While the Hampton Roads economy is outperforming the national economy at the moment, the future remains “murky,” according to Old Dominion University’s 13th annual State of the Region report. “We’re doing better than most everybody else nationally, but not as well as we would like,” said James Koch, an economist and former ODU president who edited the report.
Defense spending has acted as a stabilizer for the regional economy but the outlook for defense spending looks “hazardous” as the federal government confronts its chronic budget deficits. Despite efforts to diversify the regional economic base, Koch said, Hampton Roads has grown more reliant on defense spending, which accounted for 45.6 percent of regional economic activity last year, compared with 34.5 percent in 2000.
“I hesitate to be too critical, except to say that we haven’t been successful in diversifying, and we have to pay more and more attention to that,” Koch said. (Read the coverage in the Virginian-Pilot.)
Meanwhile, in Northern Virginia, the region’s commercial office market is stalling, with little prospect of gaining forward momentum, according to Jones Lang LaSalle’s Q3 office research. Northern Virginia, of course, faces many of the same problems as Hampton Roads, with its dependence upon Pentagon spending. The main difference is that a much larger share of the spending goes to private-sector contractors.
“Do not expect the usual suspects ― the federal government, contractors and law firms ― to get the Washington region market out of this slump,” JLL’s Managing Director Creighton Armstrong said in a statement. “Organic growth is going to have to come from another source.” (Virginia Business has the story here.)
At least Northern Virginia has the potential to reinvent itself. The region’s defense contractors employ a lot of tech-savvy people. As the firms shrink, throwing thousands out of work, we can predict that some laid-off employees will launch start-up enterprises. Whether those start-ups can achieve critical mass rapidly enough to pick up the slack in the regional economy , however, is an open question.
While other Virginia regions may not be directly in the line of fire from downsized military budgets, we will feel the impact indirectly. If the NoVa and Hampton Roads economies tumble, so will state tax revenues, potentially triggering another state budget crisis. We live in precarious times.