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Economic Impact: Even with brighter outlook ahead for defense spending, can Virginia achieve economic diversity?

Diversity is an important notion when thinking about investments.

Yet it seems that we only really appreciate diversity when the stock market is down. As the market is rising, we often wish our portfolio were more heavily weighted in stocks. That’s where financial advisers earn their keep.

The same seems to be true of economies.

The Virginia economy is heavily dependent on Department of Defense spending. In fact, firms in Virginia performed more defense contracts in the federal fiscal year that ended Sept. 30, 2017 than any other state except California.

The state’s increasing dependence on defense spending propelled employment to grow faster than most states during the first decade of 2000, when defense spending also was on the increase. I don’t recall much talk about diversity during that period.

Then came the Budget Control Act of 2011 that enforced federal government spending cuts. On top of that, the federal government shutdown in the first half of October 2013 hampered employment growth in Virginia.

Defense contracts performed in the state, for example, fell from $40 billion in the fiscal year ending in September 2013 to a low of $34.4 billion in the fiscal year ending in September 2016.

Since the federal government shutdown in October 2013, Virginia’s year-over-year employment growth has only outpaced that of the nation for 10 months. Calls for diversification away from Defense Department were heard around the state during this period.

With the new administration, defense contracts performed in the state inched up to $34.6 billion in the last fiscal year. Based on the President Trump’s budget and our calculations, Virginia firms look to gain $4.4 billion in Defense Department business over the next two years — a 12.6 percent increase through the fiscal year that ends Sept. 30, 2019.

So it should not be too surprising that employment in Virginia grew 1.5 percent over the 12 months ending with June 2018 — that’s almost back up to the national growth rate of 1.6 percent — after 27 straight months of Virginia lagging the nation.

The Northern Virginia metro area, which performed 63.6 percent of the Defense Department contracts last fiscal year, is back to its historical norm of creating 40 percent of the jobs in the state.

Employment in Virginia rose 57,500 over the 12 months ending in June and Northern Virginia added 23,372 of those jobs.

Hampton Roads, after shedding jobs each month from October 2017 to January 2018, added 4,144 over the 12 months ending in June and will see more gains as Huntington Ingalls Industries’ Newport News Shipbuilding division announced it will be hiring 7,000 shipbuilders over the next five years.

The Richmond metro area has little dependence on defense spending — it performed only 3 percent of all the defense work in the state during the last fiscal year.

The region added 4,114 jobs over the 12 months ending with June. Richmond area’s jobs growth outperformed Northern Virginia and Hampton Roads from 2012 to 2015, largely due to its diverse economy and less reliance on defense spending.

The Richmond region’s diversity reflects that of the nation, with major industry sectors making up a similar proportion of employment. The two exceptions are manufacturing (5 percent in Richmond versus 9 percent in the nation) and professional business services (17 percent in Richmond versus 14 percent in the nation).

In contrast, Northern Virginia is heavily weighted in professional business services (27 percent) — the sector that receives most of the defense spending. Hampton Roads is more heavily weighted in manufacturing (7 percent) largely because of shipbuilding.

A diverse economy, similar to that of the nation, implies that the regional economy will not be hurt disproportionally when an economic shock occurs, whether it be defense cuts or a trade war with China.

With a brighter outlook ahead for defense spending, it will be interesting to see if economic diversity remains a concern.

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