NoVA Heads Into 2020s Still Reliant On Federal Spending

NORTHERN VIRGINIA — Federal spending remains a cornerstone of Virginia's economy, even in Northern Virginia where technology firms started setting up shop in the region more than 25 years ago. The arrival of Amazon HQ2 in Arlington will give the region's private sector job numbers a big boost over the coming decade. But all signs point to the federal government remaining the dominant player in the region's economy deep into the 2020s and beyond.

The federal government's large presence in Northern Virginia, along with the Hampton Roads region, has created a demographic divide. These areas are expected to see steady population growth in 2020, while rural communities are projected to witness a population decline through at least the next couple of decades.

"For better or worse, Virginia's economic performance is influenced by decisions about the size and scope of the federal government," Old Dominion University (ODU) said in its "2019 State of the Commonwealth Report," released in December.

Over the last two decades, the federal government's share in Virginia's GDP has declined, but the federal government still accounted for about 1 out of every 5 dollars of economic activity in the state in 2018, according to the ODU report.

A recent analysis by the Nelson A. Rockefeller Institute of Government at the State University of New York estimated that Virginia ranks first for the net benefits it receives from the federal government. The net benefits refer to the amount of revenue paid to the federal government from each state's residents and economy minus federal spending in the state.

Virginia, Kentucky and New Mexico rank as the top three states in net benefits received from the federal government, while New York, New Jersey and Massachusetts are on the opposite end, with each state injecting far more revenues into the federal government than what the federal government spends in their states.

Northern Virginia is projected to see a population of more than 3 million by the end of this year. Hampton Roads, with its huge military presence, is expected to have more than 1.5 million residents. Richmond and the northern Shenandoah Valley I-81 corridor from Staunton to Winchester are also seeing population growth.

Virginia's unemployment rate has fallen below 3 percent across its metropolitan areas. Despite a tight labor market, though, workers in Virginia, on average, have not seen large increases in their paychecks in recent years, the ODU researchers found.

"If labor markets are tightening in the Commonwealth, then we would reasonably expect that earnings would increase and likely outpace inflation," the researchers wrote. "Economists continue to explore the puzzle of why real earnings have not risen faster in the current economic expansion."

One possible explanation, according to the ODU report, is a large reserve of labor outside the labor force and employers have used this development to restrain the growth in earnings. The growth of contract and informal employment and the decline of unions also may have restrained wage growth.

"Regardless of the reasons, this economic expansion has not led to the increases in earnings observed in previous periods of economic growth," the report said.

Federal Economic Impact Extends Far And Wide

The federal government's impact on the regional economy extends far and wide. The influence goes as far as the eastern panhandle of neighboring West Virginia. In Jefferson County, West Virginia, for example, many residents commute to federal jobs in Washington or Northern Virginia.

Outside the eastern panhandle, West Virginia is expected to face economic struggles in the years to come due to decades of hesitancy by state leaders to diversify the state's economy beyond coal and other fossil fuels. These regions have been caught in a cycle where high-wage and low-skilled jobs create a disincentive to invest in innovation, higher education, advanced job skills and other industries, resulting in less diversification of the economy.

Northern Virginia, unlike West Virginia and other parts of Virginia with a large federal government presence, has taken steps to diversify its workforce, an effort that could provide greater economic stability in the future during times of uncertainty over federal spending.
Amazon's announcement in late 2018 to build its second headquarters in Arlington also should continue this diversification.

In contrast, Hampton Roads still has work to do in dealing with its reliance on Department of Defense spending. Taking steps to reduce its reliance on defense spending would be highly beneficial, due primarily to the predicted decrease in discretionary defense spending over the next decade, said Robert McNab, director of the Dragas Center for Economic Analysis and Policy at ODU, who lead the research team that drafted "State of the Commonwealth" report.

Federal government shutdowns have been costly to Virginia, with state officials reporting last January's shutdown leading to more than $20 million in lost revenues. Without an extended federal government shutdown and barring a major recession, economists are expecting the Virginia economy, including its housing market, to be strong in 2020, particularly in the first half of the year.

Any economic downturn in the coming year would likely be mild, carrying nowhere near the devastating blow of the recession that began in 2007, according to Lisa Sturtevant, chief economist for Virginia Realtors.

"There is a range of positive indicators for the state's economy, including strong consumer spending, extremely low unemployment, broad increases in wages, and high levels of consumer confidence (at least in the near-term economy)," Sturtevant wrote last month in a blog post.

Business leaders in Virginia are more optimistic now than they were even three months ago about the nation's economic outlook. More than 71 percent of business executives in the state who responded to a December survey said they expect sales to increase over the next six months, an improvement over the 65 percent who expected sales to increase when surveyed in September, according to the "Virginia CEO Economic Outlook Survey."

Each quarter, the Virginia Council of CEOs and the University of Richmond's Robins School of Business conduct a joint survey of top business executives in the state.

"Despite uncertainty over next year's elections, CEO optimism for a continued strong economy seems to have returned," Randy Raggio, associate dean at the Robins School of Business at the University of Richmond, said last Friday in a statement.