Virginia economy to slow in 2026, U.Va. experts forecast

As far as forecasts on the economy go, it wasn’t as bad as it could have been.

On Monday, economists at the University of Virginia Weldon Cooper Center for Public Service discussed their quarterly forecast, which predicts the economic weakening Virginia experienced last year will grow worse in 2026 before improving in 2027.

Last year was one of the most terrible years for Virginia’s economy since the pandemic, according to João Ferreira, acting director of the Center for Economic and Policy Studies, part of the Weldon Cooper Center.

“We have to go back to probably the Great Recession to find a year like this,” he said. Last year, the state’s unemployment rate rose to 3.5%, and the loss of federal jobs and private sector layoffs related to slashed federal contracts hit Virginia hard.

Still, the state’s economy grew 1.5% in 2025, the center reported, and Virginia’s gross domestic product is projected to slow to 0.3% this year. In 2027, the GDP is expected to rebound to 1.6%.

Typically, Virginia’s economy outperforms the national economy. That wasn’t the case in January, February, June and October 2025, according to Ferreira. “That, of course, has to do with the fact that Virginia is more exposed to, first, the federal workforce reduction.”

The unemployment rate in the commonwealth reached 3.5% in 2025. The quarterly report projects it will rise to 4.4% this year before declining in 2027.

As for job creation, a total 1,400 jobs were created in Virginia last year, but the center projects that the state will lose 10,300 jobs this year, although in 2027, jobs are expected to increase by 0.9%, the report stated.

“What we’ll see for 2026 … is that these increasing unemployment rates will continue, mostly because the labor market should continue to suffer in the next year,” Ferreira said. “We are not in a recession, and the reason for that is that we are still predicting an increase in the real GDP.”

Virginia’s inflation rate is projected to remain at 2.5% in 2026, below the national rate. “Because as the economy in Virginia and the labor market is struggling more, many businesses and firms may be reluctant to increase some of the prices,” said Ferreira.

The 2025 economy did have bright spots. More than 16,000 jobs were created in health care services. Construction added 8,100 jobs, making it one of its best years for the sector since 2014, according to Ferreira.

Local, state and federal government lost 9,000 jobs lost in 2025. That number would have been higher without compensation by growth in state and local employment, Ferreira explained.

Manufacturing lost 6,600 jobs in 2025. It’s a sector that “continues to year after year to have losses” Ferreira said.

More than 11,000 jobs were lost in professional services in Virginia in 2025. Ferreira explained this could be related to cuts from federal contractors due to DOGE activities or to “AI and new policies that these firms are applying right now.”

AI impact is limited

In February, Microsoft AI CEO Mustafa Suleyman caused much of the world to hyperventilate by saying most white-collar work will be fully automated by artificial intelligence platforms within a year to 18 months.

Ferreira and Matthew Scheffel, another Weldon Cooper economist, did not appear convinced that a tsunami of AI unemployment is about to hit.

“We know that we are seeing impacts of AI in the job market already. Is this a trend that’s going to continue? We don’t know,” said Ferreira. “Our forecast continues to predict that now professional services will continue to grow this next year, but at the slower rate. Let’s see what happens.”

The consensus among experts, according to Scheffel, is that AI will mostly deliver a boost in productivity for workers. “People will be empowered by these tools to keep doing work,” he said.

With its newest quarterly report, Weldon Cooper experts looked at housing for the first time “because of something that everyone is discussing nowadays: affordability,” said Ferreira.

“As [with] many other states, [housing is] becoming much more expensive than the wages of … the average workers in Virginia,” said Ferreira. “In 2026, housing prices are going to have a soft landing and decrease slightly, but not that much.”

In 2025, the median listing price grew 2.9% to $446,000. It is expected to decline by 1% to $442,000 in 2026. In 2027, a 0.7% increase is projected.

Permits for new homes are projected to decline at a slower pace. After decreasing by 4.4% in 2025, permits are expected to drop by 4.1% in 2026 and 3.1% in 2027, according to the quarterly report.

Ferreira cautioned that world events could cause the forecast to change. When economists were preparing this quarterly report in recent weeks, for instance, the United States hadn’t yet attacked Iran.

“We must understand that as the situation moves forward, there will be also changes,” he said.