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Our Economy Is Still In Recovery Mode

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Federal spending is back on the upswing and that may provide part of the explanation for Virginia’s uptick in employment growth.

President Obama’s budget shows a 7 percent increase in spending in the fiscal year that ends Sept. 30 compared with the prior year.

Employment growth in Virginia accelerated to 1.3 percent for the 12 months that ended in June. That’s up from the 0.7 percent year-over-year growth in January.

Even so, it remains slower than the 2.1 percent in the nation over the same period ending in June.

Even the defense-intensive professional and business services sector grew 1 percent over that period in Virginia. It also remains slower than the 3.5 percent growth in the nation for the same sector.

The president’s budget has federal spending growing on average 5.4 percent a year from the current fiscal year through the fiscal year that ends Sept. 30, 2020, with national defense essentially having zero increases.

Although slower than the 6.6 percent annual average growth from the 2000 fiscal year to the peak in the 2011 fiscal year, the return to some growth in spending is good news for states and metropolitan areas that are dependent on federal contract spending.

But we’re not out of the woods yet.

A January 2015 Congressional Budget Office report indicates that defense and nondefense funding are equal to or below the current fiscal year budget caps, but the president’s budget for the fiscal year that begins Oct. 1  ignores the caps put in place by the budget control act of 2011 and modified by the bipartisan budget in 2013.

If the caps are exceeded, a sequestration will reduce federal discretionary spending by about $139 billion in next fiscal year’s budget below the president’s request. About 64 percent of the reduction will occur in defense spending based on current laws.

Virginia receives more federal contract awards than any other state in the nation, so it stands to reason that our state’s future growth remains at risk.

So which metro area economies are most dependent on revenue derived from contract work for the federal government? Which ones are most at-risk if we see another round of sequestration?

The Washington, D.C. region, which includes Northern Virginia and parts of Maryland, topped the list of 381 MSAs in the country with $71.3 billion in federal spending in the current fiscal year, according to an analysis by Chmura Economics & Analytics. The firm looked at federal contract spending data and assigned it a metro geography based on where the awarded company performed the work and adjusted it for time of performance since some contracts are awarded for work that is performed over a number of years.

Even by looking just at the Virginia part of the Washington region, that area still ranks No. 1 $38.8 billion.

Hampton Roads ranked 5th with $11.8 billion.

The Richmond region was No. 69 with slightly less than $1 billion.

A better way to assess the risk of a region to potential cuts in federal spending is to consider the concentration relative to employment.

From that perspective, Northern Virginia ranked fifth in the nation with an average $30,100 in contracts per employee.

The four areas across the country that ranked higher than Northern Virginia were Idaho Falls, Idaho ($47,976 per employee); California-Lexington Park, Md. ($40,095); Amarillo, Texas ($31,766); and Huntsville, Ala. ($31,179). All of those areas are much smaller than Northern Virginia in terms of employment.

Hampton Roads ranks 11th in the nation with $16,445 per worker while the Richmond area ranks No. 138 with $1,648 per employee.

Will sequestration happen? If so, the Richmond region’s exposure is small, but Northern Virginia and Hampton Roads can see further impacts from reduced federal spending.

(This article first ran in the Richmond Times Dispatch)

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