Financial Services: Federal policy, tariffs create economic uncertainty

Economists around the state are still speaking positively about Virginia’s economy — but there’s an elephant in the room.

The University of Virginia’s Weldon Cooper Center for Public Service expects the state’s gross domestic product will increase 2.4% this year, up from 1.9% anticipated for the nation in a Moody’s forecast delivered at the end of 2024. Old Dominion University’s Bob McNab said in his annual economic forecast in January that he anticipates the state’s GDP to increase by more than 2.5% this year.

Inflation will remain about the same in 2025, Federal Reserve staff predicted in December 2024, and in January, Richmond Fed President and CEO Tom Barkin said the U.S. economy was “in a good place.” Defense spending could grow too, boosting Hampton Roads’ economy and certain government contractors’ bottom lines.

Maybe, but here comes the elephant.

The first weeks of President Donald Trump’s hectic, headline-making second term have thrown much into doubt for Virginians, especially those who work for the federal government or in businesses or organizations that either receive federal funding or are dependent on government agencies as their clients.

More than 140,000 federal employees live in Virginia, and most of them received an email titled “Fork in the Road” in late January sent to more than 2 million federal civilian workers, offering them a seven-month buyout package if they resigned within eight days in February.

A federal judge put an indefinite hold against that deadline, but it’s quite likely a certain percentage of federal workers will be out of their jobs either willingly or unwillingly before the end of the year, experts predict.

Some federal workers were literally locked out of their offices while Trump adviser (and billionaire owner of X, SpaceX and Tesla) Elon Musk and his Department of Government Efficiency aides took charge of the Treasury Department, the Federal Emergency Management Agency, the Department of Veterans Affairs and the Federal Aviation Administration, among other agencies. DOGE’s mission from Trump: Cut staff and government spending.

Even less predictable is the potential impact of government spending cuts on Virginia’s federal contracting sector. Large defense contractors like Northrop Grumman and General Dynamics are likely to retain and receive more major defense contracts, as experts predict Trump will expand defense spending, but these contractors will need to mind their Ps and Qs. In February, Bloomberg reported that a Booz Allen Hamilton subcontractor warned the Treasury about allowing DOGE access to its payment system. That subcontractor was subsequently fired.

Govcon businesses in other sectors, such as education and foreign aid, may suffer financially as the White House targets spending in those areas. So could women- and minority-owned contracting firms if set-aside contracts end.

Meanwhile, Trump announced large tariffs on products from Mexico, Canada and China, although Canadian and Mexican heads of state worked out 30-day delays in February by promising to increase border security at their ends. Trump still went ahead with a 25% tariff on steel and aluminum imports in February, and there could be more increases soon, with the likelihood of other countries enacting retaliatory tariffs. Already China has upped tariffs on some U.S. products in response to Trump’s 10% increase on Chinese imports.

That uncertainty over long-term trade wars, McNab said in his state forecast, is driving anticipation of higher inflation in bond markets. Granted, if Trump’s tariff increases are avoided or only stay in place for short periods of time, Virginia will likely be fine economically, state economists say. The Port of Virginia so far has seen minimal impact from tariffs, although “with China, it remains to be seen,” spokesman Joe Harris noted in February.

Barkin said in February that he needed more information to see how tariffs and other policies could affect the nation’s economy and inflation, and Fed Chair Jerome Powell said in mid-February that he isn’t in a hurry to resume cutting interest rates, no matter what Trump says.

And that may be how it is for Virginia’s economy in this first year of Trump 2.0 — waiting to see what happens.