Late last year I attended the Virginia Chamber of Commerce’s 7th Annual Virginia Economic Summit in Williamsburg, where representatives from ODU’s Center for Economic Analysis and Policy presented their 2016 State of the Commonwealth Report.

The Virginia Economy in Transition

Virginia’s economy grew at only 1.4 percent last year. That’s much better than the 0.1 and 0.2 percent that we experienced in 2013 and 2014, but was still only good enough to move us up from 48th to 33rd in our ranking of the 50 states. Hampton Roads experienced 3.7 percent growth, Richmond 3.9, and the NOVA area, which accounts for 42 percent of Virginia’s metropolitan GDP, only saw 1.3 percent growth.

The report attributes most of this dismal growth to Virginia’s reliance on federal spending, which is almost 30 percent of state GDP. Sequestration was a factor, and we have lost over 25,000 active-duty personnel since 2000. The report claims we saw a $10 billion reduction in federal defense and non-defense contracts, most of which impacts Hampton Roads, Fairfax County and Arlington.

Some good news: wage growth outpaced inflation.
More bad news: labor force participation has been declining so much that the labor pool is shrinking. What to make of this is a bit difficult, since there are several hypotheses to explain the drop, and there doesn’t seem to be definitive evidence to any specific cause. The authors claim that discouraged workers and systemic unemployment are the most important factors, but together, those only account for half of the recent change.

Discouraged workers: people who have dropped out cause they can’t find a job. The Bureau of Labor Statistics reports a 5% gap between the publicized “U3” unemployment figures and the “U6” rate that included the underemployed and discouraged workers. (Historical data from 1994 is available here: )
Aging population: One would think that labor force participation would drop as a population ages, but the data shows that it’s actually picked up in recent years. 
Generous social safety net (AKA the welfare queen theory): The authors claim that this theory has “limited emprical validity”, and that it doesn’t account for more than 10–20% of the variations in labor force participation.
Rising disability claims: Accounts for no more than one-fifth of the recent declines. 
Increased college attendence: no longer a factor.

This all represents a bit of a mixed bag for Virginia. Unemployment is down, wages are up, but the labor force is shrinking. Our reliance on defense spending means that we will likely not see growth in excess of 2 percent for 2016 or going into 2017. This is especially concerning given Virginia’s performance relative other states.

The authors recommend the following actions to spur growth: 
Investments in research and development
Improving the education system
Developing exports
Diversify the economy
Improving transportation
Economic development efforts for new or expanding businesses
Improving regulatory climate

Other random notes:

75 percent of job creation in Virginia comes from growth in existing firms.

The Virginia Economic Development Partnership, which has been getting bad press recently, created 20,000 of the 67,000 jobs created by the state in 2015.