Virginia’s Economic Performance Ticks Higher

Source: Old Dominion University, “2019 State of the Commonwealth Report”

by James A. Bacon

After years of markedly under-performing the rate of U.S. economic growth, Virginia’s economy appears to be approaching national parity, according to data published by Old Dominion University’s “2019 State of the Commonwealth Report.” Indeed, as the U.S. economy slows somewhat this year, the authors expect Virginia to exceed the national rate by a small margin.

One sign of a vibrant economy is Virginia’s low statewide unemployment rate, 2.6%, significantly below the national rate of 3.6%. The Old Dominion has enjoyed a lower unemployment rate for decades, but as the economy reaches full employment, the gap between Virginia and the national has narrowed in recent years.

Unemployment can be a deceptive number.  A low unemployment rate coupled with a low labor participation rate is not a sign of dynamism; it could indicate that a large percentage of workers are “discouraged,” have stopped looking for a job, and are scraping by on savings and/or government benefits.  Nationally, the labor participation rate has declined over the past decade. In Virginia it has inched back up, hitting 66% this year.

Economic prosperity depends upon more than job creation — it requires good jobs, high-paying jobs. Virginia continues to maintain an hourly earnings differential of about $1 — $28.71 compared to $27.67 — above the national average.

In sum, the economic picture in Virginia is looking better than it has in recent years. But the ODU report issues some warnings. For one thing, the commonwealth remains more dependent than any other state upon federal spending. If federal spending takes a hit — and the ODU economists warn that the bill for swelling deficits and national debts will come due one day — Virginia’s economy will suffer disproportionately.

This table shows the five states with the biggest “balance of payments,” indicating the largest gap between federal income taxes paid and federal spending. Discretionary spending such as contracts and awards (as opposed to mandatory payments like Social Security) are the most vulnerable to cutbacks in budgetary bad times.

One other disturbing indicator is the slowing rate of new business formations as measured by “establishment” growth. (An establishment is a physical location where business is conducted or where services or industrial operations are performed.” In the 1990s, Virginia experienced a faster growth rate than the national average. But the state has lagged the national rate since 2000. The total number of establishments was lower in 2016 (199,548) than in 2007 (200,503).

The most positive indicator, not reflected in these statistics, is Virginia’s resurgence in “Best States for Business” rankings. The Old Dominion regained the top spot in the CNBC ranking this year. Plus, after a lengthy delayed reaction, Amazon decision to locate its HQ2 project in Arlington — creating 25,000 direct jobs, not counting indirect jobs — should start kicking in at some point.

Not long ago, Virginia had one of the strongest state economies in the country. The malaise of the 2010s may be the most prolonged slow-growth period of the post World War II era. Could Virginia regain its mojo next year? Depending on how long the federal government can prolong its deficit-spending binge — and there is no sign of fiscal restraint on the horizon — it could happen.

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12 responses to “Virginia’s Economic Performance Ticks Higher”

  1. Dick Hall-Sizemore Avatar
    Dick Hall-Sizemore

    I learned many things at the feet of Ric Brown. One of those was that Virginia is usually slower to go into recession than the national economy and slower to recover.

    1. TooManyTaxes Avatar

      That makes good sense. The reliance on the federal government gives protection against a slowdown in the economy. But the lack of a large and dynamic totally private sector slows recovery and growth.

      Another factor I (and others) believe effects non-federal growth is the risk-minimizing tendencies of people who work in the D.C. area. There is much less risk in working for the federal government or being a contractor than working totally in other markets.

      Further, most businesses that use lobbyists or regulatory specialists are trying to minimize risk through government action (legislation and agency regulation). A good example is trying to exclude competitors from the market through regulation, including market entry requirements or seeking subsidies.

  2. LarrytheG Avatar

    The interesting thing is that normally deficit spending is the cure for a recession and the theory is when the economy recovers, you use the increased revenues to pay down the debt.

    But – it tutns out that “stimulus” – deficit-spending can also
    supercharge a good economy. Not sure what happens when the economy cycles back again.

    So really – you have increased govt spending which creates (primarily) contractor jobs but the money spends the same but contractors get laid off when cuts are made.

    Tax cuts on top of that – shaazaaammm …

    No question that govt spending in Va is a bit of a curse because as long as the money rolls in – the pressure to do private sector economic development is not as urgent. Just compare Virginia’s military-funded economy with North Carolinas private sector economy.

    Merry Christmas to all in BR and a Good Year to follow!

  3. LarrytheG Avatar

    Merry Christmas !

    One of the things many seniors are thankful for is Medicare – it covers everyone who is age 65 regardless of their health status or “pre-existing” conditions but how it’s funded is always a discussion.

    re: mandatory versus discretionary spending

    Mandatory spending received $2.4 trillion of the total $3.9 trillion of federal spending in 2016. 945 billion of it is Social Security.
    Here’s the major categories of mandatory spending:

    Keep in mind that Social Security is ENTIRELY funded from FICA taxes – not general fund.

    Four major categories of mandatory spending are Social Security and Medicare ( which is really several parts).

    Over the years, there were actually excess FICA taxes that went into a “Trust Fund” which the govt did and DOES borrow from to pay bills – and the govt has to pay it back – but keep in mind the money that was put into the trust fund originally – all of came from FICA taxes – none of it from the general fund. Social Security IS mandatory spending but it is NOT subsidized from the general fund.

    Medicare Part A – which pays for hospitals ALSO is funded from FICA taxes and not general fund and so far has had enough FICA taxes collected to pay full benefits until 2026.

    Social Security Disability – also funded from FICA taxes and no longer generates more money than pay-outs and as a result, benefits are being cut and qualification harder and harder to keep it within its’ current funding.

    Medicare Part B – which pays for Medical providers, doctors, labs, etc IS funded 3/4 from the govt general funds and 1/4 from premiums to those who have Medicare. Premiums are going up $10 from $134 to $144 and that means the Govt share is also going up $30 per subscriber times 44 million people (Currently, some 15 percent of the U.S. population—are enrolled in the Medicare). By 2030 – enrollment is expected to be 79 million.

    Medicare program cost $582 billion — about 14 percent of total federal government spending. The increase this year is about 2 billion.

    see next post for the trend

  4. Reed Fawell 3rd Avatar
    Reed Fawell 3rd

    Time is short this Christmas day. What follows is only an outline of what will follow later this week on Jim’s fine reporting here.

    I suggest that Virginia’s rosy economic news, “according to data published by Old Dominion University’s “2019 State of the Commonwealth Report,” rests on a surprisingly firm and optimistic foundation.

    1. The Trump Economy.
    2. The Amazon Economy.
    3. The Renaissance of rural Virginia.

    These three wheelhouses, working together, are likely to carry Virginia into a future of sustained economic growth and prosperity that are unprecedented in Virginia history.

    Here I will touch very lightly on each wheelhouse.

    1. The Trump Economy.

    The Trump economy is surprisingly strong, deep, varied and innovative. It is rebuilding America now from the ground up, and it is packed with long term major game changers.

    This Trump economy is revolutionary. Its holds within its elements the capacity to heal much if the great damage done to American society by the cannibalizing American economies that hollowed out much of America starting in the 1990’s through 2016.

    This cannibalization began with Ross Perrot’s great, but unheeded, clarion call – I hear a great sucking sound.” Large segments of America were left like jetsam in its wake. Drugs, money give-away bribes, poison pill loans for housing and education, angry race and identity politics, out of control systems of higher and lower education built on narcissistic crony capitalism combined with the growing dysfunction of American politics and government, preyed on US society like never before, a vulture engaging in discrimination on a massive scale, while at same time it robbed much of society blind.

    Despite all this corruption still ongoing, Virginia is well positioned to benefit greatly from the Trump Economy, and counter to significant degree, the harms reeked by prior Administrations, since the early 1990s. The reasons for this beyond its fortuitous location, are listed in items 2 and 3 above, for which elements of Virginia’s state government deserves much credit.

    As to location: Given Virginia’s location next to the nation’s capital, and its defense ports and installations, Virginia will and is now gaining a disproportionate share of this revolutionary Trump economy. Trump’s defense spending pumping money into Virginia speaks for itself.

    But Virginia, can claim full credit for:

    2. The Amazon Economy.
    3. The Renaissance of rural Virginia.

    Here lies Virginia great advantages and the states great opportunities for a remarkable future. Much more on that after Christmas.

    1. It’s nice to hear a voice of optimism in these pessimistic times.

      I largely agree with you about the Trump economy — with one major caveat. Deficit spending and the national debt are getting worse, not better. If the economy is about $20 trillion and the deficit is about $1 trillion, deficits are 5% of the economy. If GDP was growing 5% a year, it wouldn’ t be a problem… but nominal GDP growth is about 4%, so deficits are increasing as a percentage of GDP… which is a problem.

      I look forward to your thinking about the Amazon economy and Virginia’s rural renaissance.

    2. Dick Hall-Sizemore Avatar
      Dick Hall-Sizemore

      I can’t let this pass. The “Trump economy” is an extension of 7 years of GDP growth than began in the Obama administration. Furthermore, the average annual GDP growth under Trump has been lower than under Obama. Finally, the GDP growth under Trump would have been lower if not for the temporary effect of large tax cuts that benefited mostly the rich.

  5. LarrytheG Avatar

    The “Trump Economy” is basically deficit spending to goose the economy – also called “stimulus” and exactly what Obama wanted to help the economy recover quicker from the meltdown he inherited from Bush.

    Remember the Auto and Bank bailouts?

    What we’re doing right now is fiscally irresponsible because sooner or later – the economy will flag – and the only remedy will be to actually increase deficit spending and headed to where Greece went.

    Use to be Republicans claimed the Dems would take us to financial ruin with deficit spending – remember that?

    Remember the debt “clock” ? where is it now?

    The Trump Economy indeed!

  6. johnrandolphofroanoke Avatar

    I point this problem of debt and deficits out to my 11th graders. I also raise the fact that their generation will be forced to confront this problem. Universal answer from students: kick the can down the road to the next generation. Perhaps Jefferson was right “the earth belongs to the living.”

  7. LarrytheG Avatar

    Well the earth DOES belong to the living but passing on debt to the next generation is a lot like starting out as a young person with a mountain of education debt that has preempted, starved their ability to invest in their own benefit – they owe it already to something else. It’s like being s sharecropper that owes the company store.

  8. LarrytheG Avatar

    Our economy has fundamentally changed both with regard to the concept of “investment” as well as how inflation works.

    I don’t think Trump gives a crap as to why – he’s your typical “go go” type guy…. not that different than those guys who were doing bad mortgage loans and blew up the economy – causing massive bailouts of banks and auto companies. Putting TRump in charge of the economy would be like putting the Mortgage security guys in charge… they work for their own benefit – if the economy goes south as a result – too bad.

    but the economy has fundamentally evolved and changed because of the nature of software and our ability to gather data and use that data to create businesses – without a penny going into a an asset that is “depreciated” over years.

    An “investment” know is in a few lines of computer code and a data “pipe” which is basically broadband internet – yes wires on site – but wires like electricity.. the electricity is the fuel for the equipment – and now so is data…it’s “fuel” for as many different “enterprises” that can exist in an economy – and those enterprises can be almost ephemeral – existing for a few months or years then replaced by something even more efficient and useful.

    So many industries have been so fundamentally changed in recent years that their place in the economy is no longer a “given” – a “constant”..

    In terms of “investment” – we have incentivized it in the tax code as something long term that takes years to get an ROI and the physical plant is expensed as . We tax it at a lower rate and we allow investment into “hard” equipment to be “expensed” and depreciated over years. But now days the “machinery” that drives the economy is “soft”. It’s almost infinitely re-configureable overnight with a change to “software” instead of months/years from tool and die work.

    You buy as much of it you need – when you need it – from Amazon AWS and if business hits ups and downs – you change
    how much you buy – you reduce expenses fast and you know longer have your “investment” money sunk in equipment that has been obsoleted sooner than you expected.

    All these data centers – we all know about them but do we really know what the place is in the economy? Do economists know?

    All these data centers – that’s the “investment” into hard tangible equipment these days and it’s not unique one-off stuff, its pretty much standardized computers and storage and networking…

    what’s actually different is the data – what’s “in” the data, how you get the data.. it’s all about the data!

    companies have formed almost overnight, for instance, that determine how many students are in attendance at a College lecture course – the students “check in” when they enter the room with their phones. No phone – you’re absent!

    Employers are doing that now. No more time clocks – you “clock” in when you come through the door with your phone!

    Machines that make car parts are computerized… you can change the shape of a fender – or a bracket or a computer console…

    That’s true of a LOT of hardware whether it’s heat pumps or medical equipment. Changes to equipment doesn’t take years of investments and new employees – it can happen within days or weeks or months.

    So the demand for capital to expand “plants” is very different than before and basically “investmestments” are no longer really long term “capital” investments. They’re money chasing after data and software and people that know how to play with data and software like a cook knows how to reconfigure recipes.

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