Off the pace

It’s not a roaring comeback by any measure, but Virginia’s economy is growing. Housing sales are rebounding. Construction hiring is up. Unemployment keeps going down, dropping to 5.2 percent in December. And most important, the federal budget is not locked in a game of partisan brinksmanship the way it had been in the past few years. Federal dollars have long been the lifeblood of Virginia’s statewide economy, and the congressional budget agreement reached late last year gives businesses some certainty.

So, for most of the commonwealth, this year looks like it will bring at least modest improvement. After the recession and the sluggish recovery since 2010, that’s not so bad. Yet, there are reasons for concern about how the current recovery is unfolding and whether Virginia will be able to sustain stronger growth over the next decade.

The biggest hit this year is the lingering effect of federal spending cuts. Virginia actually faces predicted growth rates below the national average for the next few years. According to data from George Mason University’s Center for Regional Analysis, Virginia took less of a blow from the recession than did the rest of the country, but its recovery will be significantly slower.

Virginia’s economy shrank just 0.7 percent in 2009, the recession’s worst year, while the U.S. economy declined 2.8 percent. Yet Virginia has lagged behind the nation’s economic growth in every year since, a pattern that the center predicts will continue through 2017. “This is an unusual position for us because we’ve gotten used to benefiting from all of the government spending,” says Christine Chmura of Chmura Economics & Analytics in Richmond.

Plus, Virginia’s rebound so far is weaker at replacing the mid-wage jobs. During the recession, Virginia lost close to 80,000 jobs at that income level but replaced only 20,000 of them so far, according to GMU data. “That shows the hollowing out of the middle class over the past decade,” Chmura says, a trend that has been happening nationwide. “The job growth [in Virginia] has been at the highest-paid and the lowest- paid [positions].”

Many of those mid-wage jobs have been lost in manufacturing sectors, but that sector is regaining strength, she says, by adding jobs in advanced manufacturing. “That should help the mid-wage jobs, so I would expect to see some of that hollowing out of the middle class reversed in the next few years, but not a total reversal,” she says.

Training a key issue
A big obstacle to regaining those jobs is training, which many believe is key to the state’s economic future. “There are areas where there is demand, for example in IT jobs, and we’re just not producing enough graduates in those areas. There are openings that are not being filled,” Chmura says.

Still, economists expect most of the state to see at least modest growth. Northern Virginia, for example, with 1.3 million of the state’s workers, is projected to increase its employment by 1.2 percent this year. Most of the federal spending in Northern Virginia falls under the category of professional services, and jobs in that area have dropped 1.3 percent from a year ago, Chmura says.

“Northern Virginia has a higher education level, and the higher the education level, the more opportunities,” she says. “I would expect Northern Virginia to be more resilient than many economies, just because of its highly educated workforce.”

Gerald Gordon, president and CEO of the Fairfax Economic Development Authority, agrees that Northern Virginia is having a slower recovery this year because of federal budget cuts, but he sees some opportunity in changing federal priorities. “One of the things the federal government has said is it will actually increase funding for is cybersecurity, which is a strength of ours because we’re so dominant in the IT area,” he says.

In spite of the spending cuts, the D.C. region is still where the government gets much of its work done. “Even when the federal government cuts $85 billion a year for a couple of years at least, they are still going to be a larger buyer of goods and services, so they’re still a strong anchor of the economy,” he says.

Bullish in Hampton Roads
Hampton Roads is the state’s other major recipient of federal money, mostly defense-related dollars. Chmura says Hampton Roads’ federal contracts mostly are related to shipbuilding, “and for the most part those contracts have held up. We haven’t seen much of a decrease there, if any,” she says. She predicts job growth of about 1.3 percent this year.

Vinod Agarwal, a professor at Old Dominion University who works on the school’s Economic Forecasting Project, is optimistic. “I’m more bullish on 2014 than I was about three months ago,” he says. “In the last couple of years, the federal government has really created a lot of uncertainty, and, in an uncertain environment, businesses are not anxious to make long-term plans.” With a federal budget agreement in place “it has taken that uncertainty out, so businesses know what the fiscal environment will be for 2014 and 2015.”

Agarwal says there’s actually more defense-related money available in the coming year, which is good news for defense contractors. After enduring the cuts related to sequestration, discretionary defense spending will rise about $30 billion nationwide this year, he predicts. “We do not [yet] know how this extra money will play out in this region,” he says. “But from all I have seen, defense contractors seem to be happy in this area, and ship-repair contractors are happy. So, they see positive signs, which means they’ll start hiring people.”

ODU’s projections for 2014 call for the region’s employment to rise about 1.5 percent, and retail sales to increase at least 3.5 percent. Unemployment could drop to 5.3 percent, down from 5.9 percent for 2013.

The region’s housing and construction sectors already are improving, with a surge last year in the number of new apartment projects. And, the Port of Virginia should benefit from the higher retail demand across the nation, with tonnage rising about 6 percent, Agarwal says.

Cloud on the horizon
A cloud that briefly appeared on the horizon for the Hampton Roads’ economy now appears to have vanished. It involved a Pentagon proposal that would deactivate an aircraft carrier.

Next year three aircraft carriers are scheduled to rotate. The aircraft carrier George Washington is due to return to Hampton Roads next year from Japan. At the same time, the Theodore Roosevelt would move from Norfolk to San Diego. Replacing the George Washington in Japan would be the Ronald Reagan, currently based in San Diego.

The George Washington, which left Norfolk for Japan in 2008, is scheduled to undergo an extensive refueling and overhaul costing more than $3 billion at Newport News Shipbuilding.

Defense News, however, reported in January that  the Pentagon was  considering eliminating one aircraft carrier and a carrier air wing. “The carrier most often targeted is the Japan-based George Washington,” the report said.  By February, however, that idea was off the table, after the Pentagon received a letter protesting the move from a bipartisan group of lawmakers, according to The Wall Street Journal.
2 million jobs

The Virginia Chamber of Commerce, the state’s leading business advocacy group, is pushing for more state money for workforce training. It’s part of Blueprint Virginia, a comprehensive economic plan the chamber spearheaded last year. “Virginia is going to have about 1.3 million workers retire in the next 10 years, and we’re going to have a need for about 800,000 new jobs, based on a very conservative 2 percent growth rate,” says Barry DuVal, the chamber’s president and CEO. “The total is about 2 million jobs over the next 10 years. That will be the engine that fuels our economy,” he says.

Virginia isn’t ready, DuVal says. “Our concern is that about 50 percent of the jobs are going to be in the science, technology and mathematics fields. What the chamber is supporting is investments in workforce training, in education and in public-private partnerships that will fill that need in the years to come.”

Former Gov. Bob McDonnell proposed $183 million in funding for higher education in the two-year budget he proposed in December, and the chamber backs that spending, DuVal says. The money would support goals of the 2011 Higher Education Opportunity Act, which seeks to produce an additional 100,000 college degrees by 2025 and to encourage students to study the STEM-H fields — science, technology, engineering, math and health. “We think the colleges and universities have the right vision and are supporting what the business community needs,” DuVal says.

The chamber is pushing its priorities in the current General Assembly session, supporting bills to increase funding for STEM-H education efforts. Those bills are being proposed by Del. Chris Jones, a Republican representing Chesapeake and Suffolk, and Sen. Walter Stosch, a Republican representing parts of Henrico and Hanover counties.

Personalized medicine
In Fairfax, Gordon, the economic development authority CEO, also is looking to catch the next wave of high-wage job growth. He thinks the county should move toward personalized medicine, a new field in which medical therapies are based on an individual’s genetic information. This nascent field lies at the intersection of information technology and the life sciences.

Gordon believes the commercial growth in the field is still several years away, but thinks Virginia is at risk of missing out. “The discoveries that will lead to the jobs will take place where the financing is available for the research,” he says. Places like Northern California and Boston are at the top. “We don’t have enough researchers. What we need to do is attract the capital, which will attract the best scientists and researchers,” he says.

Cuts in recent years in federal research grants through the National Institutes of Health have made finding research funding more difficult. Nonetheless, there’s been some movement in the field — in 2011, Inova Health System in Fairfax launched the Inova Translational Medicine Institute. It hired as its CEO Dr. John Niederhuber, former director of the National Cancer Institute, and put in $150 million in startup money.

“That’s a drop in the bucket compared to what’s available” in other areas, Gordon says. “In Boston and Northern California, they have the venture capital community that will fund these things. They understand taking risk and reaping the reward for it. We don’t have any large venture capital community here. These are very, very long-term investments, and the return is uncertain, and it’s high risk.”

The competition isn’t just from other U.S. regions, but from other countries as well. “I don’t know what the answer is. It’s got to be the long-term, high-risk funding that will generate these results, and we don’t have it. How do you get it, that’s the issue.”

All of the big plans and big numbers about which direction the state’s economy is going may not mean much to businesses trying to have some success for the rest of this year. DuVal says a closer look at the business environment reveals a key difference. “I see almost two Virginias,” he says. “Some of the larger companies are more optimistic than smaller companies.”

Bigger firms that endured the recession years made the cuts and changes they needed to make “and are in a fairly healthy financial position,” he says. “Then you have smaller businesses that are still recovering. They’d like to see some growth, but they’re concerned about the economy.”