Category Archives: Economy

Virginia’s New Metropolitan Growth Leaders

Northern Virginia has set the pace for economic growth in Virginia for so long, it’s hard to remember when any other region led the way. But this decade’s contraction of the defense industry has hit the NoVa regional economy hard. Inflation-adjusted growth in the Gross Domestic Product between 2010 and 2016 averaged only 1.2% in Northern Virginia, according to the 2017 State of the Commonwealth Report. Thanks to the innovation capacity of NoVa’s technology sector, the growth rate could have been far worse. Hampton Roads, also dependent upon military spending, experienced essentially zero growth over the same period.

Economic growth leadership for the past several years has shifted to the Richmond, Charlottesville and Blacksburg metropolitan areas. Richmond experienced 2.0% growth, while the home towns of the Hoos and Hokies racked up 1.8% annualized growth. Not one metro area matched the U.S. average growth rate of 2.1%, however. The economies of Staunton, Harrisonburg and Lynchburg actually contracted. (The figures don’t tell us about non-metropolitan Virginia, but the picture probably wasn’t pretty.)

Here’s the State of the Commonwealth report’s breakdown of GDP growth by metropolitan area (click for more legible image):

Somewhat different story for wage growth: Here Charlottesville and Roanoke led the way. Northern Virginia was the state laggard.

And one more measure, taxable sales, where Richmond and Lynchburg blazed new paths to consumer excess:

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.

The Great Migration Breakdown

Historically, a source of American prosperity has been the willingness of workers to move from regions with poor economic prospects to regions with better economic prospects. Think Depression-era Okies fleeing the Dust Bowl to California. Think Jim Crow-era African-American sharecroppers migrating from the rural South to booming Northern industrial centers.

Since the 2008 recession, the rate of inter-state migration has slowed dramatically, observe Kyle F. Herkenoff, Lee E. Ohanian, and Edward C. Prescott in a new paper, “Tarnishing the Golden and Empire States: Land Use Restrictions and the U.S. Economic Slowdown,” published by the National Bureau of Economic Research.

Sluggish geographic labor mobility has coincided with three other trends: a spike in real estate prices in California and New York, an end to the population booms in California and New York, and a slowdown in the convergence in incomes between states. The authors think those trends are intertwined.

“U.S. economic growth has gone hand-in-hand with the regional reallocation of labor and capital,” write the authors. “The pace of resource allocation, however, has slowed. This decline has coincided with lower productivity and output growth, as well as growing home premia in high income states, including California and New York.”

Here is what they think is going on: Land use regulations create housing shortages, which drive up housing prices. Sky-high housing prices price lower-income residents out of the housing market in high-productivity metropolitan regions like San Francisco-San Jose and New York. Despite the superior work opportunities, people leave and people from lower-productivity regions are discouraged from moving in. Millions of Americans remain trapped in lower-productivity labor markets.

Herkenoff et al build an elaborate econometric model designed to gauge the effect of land-use regulations. (The model is way too complex to describe here — I’ll confess, the methodology is beyond my ken.) After running the numbers through their black box, here’s what they conclude:

Reforming land use regulations would generate substantial reallocation of labor and capital across U.S. regions, and would significantly increase investment, output, productivity, and welfare. The results indicate that too few people are located in the highly productive states of California and New York. In particular, we find that deregulating just California and New York back to their 1980 land-use regulation levels would raise aggregate productivity by as much as 7 percent and consumption by as much as 5 percent.

Deregulating all U.S. regions would raise labor productivity by 10% and consumption by 9%.

Under various deregulation scenarios, the authors noted that the “Mid-Atlantic” region, which includes Virginia, would, with California and New York, see the greatest population gains.

Bacon’s bottom line: This is an important paper. I firmly believe that the links described by Herkenoff et al are real — land use regulations restrict the housing supply, which drives up housing prices, which hinders geographic mobility, which hurts productivity gains and economic growth.

These linkages shed light on a two ongoing debates about American society.

Slowing rate of economic growth. Economic growth in the Obama business cycle was the slowest in the post-World War II era. The debate over the reasons for the slowdown has almost totally ignored the land use-housing shortage-migration connection. Economists look for national reasons — aging workforce, dearth of breakthrough technologies — to explain national economic phenomena such as national economic growth. Land use is a local phenomena, so it tends to be overlooked. If Herkenoff et al are right, it will be difficult for the U.S. economy to resume a 3% to 4% annual growth rate, no matter how Congress reforms taxes and the Trump administration prunes national-level regulations. (I’m not defending the status quo in taxes and regulation, just acknowledging that they address only a part of what ails the economy.)

Income inequality. The debate over income inequality in the U.S. has largely overlooked the malign effects of land use regulation. Insofar as incomes have become more unequal in the U.S. in recent decades — I think the extent has been exaggerated, but that’s another debate for another time — the slowdown in the migration of Americans from low-productivity (and low paying) regions to high-productivity (and high paying) regions has played a major role.

Land use is the most overlooked and least understood driver of the American economy. The influence of land use upon the economy is even more pervasive and complex than described in the Herkenoff et al econometric model. But their article is a good place to start the discussion.

Virginia Job Trends — Positive but Fuzzy

Image source: Richmond Times-Dispatch

The Richmond Times-Dispatch ran a striking chart in its Sunday edition contrasting the growth rate for different metropolitan statistical regions in Virginia. The main thrust of the article was to show that the Richmond region, after years of sub-par job creation, is growing smartly these days, creating almost as many jobs over the past 12 months as Northern Virginia. Indeed, if you adjust for the fact that Northern Virginia has roughly twice the population, Richmond’s performance is all the more remarkable.

(If you infer that Richmond has an inferiority complex regarding Northern Virginia, you’re right. As a Richmonder, I confess that it feels really good to sport a stronger economy, even if only for a brief moment in time.)

While the Times-Dispatch did not dwell on the point, the chart reinforces a post I made a couple of months ago pointing out that Hampton Roads is the main drag on Virginia’s economy this year.

As is my wont, I began playing with the numbers. I wondered how non-metropolitan Virginia was faring. By non-metropolitan Virginia, I’m referring to the mill towns and truly rural counties where the economy is thought of as moribund. Non-metro Virginia appears in the gray hatched area below — mostly Southside Virginia, the far Southwest, the western mountains, and the Chesapeake Bay.

I started with the fact that, according to the data in the chart, Virginia created a net 34,000 jobs between September 2016 and Sept. 2017. I netted out the job gains and losses for the metropolitan areas shown in the chart and got a gain of 14,800 jobs that could be attributed to non-metro Virginia. That number suggests, in defiance of all anecdotal evidence to the contrary, that Virginia’s small towns and rural areas are experiencing the biggest job-creation boom of all.

Either the anecdotal evidence is deceiving or the data is wrong. I think the data is wrong, or perhaps missing vital context. The Times-Dispatch attributed the information to the Virginia Chamber Foundation, and I have no doubt that the reporter transcribed the information accurately. Unfortunately, in the time available to me, I could not track down the original source on the Chamber website, so I hit a dead end.

I went to the federal Bureau of Labor Statistics, the most authoritative labor market source I could find. These numbers reflect 12-month job growth from August 2016 to August 2017 — one month earlier than the Chamber data.

These data confirm that Hampton Roads is a drag on the economy. But the region’s economy is in slow-growth mode, not shrinkage mode, which is some consolation. It also confirms that, for a brief shining moment, Richmond is leading the pace in Virginia job creation. Hoo ah! Unfortunately, the Washington data from this source is for the metropolitan area as a whole, not just Northern Virginia, so the job-creation rate should be regarded as only a rough proxy.

Regarding the Washington/Northern Virginia economy, it is natural to assume that tight federal spending is to blame. And perhaps it is. But there’s more to the story. Northern Virginia has an extremely low unemployment rate. In fact, in certain sectors, there is a labor shortage. Consider this Virginia Employment Commission data on where the job openings are (based on online advertising):

Fairfax County — 40,605
Richmond — 11,850
Arlington — 9,899
Loudoun — 8,898
Norfolk — 5,595
Virginia Beach — 5,439
Alexandria — 5,187
Henrico — 4,441
Prince William — 4,014
Albemarle — 3,410

Obviously, there’s a strong correlation between total jobs advertised and the population of the locality. But the numbers indicate that Northern Virginia has nearly 70,000 job openings right now. A worker shortage could be the main constraint on growth, not a weak economy. The data also show that the City of Richmond is cooking with gas — the city and the larger region lost a decade reinventing itself, but the efforts finally seem to be paying off. Finally, for all of Hampton Roads’ job woes, Norfolk and Virginia Beach are still hiring.

Chart of the Day: Median Household Income

Source: Commonwealth Institute

Here’s the latest data on median household income from the Census Bureau, courtesy of the Commonwealth Institute. Nothing much new here: Residents of the Washington Metropolitan Statistical Area make 50% or more than inhabitants of Virginia’s other metros, more than $90,000, just like they always have.

There is a well-defined second tier: Hampton Roads (Virginia Beach-Norfolk), Richmond, Charlottesville and Winchester. I haven’t looked into it, but my porky sense tells me  (if you don’t get the feeble joke, porky sense is Bacon’s analogy to spidey sense) that Charlottesville is on the rise. All those horse country gentry and handsomely paid University of Virginia administrators may be pulling up median incomes.

The smaller metros — Roanoke, Lynchburg, Harrisonburg, Blacksburg, Staunton/Waynesboro — constitute a third income tier. And then there’s non-metro Virginia, which is not included in this chart, which I expect constitutes a fourth tier.

Overall, Virginians’ median income rose 1.8% last year. While incomes in the Old Dominion are relatively high — $68,100 statewide compared to the national median of $57,600 — the growth in income lagged the national average of 2.4%. Sequestration still haunts the commonwealth. Incomes in the Washington metro, only 1.5%, dragged down the state average. Once the highest-income metro in the United States, Washington now lags San Jose and San Francisco.

As an aside… the Commonwealth Institute notes that “communities of color” — African-Americans and Hispanics — tend to have much lower incomes on average, citing “structural barriers” such as poor schools, housing discrimination and employment discrimination. Given the fact that it was citing Census data on household income, the think tank appears to have missed an excellent opportunity to examine the contribution of household size and structure on income levels.

One of the biggest contributors to household income is the number of bread winners in the household. If African-American and Hispanic households are more likely than communities of pallor to consist of single-income households — as, in fact, they are — the breakdown of the family contributes in a direct and measurable way to reduced median household income.

Hampton Roads the Dragging Anchor on Virginia Job Growth

We’ve talked a lot on this blog about Virginia’s ailing mill-town economy. But the real economic laggard is Hampton Roads. Based on July 2017 Bureau of Labor Statistics data, all but one of Virginia’s metropolitan regions achieved job growth compared to 12 months previously. Hampton Roads lost 0.4% of its jobs.

Harrisonburg showed the strongest job growth, followed by Washington (which includes Northern Virginia), Richmond, Charlottesville, and Blacksburg, at 2.6% job growth. University towns, it seems, are doing just fine, as are Northern Virginia and Richmond. The smaller metros without a major university are growing but at slower rate.

Then there’s Hampton Roads. Here’s the BLS chart showing how the region’s job creation, never strong since the end of the recession, has dipped below zero several months in the past year. Job losses are concentrated in the following occupational categories: trade, transportation and utilities; information; financial activities; and leisure and hospitality.

(I couldn’t find the numbers for non-metropolitan Virginia. If someone can point me to them, I will add that data.)

Charts of the Day: Job Polarization

Virginia employment change since 2008. Source: StatChat

The good news in the ongoing evolution of Virginia’s economy is that employment in high-paying occupations has increased since 2008. The bad news is that employment in low-paying occupations has risen as well while employment in middle-class occupations is shrinking.

Kathryn Crespin with the Demographics Research Group at the University of Virginia published these charts from Bureau of Labor Statistics data in the StatChat blog.

“Job polarization is certainly not unique to Virginia,” she writes, but the trend has been more noticeable here since 2008 than in the rest of the country. … Although there has been an uptick in middle-wage job growth in Virginia over the past few years, job polarization is a nationwide, long-term trend that has developed over the past few decades and shows no signs of resolution any time soon.”

Virginia employment change since 2008. Source: StatChat

Hampton Roads Still Stuck in the Economic Doldrums

More disappointing news from Old Dominion University’s economic forecast for Hampton Roads: sub-par economic growth of 1.41% in 2017. That’s slightly below the state’s anemic 1.44% growth rate. While Congress and the President have agreed upon a sustained increase in military spending, the economists don’t expect a significant impact on the region until 2018.

The forecast expects employment growth of 3,800 for the region, concentrated in firms providing professional and business services, leisure and hospitality, and health care services — leaving the region 6,500 jobs below its record, pre-recession employment. Unemployment will decline to 4.4%.

Economic recovery is being led by the private sector. Among primary industries, the forecasters say that the factors contributing to a 6.7% increase in tourism last year should remain in place in 2017: moderate increases in federal travel, low gasoline prices, and economic growth in Hampton Roads’ historic market areas. Meanwhile, the port sector has recovered traffic losses experienced after the recession and is setting record volumes. Major capital investments have made port operations more efficient, and bigger ships, utilizing Hampton Roads’ deep channels, have been calling at the port.

But the military and naval shipbuilding continue to dominate the regional economy — defense spending accounts for 37% of domestic regional product — so, absent a large flow of expenditures from Uncle Sam, Hampton Roads is unlikely to break out of its economic doldrums this year.

Boomergeddon Watch: Higher Interest on Debt

Graphic credit: Wall Street Journal

Today’s Wall Street Journal editorial page explores the ramifications of the Federal Reserve’s decision to dial back years of Quantitative Easing and near-zero interest rates. Higher interest rates will translate directly into higher debt payments for the world’s largest debtor, Uncle Sam.

Interest on the debt rose $28 billion for the six months of fiscal 2017. Annualized, that amounts to $56 billion in a budget that is running a $522 billion deficit this year

During the era of Quantitative Easing the Fed purchased trillions of dollars of financial assets, the profits on which were remitted back to the U.S. Treasury. That amounted to a gift of between $50 billion and $70 billion or so above typical remittances of the pre-QE era. As the Fed unwinds QE and disposes of its assets, those remittances will decline as well, creating a double-barreled shot to federal budget deficits. Between higher interest payments, lower remittances and the structural imbalance of spending and revenue, increasing federal deficits are on auto-pilot. Not a single additional dollar of spending increases or tax cuts is necessary to push the nation toward fiscal crisis.

The Trump administration has different budgetary priorities than the Obama administration — it wants to increase defense spending while cutting domestic spending — but it appears to be no more serious about attacking deficits than was the Obama administration. Insofar as there seems to be a fiscal policy, it amounts to cutting regulations, reforming the tax structure and protecting American jobs from foreign competition in order to boost economic growth. In theory faster growth will generate a gusher of tax revenue that will more than make up for the tax cuts.

In my humble appraisal, dialing back regulations and reforming the tax code will stimulate economic growth, but not by a miraculous amount. The U.S. economy faces strong headwinds of an aging workforce, stagnant productivity, runaway education and health care costs, a spread of social dysfunction from the lower class to the working class, massively underfunded pensions, and fragile overseas economies. The global economy is more heavily leveraged with consumer, business and government debt than at any time in peace-time history and remains extraordinarily vulnerable to black swan events. Boomergeddon is coming. The only question is whether it takes fifteen years or twenty to get here.

Implications for Virginia. The Old Dominion is more dependent upon federal spending than almost any other, and we have more to lose than most from a federal fiscal and monetary meltdown. We need to diversify our economy, we need to bullet-proof the balance sheets of our state and local government, and we need to re-think how we deliver core government services more cost-effectively. Indeed, we should strive to be not merely resilient in the face of federal budgetary disaster, that is, in a position to survive a Boomergeddon scenario, but to be, in the words of Nassim Nicholas Taleb, “anti-fragile,” that is, in a position to actually thrive amidst a federal fiscal crack-up.

How could Virginia prosper while the rest of the country descends into fiscal anarchy? Simple: by preserving the ability to maintain core government services like roads, education, health care and public safety while other states experience fiscal insolvency and disintegrating services. Corporate capital and human capital will flee to the oases of order and sanity. Think of California during the Great Depression. Think of Switzerland today.

I acknowledge that it’s difficult to act upon projections of what might happen 15, 20 or 25 years from now. Indeed, many will accuse me of gloom-mongering. But I have read enough history and experienced enough history to know how rapidly things can change. Everything is fine… until it’s not. And then we’ll wish we’d heeded the warning signs.

Virginia Ranks 6th in Tech Employment

From the “Cyberstates 2017” research report…

Virginia tech employment (2016): 291,312
National rank: 6
Increase from previous year: 4,145 jobs
Percent of overall workforce: 7.7%

Average tech industry wages in Virginia (2016): $112,014
National rank: 7