After lagging national growth for much of the current decade, Virginia’s economy “has pulled itself out the doldrums of the Great Recession” and is now growing at a fast clip, though that growth seems to be significantly fueled by increases in federal defense spending, a new research report says.
Boosted in part by federal tax cuts and spending, the state’s gross domestic product has been growing for five consecutive quarters and approached an annualized growth rate of 4.2 percent in the second quarter of 2018, according to the 2018 State of the Commonwealth report by researchers at Old Dominion University.
The job market also has improved, as Virginia’s unemployment rate has fallen from a high of 7.5 percent in February 2010 to a seasonally adjusted low of 2.9 percent in October 2018, the lowest rate since 2007.
“The overall news is good for the commonwealth because we are seeing upticks in federal spending and private sector activity,” said Robert M. McNab, the lead author of the 160-page report and a professor of economics at ODU. “It appears from our perspective that for the first time this decade, the commonwealth will be at or above the U.S. rate of growth,” in 2019.
McNab said he is forecasting that Virginia’s economy will grow at about 2.6 or 2.7 percent in 2019.
However, the report, published Saturday, warns that Virginia’s continued dependence on federal spending — which accounts for about 30 percent of economic activity in the state — is “a blessing and a curse” because the economic stimulus of federal contracts and defense spending may not last.
“One of the most significant things that worries me is the burgeoning federal deficit,” McNab said.
“At some point, we all expect that markets will say the fiscal position of the federal government is unsustainable,” he said. “When that happens, the federal government is going to have the choice of raising taxes or cutting expenditures, or both.”
Virginia’s economic performance compared with other states has fluctuated enormously since 2010, according to the report.
The state was ranked 19th in economic growth in 2010 with GDP growth of 2.7 percent. It fell to 45th in 2014 when GDP turned negative, a decline of 0.2 percent for the year, but Virginia’s prospects rebounded and the state ranked 19th in 2017 with GDP growth of 2 percent.
“If Virginia is to continue to improve its economic fortunes, then it must address its sometimes antiquated tax system, maintain its competitive advantage in workforce development and make wise investments in public infrastructure,” the report says.
There are some signs that the private sector contribution to the state’s economy is growing relative to federal spending.
From 1997 to 2016, government and government enterprises was the largest sector of economic activity in Virginia, according to the report. However, in 2017, the professional and business services sector and the finance, insurance, real estate, rental and leasing sectors eclipsed the government and government enterprises sector.
With the unemployment rate at its lowest in a decade, “the challenge now is to find qualified individuals, given that Virginia’s unemployment rate is near what most economists would consider full employment,” the report says.
However, while the unemployment rate has declined, the labor force participation rate in Virginia and the nation also has declined since the Great Recession.
Labor force participation — the percentage of people who are either working or actively seeking work — stands at about 65.2 percent in Virginia, compared with 62.9 percent for the United States. It peaked in Virginia before the Great Recession at almost 70 percent.
The report calls the decline in labor force participation “an economic puzzle,” and says that demographic changes such as an aging population along with a mismatch between available jobs and workforce skills are contributing to it. Even the opioid addiction crisis could be a factor, the report says.
Another culprit could be stagnant wages, McNab said. While wages have started to tick up as the labor market has tightened, “until we see a strong, sustained earnings growth, it is going to be hard to bring people who are disaffected back into the labor force,” he said.
The report also says that e-commerce giant Amazon’s recent decision to open part of its second headquarters in Northern Virginia and hire 25,000 employees will conservatively lead to the creation of another 40,000 jobs, and “a more optimistic estimate is well over 60,000 jobs.”
“The number of indirect jobs created depends on how many other firms decide to co-locate in Northern Virginia as part of an innovation cluster,” the report says.