Category Archives: Economy

Trump Budget Bullet Barely Grazes NoVa

President Trump’s proposed budget would cost the Washington metropolitan region up to 24,600 jobs and billions in lost salaries and procurement spending, according to a new analysis by regional economist Stephen Fuller.

But Washington’s Virginia suburbs would get off easier than Maryland and the District of Columbia, reports the Washington Business Journal. The district would lose 14,000 to 15,000 jobs and Maryland would lose 5,500 to 6,000. But in Northern Virginia, where cuts to the federal bureaucracy would be partially offset by an increase in defense spending, would lose only 500 to 3,600 jobs.

Overall federal spending in the Washington region would drop between $4.2 billion to $5 billion, reducing growth in the region’s gross domestic product by 1%. If GDP tracks job losses, the impact on Northern Virginia will be even milder.

Bacon’s bottom line: Trump’s budget will not be enacted as submitted. Congress will tinker, undoubtedly sparing some non-defense programs on Trump’s chopping block. (I’m rooting for preservation of funds for Chesapeake Bay restoration.) But assuming that Fuller’s projections are in the ballpark, it doesn’t look like Virginia has much to worry about. The loss of 500 to 3,600 jobs in Northern Virginia’s dynamic economy will cause no more than a burp in growth.

What the Obama Giveth, the Trump Taketh Away

Slash and burn

The federal budget sequestration may have kept a lid on escalating federal budget deficits, a good thing, but it was a disaster for Virginia’s economy. The cap on federal spending hammered a Northern Virginia economy built largely around the Pentagon. The ascension of Donald Trump to the presidency signaled a possible return to the region’s glory days as the new president promised to increase defense spending by $50 billion.

But the president has created massive uncertainty with a vow to slash discretionary spending in civilian programs and bureaucracies. The Washington Post is all in a dither:

The cuts Trump plans to propose this week are also expected to lead to layoffs among federal workers, changes that would be felt sharply in the Washington area. According to an economic analysis by Mark Zandi, chief economist for Moody’s Analytics, the reductions outlined so far by Trump’s advisers would reduce employment in the region by 1.8 percent and personal income by 3.5 percent, and lower home prices by 1.9 percent. …

Trump’s emphasis on defense spending might provide a buffer for Northern Virginia, although, as noted previously on this blog, there are some within his administration who believe that the Pentagon civilian bureaucracy needs to be whacked down to size in order to free more resources for fighting forces. Under a serious effort to rebuild the U.S. Navy, Hampton Roads’ military bases and shipbuilders could be big beneficiaries.

We can’t say anything with certainty until Trump releases the details of his plans later this week. But at this moment in time, it looks like the new budgetary policies could be a mild plus for Virginia with boosts in defense spending offsetting cuts in other areas. Conversely, Maryland and Washington, D.C., with their large non-military exposure, could be in for a world of hurt

Adding to Washington’s woes…. The metro area’s job performance in 2016 has been revised downward. Reports the Washington Business Journal: “The D.C. region added 55,600 jobs in 2016, according to final data released Tuesday by the Bureau of Labor Statistics — about 16,800 fewer than the agency had initially counted.”

“We are talking slashing and burning several different agencies on the discretionary, non-defense side. That could have a pretty chilling effect for the local economy,” said Clifford Rossi, a professor of the practice at the Robert H. Smith School of Business at the University of Maryland-College Park.

Rossi agreed that the revised job growth numbers reveal an economy that was weaker than it originally appeared, and that the federal spending cuts proposed by Trump could have a compound effect on the regional economy.

Bacon’s bottom line: Actually, the loss of 1.8% employment and 3.5% income is no worse than what dozens of other metros experienced in the last recession. But have compassion! Washington has never been through anything like this before.

(Hat tip: Rob Whitfield)

Alternate Facts Regarding Virginia Employment

Gallup's Good Jobs Rate for Virginia is 49.2%. Despite sequestration, Virginia employment numbers are robust.

Gallup’s Good Jobs Rate for Virginia is 49.2%. Despite sequestration, Virginia employment numbers are robust. 

Virginia’s economy  may be down in the dumps by Virginia standards, but it still looks buoyant compared to many other states, according to Gallup Organization data based on tracking interviews with nearly 355,000 U.S. adults.

The official state unemployment was 4.1% in December 2016, lower than for 33 other states. But the unemployment rate does not include the under-employed, discouraged workers not looking for jobs, people on disability, or those who have retired early. While four percent has long been regarded as “full employment,” we all know that hundreds of thousands of Virginians who would like to work can’t find full-time jobs.

Gallup compiles what it calls a “Good Jobs” rate which expresses the total number of 18-and-older adults with full-time jobs (more than 30 hours) as a percentage of the adult population. The metric excludes part-time and self-employed time workers. Virginia scores 49.2%, which means that almost half of all adults are working in full-time jobs.

Gallup views the Good Jobs rate as an indicator of economic vitality. It’s important to note, however, that a state with a large population of the elderly and retirees will look worse by this measure. Thus West Virginia, a state with an aging population where only 36.6% of adults are fully employed, fares the worst in the country. Likewise, Florida and Arizona, states with otherwise robust economies, also rank in the bottom 10 states by this measure.

Still, a high Good Jobs rate indicates that a high percentage of the adult population is contributing to economic activity.

Nationally, there are two clusters of very high Good Jobs scores — one in the northern plains states and the other in the two states bordering Washington, D.C.: Virginia and Maryland. Whatever harm sequestration has inflicted upon Virginia’s economy, the employment rate remains high by national standards.

Gallup also compiles an “underemployment” metric, which adds both unemployed people looking for jobs and those working part time but desiring full-time work. This number is expressed as a percentage of the adults in the workforce (not the entire adult population, as with the Good Jobs indicator).

Gallup did not publish the Virginia number for this metric, but in the map reproduced below, the company classified Virginia among the “low” underemployment states, meaning that it scored between 11th and 20th — ahead of Maryland, heh, heh.

Bacon’s bottom line: By both these alternative measures, the Virginia employment picture looks better, relatively speaking, than the official unemployment rate. They may be “alternate facts,” but they’re real facts. The economy is not as vibrant as it should be… but as a working man, I’d rather be in Virginia. (Hat tip: Tim Wise.)

Is Virginia Getting its Mojo Back?

Good news for Virginia ports: container cargo shipments increased 8.5% in 2016.

The Port of Virginia saw an 8.5% surge in container traffic in 2016, making it the fastest-growing port on the East Coast and second fastest in the country, trailing only Los Angeles, reports the Virginian-Pilot.

Said port Chairman Jon Milliken: “We outstripped other East Coast ports; we outstripped the West Coast ports. We outstripped everybody in terms of growth.”

The Pilot article does not explain the increase, but the growth coincided with major capital expansion programs designed to increase port throughput as well as the long-awaited opening of the Panama Canal expansion, which expedites the movement of deep-draft mega-ships. With the deepest channels of any East Coast port, Hampton Roads enjoys a competitive advantage in serving the big ships.

In other good economic news, as noted in Virginia FREE newsletter distributed this morning….

Swiss food confectioner giant Nestle S.A., has announced the move of its U.S. corporate headquarters from Glendale, California, to Arlington.

Air India has initiated nonstop service between Washington Dulles International Airport and Delhi.

Virginia’s unemployment rate dropped to 4.1%, even as the state’s labor force swelled by 17,000 workers as discouraged workers began re-entering the workforce.

Admittedly, the gains are all anecdotal. But pile together enough anecdotes, and they add up to a real trend.

Subtle Signs of Malaise in Puerto Rico

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East of San Juan, a boardwalk and walking/jogging trail runs along the shore line of Puerto Rico. It would be an exaggeration to describe the views as “stunning,” but they certainly qualify as picturesque. The beaches aren’t wide enough to attract the interest of big hotel developers, but the sand is clean and the views more interesting than anything you’ll find along the crowded shores of the Outer Banks.

When the Bacon family and friends visited Saturday, the beach-side promenade was little used. The action was concentrated near clusters of open-air restaurants specializing in fried and barbecued food and blasting out catchy Latin music. The roads and parking lots were clogged with locals. But it was evident that the island had seen better days. Many establishments abutting the boardwalk looked abandoned and dilapidated — a consequence, I suppose, of Puerto Rico’s shrinking, debt-ridden economy.

This vantage point offered a tremendous view of waves crashing on coal rocks. But what’s that yellow piece of metal junk doing there?

One of many abandoned properties along the beach-front walking trail.

I often fantasize about relocating the Global Command Center of Bacon’s Rebellion from Richmond to some sunny locale where the temperature rarely strays from 75º. I wonder if there are some bottom-fishing opportunities in Puerto Rico. I find it astonishing that just a couple of miles from one of the largest metropolitan areas in the Caribbean, properties fronting the boardwalk and trail are being abandoned. My friends (not to mention my wife) think I’m crazy. Puerto Rico still has a long way to fall, they say. The territory’s massive indebtedness will lead to a deterioration of infrastructure and services, and even more people will immigrate. Wait until the next recession when the tourism industry takes a hit, and beach-front property will go for a song.

I suppose that’s good investment advice. I feel badly for the Puerto Ricans, though. They are a welcoming and friendly people, and they have a beautiful country. It’s a shame that their government and ruling elites have served them so poorly.

Note to readers: We’ll be boarding a cruise ship this afternoon, and I refuse the pay the extortionate $40-per-day Internet charge. I’ll try to blog if I can find free Wi-Fi on shore. But, then, I may have better ways to spend my Caribbean vacation hunched over a laptop at Senor Frogs.

Reminder: Where the Defense Dollars Are Spent

Top Ten defense spending locations in Virginia. Source: Office of Economic Adjustment

Just to remind people how heavily dependent Virginia is on defense spending… This graphic comes from the Defense Department’s Office of Economic Adjustment. The numbers include defense spending only, not spending by homeland security or intelligence agencies. (Hat tip: Steve Haner.)

Earlier this week I quoted Newt Gingrich as saying that the Pentagon bureaucracy is massively overstaffed and hinting that a priority of the Trump administration might be to whack that bureaucracy down to size. Along the same lines, the Wall Street Journal reports this morning that Trump is working with advisers to “restructure and pare back” the National Security Administration. The NSA headquarters is in Maryland, so I don’t know if that will have much impact on Virginia. But the larger point is that the president-elect holds few Washington arrangements sacred. If he’s willing to go after the NSA bureaucracy, he could well go after the Pentagon bureaucracy, the CIA bureaucracy and the Homeland Security bureaucracy.

Virginians need to pay close attention to these developments because, regardless of the wisdom of the bureaucracy busting, Virginia (and Maryland) will feel the impact more than the other 48 states.

This does not mean that the Northern Virginia economy is doomed, as one commenter to a previous post implied I meant. But a Trump administration assault on the federal defense/intelligence/homeland security bureaucracy potentially could amount to a Sequestration II for the Washington metropolitan area. Given the fact that NoVa now accounts for about 40% of Virginia’s gross economic output, when NoVa sneezes, Virginia’s General Fund budget catches a cold. And that matters to the Rest of Virginia.

The Self-Employed as a Political Constituency

Will 3-D printers swell the ranks of self-employed manufacturers?

Will 3-D printers swell the ranks of self-employed manufacturers? Image credit: CNN

The maker movement is transforming the American economic landscape. The number of people who make a self-employed living making stuff is still small — almost imperceptible in a U.S. labor market of 160 million — but it is growing.

In 2014 more than 350,000 manufacturing establishments in the U.S. had no employee other than the owner, up almost 17% over ten years, according to Commerce Department data reported by the Wall Street Journal. By comparison, the 293,000 establishments with employees had experienced a 12% decline in number over the same period. Overall, there are roughly 12 million manufacturing jobs in the U.S.

The boom in self-employed manufacturing is most pronounced in the “food” category, but also notable in chemicals (including soaps and perfumes), transportation, leather, and beverages & tobacco.

I expect the movement to gain momentum as the revolt against mass, industrial-era standardization gives way to mass customization. Technologies such as Computer Aided Design and 3-D printers continue to gain in capability and come down in price, making them available to almost anyone. Many colleges have 3-D printers on campuses, and students are learning how to use them. Meanwhile, just as the Miller-Budweiser beer duopoly has given way to the craft beer revolution — the biggest advertising budgets in the country could not halt that consumer trend — we are seeing the revival of artisinal foods, beverages, and craft products.

The proliferation of self-employed, small-scale manufacturers is part of a larger trend toward the so-called “gig” economy. So far, the needs and aspirations of makers, hackers, craftsmen and free-lancers have gone mostly unrecognized by the political establishment. These self-employed workers are even more politically invisible than small business. They are unorganized politically. They don’t have trade associations, they don’t hire lobbyists, and they don’t donate money to politicians. Indeed, the only politician I can think of who takes them seriously is Sen. Mark Warner, D-Virginia. While the senator has performed a valuable service in highlighting the group and its unique needs, his interest in the topic does not appear to be widely shared, and he can cite few tangible accomplishments yet.

Making a living as a free-lance writer and blog publisher for the past 14 years, I feel a strong affinity for this group. In Virginia, there are hundreds of thousands of us. And as consumer tastes continue to shift from standardized products and services to personalized products and services — our numbers will grow.

We are the petite bourgeoisie. We are noted for our stubborn independence and our ornery attitude toward our “betters” who would tell us what to do. In my view (which, I concede, may not be universally shared), we don’t seek special treatment. We don’t want subsidies, tax breaks or special privileges. We just want a level playing field.

The most important legislative priority for self-employed workers is to gain more control over our health care insurance and retirement plans. Our health insurance should enjoy the same tax status as health plans provided by corporations and other major employers. Our pension vehicles should be portable as we move back and forth between conventional employment and self employment. Oh, and it wouldn’t hurt to keep a lid on taxes.

As I scan the political economy of Virginia, I don’t see anyone (other than Warner) representing the interests of the self-employed. Neither Democrats nor Republicans, beholden as they are to established corporate and bureaucratic interests, provide a natural home for us.

The Libertarian Party could become that home if it moved beyond articulating abstract principles to applying those principles to real-world problems. Indeed, if the Libertarian Party has a natural constituency, it would be the free-lancers and small businesses whose interests are routinely subordinated to those of better organized, more vocal groups who turn to the government for everything. As Libertarians run for office, they would do well to cultivate the large and growing ranks of the self-employed.

Forget Globalization. Worry about Automation.

Automation is taking more American jobs than Mexicans are.

Automation is destroying more American jobs than Mexicans are.

Watcha gonna do… watcha gonna do… whatcha gonna do when robots come for you?

Robots aren’t science fiction. You need to start thinking about them — and so does Virginia’s political establishment.

The 2015 Oxford automation study, “The Future of Employment: How Susceptible Are Jobs to Computerisation,” concluded that 47% of all U.S. jobs in 702 occupations are at “high risk” of decimation by automation. If it’s any consolation, an Organization for Economic Cooperation and Development (OECD) study found that a mere 9% of jobs are at risk. But don’t get complacent. A 2016 McKinsey study predicts that 60% of all U.S. occupations could see 30% or more of their work activities automated.

Using the same methodology as the Oxford study, Dr. James V. Koch, an Old Dominion University economist, calculates that nearly 1.9 million jobs are at risk in Virginia — about 51% of all jobs, four percentage points higher than the national average.

Seeking refuge in a college education will not necessarily save your job from robots or artificial intelligence. A hair stylist in Harrisonburg stands better chance of surviving the job carnage wrought by our robot overlords than, say, a tax preparer in Danville.

The deciding factor, says Koch in an essay in the “2016 State of the Commonwealth Report,” sponsored by the Virginia Chamber Foundation, “is the extent to which jobs require creative and and social intelligence and the ability to manipulate as opposed to being dominated by repetitive, routine tasks capable of being learned by machines fueled by artificial intelligence.”

So, in the immortal words of 19th-century Russian revolutionary Nikolai Chernyshevsky, “What is to be done?”

Writes Koch:

Wise public policies in this arena should focus on “riding the wave” of technological change rather than encouraging resistance movements that are destined to prove futile. Astutely constructed public-private partnerships between governments and firms have the potential to develop programs designed to compensate and redirect job losers, who in many cases are relatively innocent victims of dynamic economic forces beyond their control.

Koch, a former Old Dominion University president, argues the state should work to increase the skills, flexibility and mobility of the workforce. By skills, he means proficiencies that count in the marketplace. “This is not the same thing as generating massive numbers of additional bachelor’s degree holders, or STEM-degree holders,” he says. “There is relatively little rigorous economic evidence available that a significant shortage of job candidates exists in STEM-related occupations.”

By flexibility, Koch means “suppleness in thinking and approach” — critical thinking. And by mobility, “wise public policy will reduce barriers that discourage people from moving geographically and/or telecommuting to jobs that may be located thousands of miles away.”

What the empirical evidence tells us, says Koch, “is that the current range of public policies is insufficient to deal with the occupational ferment that Frey and Osborne (the authors of the Oxford study) have identified. We are forewarned.”

Is Northern Virginia Turning the Corner?

Monthly changes in professional and business services employment and federal employment in Northern Virginia, June 2011 to June 2016. Despite decline in federal spending, the all-important Professional & Business Services sector is performing handsomely.

Monthly changes in professional and business services employment and federal employment in Northern Virginia, June 2011 to June 2016. Despite a decline in federal employment and procurement, NoVa’s Professional & Business Services sector is performing handsomely. Source: “2016 State of the Commonwealth Report.”

As Northern Virginia goes, so goes Virginia. The wealthy Virginia suburbs of Washington, D.C., account for 45% of the state’s economic output. If NoVa is in a slump, as it has been the past few years, a peppy performance in Richmond, Hampton Roads or elsewhere won’t do much to counteract it.

The sequestration-driven decline in federal government employment and a cutback in procurement contracts hit Northern Virginia hard over the decade. But James V. Koch, an Old Dominion University economics professor and author of the “2016 State of the Commonwealth Report,” sees hints of a turnaround. Major NoVa employers, once tethered to the federal government, have been diversifying their business base by making inroads into the private sector.

What’s his evidence?

Federal spending in the Washington metropolitan economy has declined over the decade. “Between mid-2011 and 2014, federal employment each month was consistently lower than the comparable month in the previous year,” writes Koch, in the report, which was sponsored by the Virginia Chamber Foundation. “This had, and still has significant consequences for the region because annual average wages per federal employee approximate $100,000.” Moreover, federal procurement spending in the Washington region declined dramatically, from a peak of $82.5 billion in 2010 to $71 billion in 2015.

The good news:

Since the middle of 2014 … a new pattern has emerged. The professional and business services sector has begun to grow even though federal employment and procurement remain relatively flat. While it is a bit early to declare that this signals the emergence of a new economic model for Northern Virginia, clearly this is a potentially significant change. It appears that professional and business services companies in Northern Virginia may be diversifying their markets and becoming less reliant on federal spending. If so, it bodes well for the region.

The professional & business services sector contributed roughly one-third of the 35,400 net new jobs created in Northern Virginia between June 2015 and June 2016, Koch notes.

It will not be easy for NoVa’s tech companies to shift from a business-to-government model to a business-to-business model, says Koch, but he sees the region’s expertise in cyber-security as an obvious way to make inroads with private-sector clients. He also sees potential in the biotechnology sector. However, for NoVa’s economy to take off, other industries will have to make the switch as well, and it is less clear what they might be.

“Northern Virginia has the assets to turn the corner and become a more business-oriented, globally competitive region,” he says. “But will it happen? Stay tuned.”

What the Trump Victory Means for Virginia

What does a Trump presidency mean for Virginia?We woke up this morning to a very different world than most of us expected twenty-four hours ago: the prospect of a Trump presidency and a Republican-controlled Congress. After four years of political gridlock, the odds have improved immeasurably that something will get done in Washington. You might not like the result, but the logjam will break. The ramifications for foreign and domestic policy are far-reaching.

Herewith are some preliminary thoughts on what a Trump presidency means for Virginia.

Energy policy. Trump famously declared global warming to be a hoax perpetrated by the Chinese, and he has campaigned on the promise to boost the U.S. energy economy and revive the coal industry. It’s safe to say that he will do what he can to scrap the Clean Power Plan, which is designed to slow global warming by reducing CO2 emissions from electric power plants. Whether he can do so with a stroke of the pen — issuing an executive order that reverses President Obama’s order — is not clear to me. But one way or the other, I expect he will modify the plan significantly if not kill it outright.

What does that mean for the future of Virginia’s electric grid? Coal is the big winner. Most likely, some coal-fired power plants in Virginia will enjoy an extended lease on life. In the case of Dominion Virginia Power, that implies the need for fewer natural gas-fired plants in the future (or at least a delay in their deployment), which in turn implies diminished future demand for natural gas. What does that portend for the proposed Atlantic Coast Pipeline and the Mountain Valley Pipeline? I’m not sure, but these are obvious questions to ask.

The future of solar and wind energy also is up in the air. Congress has extended hefty tax credits for the renewable energy sources well into the 2020s. Trump and Congress may spike those subsidies, and the political pressure will be off Dominion and Appalachian Power to boost their commitment to solar and wind. But the economics of solar and wind are steadily improving, and Dominion has stated its conviction that there is value in having a diversified energy portfolio. Furthermore, there is nothing to stop merchant power generators from building solar farms and wind farms and selling the energy into wholesale electricity markets, thus bypassing the established utilities.

In sum, while the pace of adoption may slow, the progress of renewable energy, electric vehicles, battery storage, voltage regulation and other technologies suggests that the electric grid will look very different ten years from now than it does today, regardless of what Trump does. Virginians need to prepare for that future, even if it is not imminent.

Medicaid. Trump campaigned on a promise to end and replace Obamacare. Repealing the program will probably be more difficult than Trump was willing to admit on the campaign trail– will he really yank benefits from the millions of Americans who benefited from the plan? — and his plan to replace it is still fuzzy. But it’s a safe bet that the option of expanding Medicaid under provisions of the Affordable Care Act in Virginia will be taken off the table.

Given the unpopularity of Obamacare with a majority of the population and the promise of Congressional Republicans to repeal it if they got the chance, General Assembly Republicans were wise to have rejected Medicaid expansion. Thankfully, Virginia maintained its safety net of hospital-provided indigent care, health clinics, health wagons, and other patchwork programs that provide at least a modicum of treatment for the poor and near poor. That safety net is inadequate but it’s better than nothing.

One thing Virginia can do to replace Obamacare is eliminate the dozens of mandated benefits that drive up the cost of open-market health insurance. One reason the plans in the Obamacare health exchanges are so expensive is that they are gold-plated with federally mandated benefits. If Trump and Congress repeal those mandates, state mandates still will stand in Virginia unless the General Assembly repeals them as well. Health insurers should be given the option of offering stripped-down, basic health coverage which, while less than ideal, would provide cheaper options than are available now.

Military spending. Virginia’s economy has taken a big hit from the reduction in military spending under the Obama administration. Trump has promised to rebuild the military. A Trump presidency undoubtedly will spare the state from further defense cuts, but given the budget box the country is in — a $19+ trillion national debt, rising deficits, and a Federal Reserve Bank seemingly intent upon nudging interest rates higher — it is difficult to see how the U.S. can ramp up military spending to anything close to Bush-era, war-on-terror levels. Relief may be coming, but the glory days are not returning.

Boomergeddon. Dr. Trump has been peddling a magical elixir of tax cuts, deregulation and a confrontational trade policy to get the economy rolling again. Let’s just say I’m skeptical. Trade wars will be disastrous. Tax cuts may goose the economy, but they will add to the deficit. Deregulation will help, but I think there are practical limits to what can be deregulated. Yes, deregulating the broadband sector and re-examining Dodd-Frank bank regulations could provide a stimulus. But most regulations are embedded in the economy and don’t make sense to scrap. Just to pick one example, are we really going to deregulate coal mine safety after mining companies have already created the technologies, developed the business practices and absorbed the costs of meeting those regulations?

While some economic sluggishness can be blamed on Obama administration policies, not all of it can. As I noted recently on this blog, the aging of the population and the lack of growth in the workforce are demographic trends impervious to public policy manipulation. Meanwhile, Trump has evinced no interest in reforming entitlements like Social Security, Medicare, Medicaid and the panoply of anti-poverty programs. Massive spending increases are baked into the cake. The United States is in a fiscal box that limits our economic options, and there is no politically painless way out of it.

Bottom line for Virginia: Don’t look for a miraculous restoration of economic growth and tax revenue. Budget austerity is the new normal. Trump won’t change that. We need to get on with the business of re-thinking the way state and local governments do everything.