Virginia not in recession, experts say, but significant challenges remain

An economic report from Old Dominion University‘s Dragas Center for Economic Analysis and Policy notes that Virginia is not yet in a recession, but that doesn’t mean it’s all sunshine and rainbows for state’s economy.

The report, authored by economists Bob McNab and Vinod Agarwal and released Wednesday, provided an overview of Virginia’s 2025 economic trends and made predictions for what is to come.

“My personal opinion is that we’re not in a recession yet, but we’re looking over the cliff at one,” McNab said.

The report notes that the state’s gross domestic product growth slowed in 2025 and is expected to remain anemic this year due to federal layoffs, contract cuts, higher tariffs, changes in immigration policy and general uncertainty. The state’s GDP growth in 2025 was 1.2%, down from 2024’s 2.4%. The report forecasts 1% GDP growth in 2026.

Unemployment rises

The civilian labor force dipped to about 4.527 million by December 2025, down 71,634 from the approximately 4.598 million in December 2024. In 2024, the state’s civilian labor force increased each month of the year, whereas last year it decreased each month.

Citing data from the Bureau of Labor Statistics, the report noted that the state’s unemployment rate was 3.6% in December 2025, lower than the national average of 4.4% for December 2025, but significantly higher than Virginia’s unemployment rate of 2.9% in December 2024. McNab predicts the unemployment rate will continue to climb.

Joseph Mengedoth, a regional economist at the Federal Reserve Bank of Richmond, emphasized that although the state’s unemployment rate is higher than in 2018 and 2019, when the rates were below 3%, they are favorable compared to around 2015 and 2016, when the unemployment rate was around 4%. He compiled an economic snapshot for the Fed’s Fifth District, which includes Virginia, released this week.

“And 4% is sort of where, for a long time, economists have said, that’s sort of the natural rate of unemployment for just people moving in and out of the labor force,” Mengedoth said. “So still, I think Virginia’s unemployment rate situation is not that bad.”

McNab noted that many Virginians who left the labor force in 2025 may have left the state entirely, meaning they are not counted in the state’s unemployment figures.

“If they had remained in the labor force and were treated as unemployed, our unemployment rate would be closer to 4% than 3.6%,” he said. “So those discouraged workers, those people who are detaching themselves from the labor force and exiting entirely, are no longer counted in the calculation of the unemployment rate.”

Data from the Richmond Fed suggests another factor may be at play with the unemployment rate: retirement. Mengedoth said declining labor force participation in Virginia might indicate older workers leaving the workforce rather than being laid off.

“If all these folks were leaving employment and ending up unemployed, we would see that spike even more,” he said. “And we’re not really seeing that.”

Except for January and July, federal civilian payrolls declined each month in 2025, with the largest drop in October, a loss of 11,400 jobs. The October spike showed the departure of tens of thousands of federal workers who had accepted a deferred resignation package earlier in 2025.

There was a loss of 23,900 federal jobs in Virginia last year, followed by 12,700 in the leisure and hospitality industry, 7,900 in professional and business services and 5,900 in manufacturing. McNab said declines in international travel are the likely culprit in the harm to the leisure and hospitality industry.

There were 20,324 unemployment claims for the week of Jan. 17, up from 16,426 for the same week in 2025 and 13,351 for the same week in 2024.

Other economic concerns

The Dragas report said that higher U.S. tariffs lowered employment in manufacturing, increased tariffs on U.S. exports, and reduced real GDP growth. It also cited findings from the Kiel Institute, which estimated that 96% of U.S. tariffs were passed through to American consumers and businesses.

The report said the percentage of the total number of 20-foot equivalent units (TEUs) loaded at the Port of Virginia declined each month in 2025 compared to 2024, except in March and October.

McNab said 2025 was not a good year economically, and that the state experienced “significant headwinds.” He forecasts that there will still be slow growth in 2026, but that the number of jobs will largely stay around the same.

Mengedoth described Virginia’s economy as in a “low hire, low fire” phase, with businesses largely holding staffing steady rather than expanding or downsizing aggressively. He said many employers are allowing headcounts to drift down through attrition while testing productivity gains from artificial intelligence, rather than adding workers.

McNab said growth will primarily depend on higher-income households, which make up more than 50% of consumption in the United States.

“If the stock market continues to increase, if property values continue to increase, economic activity will continue to grow,” McNab said. “However, the danger is given increasing levels of federal debt, given that we’ve seen international investors become increasingly reluctant to buy treasuries or sell treasuries, right because of political uncertainty, that recovery is increasingly sensitive and uncertain.”