Sluggish Economic Growth May Pick up in 2018

The decline in Department of Defense contracts (red line) has hit Virginia hard since 2011. Source: 2017 State of the Commonwealth Report

Economic growth in Virginia has under-performed the national average since the beginning of the business cycle, and will continue to do so in 2018, concludes the 2017 State of the Commonwealth Report. Proposed increases in defense spending could boost growth and job creation by the second half of the next year, but the Old Dominion faces long-term challenges in stimulating the creation of new and innovative business enterprises.

The report, authored by Robert M. McNab and James V. Koch, economists with the Center for Economic Analysis and Policy at Old Dominion University, updates an all-too-familiar story — lagging growth caused by the contraction in defense spending under the Budget Control Act, most commonly known as sequestration.

Virginia depends upon Defense Department (DoD) spending more than any other state, and the dollar volume of DoD contracts fell 21% between FY 2008 and FY 2016, while the number of active-duty military personnel declined more than 25%. Those fall-offs crimped growth in Northern Virginia and Hampton Roads. Meanwhile, Virginia’s smaller metropolitan areas and rural areas suffered from a declining of mining and manufacturing. Even Virginia’s top-performing metros between 2010 and 2016 — Richmond, followed by Charlottesville and Blacksburg — fell slightly short of the national compounded annual growth rate in Gross Domestic Product for the nation as a whole.

Fortunately for Virginia, there is widespread sentiment in both Congress and the Trump administration that the United States needs to invest more in the defense budget, say McNab and Koch, so there is a good chance that military spending will give the Virginia economy a positive jolt by the second half of 2018.

GDP is just one measure of economic health. If the metric is unemployment, Virginia fares somewhat better: Despite sup-par growth, the unemployment rate here remains lower than the national average. But the report gives even this positive news a gloomy footnote. Traditionally, Virginia’s unemployment rate has ranged around 1.5% lower than the national average; the differential has shrunk to 0.7%. “Could this signal a new economic era for Virginia?” the authors ask. “Perhaps.”

Another measure of economic vitality is labor force participation — the percentage of adults actively working or seeking work. Almost 66% of all Virginians participated in the workforce in 2017 compared to 63% nationally. But the figure varies widely by geographic region, as seen in this map:

While three-quarters or more of adults are in the labor force in Northern Virginia and much of the Richmond metro, the participation rate is less than 50% in the coalfield counties of the far Southwest.

Yet another metric is weekly earnings. Virginians’ earnings growth outpaced that of other Americans 3.4% to 2.6% in 2016, but had fallen behind to less than 2.0% this year.

A disturbing underlying trend, write McNabb and Koch, has been the lack of vigor in the small and medium-sized business (SME) sector. For most of the 21st century, net new business formations (business births exceeding deaths) by SMEs has trailed that of the U.S., although the numbers have surged in the past couple of years.

The report doesn’t offer an explanation for the uncharacteristic leap in SME business formations in 2015. Whatever the reason and however lasting the trend, the authors suggest that Virginia public policy should give closer attention to business formations and deaths. “It is not enough to proclaim the number of startups as a measure of success,” they write. “Reducing the mortality rate of these firms is important to retain the newly created jobs and create economic growth in the Commonwealth. Redirecting scarce public funds from grandiose development efforts to services that sustain small firms is a step in the right direction.”

Speaking of those “grandiose development efforts,” McNabb and Koch contend that dedicating economic investment dollars to “showpiece hotels, arenas, and other visible structures” beloved by elected officials is a poor idea. Abundant evidence shows that the rate of return on such public investments is “impressively low, or even negative.”

Instead, Virginia needs to make long-term investments in infrastructure, K-12 education, “ed-med” (educational-medical) activities, and SME business promotion, the authors say.

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3 responses to “Sluggish Economic Growth May Pick up in 2018

  1. Not sure how much lower the unemployment rate can go in places that are economically “good”. It’s at the theoretical limit, isn’t it?

    the “problem” can be seen in the chart below – and I’m pretty dubious that the things they say they want to do – to improve growth … and reduce unemployment, increase labor participation rates.. for the areas that actually have the problems… :

  2. Here is what this Larry’s chart and Jim’s post and charts tell me.

    Pay particular attention to:

    “The report doesn’t offer an explanation for the uncharacteristic leap in SME business formations in 2015. Whatever the reason and however lasting the trend, the authors suggest that Virginia public policy should give closer attention to business formations and deaths …”

    Virginia, leverage off these two sentences. Do it in under performing locates that are ripe for change whether they be urban or town, from N. Va. on down.

    Do it by empowering those places locally, regionally, and statewide.

    Do it by creating a revolution of innovative and synergistic land use planning and development, each tailored specifically to needs and opportunities of each locale.

    Drive those initiates with imagination, concentrated entrepreneurial talent and expertise, and state support that knows how to align forces for synergy and cumulative affect, per superb marketing master plans and sales.

    Finally, build such a comprehensive system for the long term.

    Thus, do it differently as times dictate now, Virginia.

  3. I don’t know how you “fix” the under “performing” parts of RoVa like southwest and south central Va.

    Or put it this way – I don’t think you can “fix” them the way you might a metro area like Richmond.

    Once again – a few days of paddling near the towns of Weldon and Halifax, NC both are hollow looking… and I see “historic” buildings and shuttered industries and a town center full of empty storefronts.

    These two towns are not that different than ones across the border in South Central Va nor SW Va.

    So these places with their 12% unemployment and even more horrible labor participation rates are not going to be “fixed” by the traditional economic development ideas – AND one does have to wonder if a metro area has an unemployment rate of 3% .. what then are we trying to “stimulate” since they are at the theoretical number…

    Like so many things… if we look at things from 10,000 feet they don’t look much like they do at 1000 feet… and in my view it’s the 1000 feet view that is the more real one.

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