MD’s volatility premium: Why output held while 49,300 jobs vanished

Maryland’s economy did two contradictory things last year. Its real gross domestic product grew, barely, rising 0.7% to a record of roughly $436 billion, one of the slowest rates in the country but growth all the same. Over the same 12 months, from January 2025 to January 2026, the state lost 49,300 jobs, of which 31,100 were federal.

Output held while the labor market took the blow. That divergence is not a paradox, and it is not bad luck. It is the signature of a concentrated economy meeting a shock, and in the language of portfolio analysis it carries a name: a volatility premium.

Read part one of this series: Understanding what unaffordability means to MD residents

The anatomy of a concentrated economy

Maryland is, in the plainest terms, long one position. Federal spending ran about 30% of GDP before the 2025 cuts, roughly $150 billion against an economy just over $500 billion. Around 229,000 residents held civilian federal jobs, close to 7% of resident employment.

The exposure is more concentrated than even that share suggests. The Department of Defense and the health agencies clustered around Bethesda and Silver Spring anchor the base, with the Department of Health and Human Services alone spending about $30 billion in the state in 2024, and two counties, Montgomery and Prince George’s, account for roughly 40% of all federal spending in Maryland. An investor holding a single asset at that weight would be told, correctly, that the portfolio is undiversified. A state economy built the same way carries the same exposure, whatever the asset’s reputation for stability.

Read part two of this series: Can MD tell if build our future grants are actually creating jobs?

What the 49,300 number actually says

Concentration pays in calm years and bills in bad ones. The 31,100 federal jobs lost were the direct hit; the balance came through the channels a large federal payroll feeds, the contractors, grant recipients and local businesses whose revenue traces back to a federal paycheck. A federal position in Maryland is also a high-wage one, so its removal subtracts more spending per job than the average layoff. The figure is not merely large. It is heavy, because of what each of those jobs carried into the rest of the economy.

Why GDP held while jobs fell

Here the methodology matters, because output and employment measure different things. GDP counts the value of what the state produced; payroll counts the people producing it. In a year when federal activity contracted but private output and prices held, the two series can move apart, and they did.

The deeper reason is the one portfolio math describes. A concentrated holding shows low variance right up until the concentrated risk materializes, and then it delivers a loss out of proportion to the calm that preceded it. Maryland spent years being told its federal anchor was a source of stability. The anchor held until it was cut, and the labor market recorded the cut that GDP smoothed over. That gap between the two series is the premium, and in 2025 it was paid in jobs.

The diversification math for the next 24 months

Reducing the premium is arithmetic before it is politics. If federal employment keeps contracting at even a fraction of the 2025 pace, the state must generate non-federal jobs fast enough to cover the runoff before it can grow net payroll at all. Some of that is already underway, with private-sector hiring led by health care adding 10,100 positions in the same January that federal rolls fell again.

The obstacle is scale, not direction. Replacing a dependency worth 30% of GDP is not a one-cycle project, and the sectors most often named as the future, quantum and cybersecurity and biotechnology, sit on smaller bases that must compound at high rates for years to move a number this large. The honest projection for the next 24 months is slow net progress rather than a clean handoff, and a budget that plans for the faster version is planning on optimism.

Does diversification move the number?

This series asks one question of every Maryland policy: Does it move the number it claims to move? Applied to diversification, the number is not the count of initiatives announced or the dollars appropriated to them. It is the federal share of the state’s output and employment, measured over time and expected to fall.

A concentration ratio is easy to publish and hard to game: Total federal earnings over total state earnings, reported annually and trending down if the strategy is working. Without that figure in public view, diversification is a direction rather than a result, and the state will not know whether the premium is shrinking or merely waiting for the next shock to arrive.

The bottom line

A concentrated economy is not a doomed one. It is a portfolio with a known risk that has now priced itself in full, and the remedy is the one any analyst would prescribe: reduce the weight of the single position, and measure that weight as you go. Maryland’s output survived 2025 and its workers did not, and the distance between those two facts is the cost of concentration. The next 24 months will show whether the state treats the volatility premium as a warning it acts on or a number it explains away.

Thomas Young  is an economist who builds models, researches the economy, advises on public policy, speaks at conferences, and enjoys thought leadership.