976 FORD JIMMY 1979 CARTER RONALD 1985 REAGAN GEORGE H.W BUSH BILL CLINTON GEORGE W BUSH BARACK OBAMA WAR/PEACE TIME WW II KOREA VIETNAM IRAQ (03-11) & AFGAN. (01- ) KEY: Republican Republican Recession War Time Democrat Democrat Recovery Peace Time Divided GULF July 2016 Republicans vs. Democrats 7

8 Office demand in the Washington metro area was, on average, higher with a Republican president. This was likely due to the office boom of the 1980s. The boom occurred under Ronald Reagan and into George H.W. Bush s terms where net absorption averaged 9.9 million SF per year in the metro area, well above the longterm average of 6.3 million SF. Under Reagan s term, professional/business services jobs, primary office-users, rose at a notable pace, at 7.3% in the metro area during his term, compared to the long-term average of 4.2%. This was due in part to federal procurement spending on the Cold War mentioned earlier. Notably during the height of the boom during the mid-1980s, net absorption averaged 11.7 million SF per year, which pushed the rate for Republican presidents ahead of Democrats. It is important to note that after this boom, there was a downturn as the vacancy rate increased to 15% in the Washington metro area due to overbuilding, the highest vacancy rate experienced to date 6. Further crippling occurred with the Savings and Loan Crisis of the late 1980s. In addition, office returns took a hit in the early 1990s, declining on average 1.3%, compared to rising 13.3% during the height of the office boom, according to NCREIF. Net absorption under a Republican-controlled Congress slightly outpaced a Democratic-controlled Congress during 1995 to 2000, under Bill Clinton s presidency, and during 2003 to 2006, under George W. Bush s term. During this period, net absorption averaged 7.6 million SF in the Washington metro area, outpacing the longterm average of 6.3 million SF. Both time periods were not faced with recession and specifically during 2003 to 2006 George W. Bush fueled procurement spending, which in turn boosted office demand due to the wars in Iraq and Afghanistan following 9/11. In addition, net absorption during the current recovery period has been soft in the Washington metro area, as federal sequestration reduced procurement spending and caused federal contractors to shed office space. Since 2009, net absorption has averaged only 1.1 million SF. OUTLOOK The 2016 election will continue to heat up through early November. The key question surrounding the upcoming election is, Which party is better at growing the economy? Based on the findings in this report, we do not believe a new president will drastically alter the national or local economy, unless a notable event like the ones discussed previously occurs. In addition, the newcomer will be inheriting a sizable deficit, which will continue to limit federal spending under the new president and Congress. Congress could shift power as well, out of Republican control. The Senate has a chance to turn to Democratic power, but it is unlikely the House will turn to the Democrats due to geographical advantages. Therefore, it is likely the new president will either have to work with a Republican-controlled Congress or a divided Congress. In addition, if Trump is elected with a Republican-controlled Congress, we do not expect major changes, as the above-average performance of total party control was likely due to lack of recessions during the time in power. This is not to say that political policy does not influence the economy, as fiscal policy comes into play particularly during recessions. During the most recent recession, a handful of policies were initiated to help pull the out of recession, such as the American Recovery and Reinvestment Act of 2009 and the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of During the early 1980s recessions, the Economic Tax Recovery Act of 1981 was implemented, and later amended, to cut personal 6 Dating back to July 2016 Republicans vs. Democrats 8

9 and business taxes to in turn stimulate the economy, which also fueled investment in the office market. It is important to note there is a lag effect from when a policy is enacted and when results might appear in the economy. This lag could be anywhere from 12 to 24 months. Once the policy starts to take effect after this lag, it becomes difficult to determine if the policy was effective in improving the economy or if another factor was at play. What does this all mean for the office market? We expect office demand to remain steady in the near-term as office-using jobs continue to grow. However, there are competing forces at play. Growth in office-using jobs does not always translate to office demand, as densification (tenants taking less SF per worker) and consolidations have and will continue to impact demand in the period ahead. CONTACT Elizabeth Norton Managing Research Director Mid-Atlantic elizabeth.norton@transwestern.com Although the information contained herein is based on sources which Transwestern (TW) believe to be reliable, TW makes no representation or warranty that such information is accurate or complete. All prices, yields, analyses, computations, and opinions expressed are subject to change without notice. Under no circumstances should any such information be considered representations or warranties of TW of any kind. Any such information may be based on assumptions which may or may not be accurate, and any such assumption may differ from actual results. This report should not be considered investment advice. July 2016 Republicans vs. Democrats 9

DEMOCRATS AND ECONOMIC GROWTH

DEMOCRATS AND ECONOMIC GROWTH This data is compiled by offsetting a President s Administration by a year to account for the fact that the Federal budget for any given fiscal year is drafted and passed