Increased military spending could benefit Virginia’s economy

Virginia stands to receive more benefit than any other state in the country under the president’s plan to increase military spending.

In President Trump’s address to Congress last week, his plan “calls for one of the largest increases in national defense spending in American history.”

Defense spending contributes to the Virginia economy in multi-facet ways.

The Department of Defense operates in Virginia as well as military bases such as Quantico, Fort A.P. Hill, Norfolk Naval Base and Fort Lee. Those operations and bases create thousands of military and civilian jobs in the state.

Virginia’s firms also benefit from defense spending through contracts. Some of the nation’s largest defense contractors, such as Huntington Ingalls Industries, General Dynamics and Northrop Grumman, are based in the state.

In fact, Virginia ranked first in the nation in defense spending with $53 billion in the fiscal year that ended Sept. 30, 2015, according to the defense department’s spending by state report. That’s 13 percent of all the defense spending in the nation.

California ranked second with $49.3 billion during the same time period, or 12.1 percent of the defense spending in the nation.

If proportions hold, Virginia and California stand to receive a quarter of the benefit of the increase in spending.

But the increased spending will have a bigger impact on the Virginia economy given its relative size.

Defense spending in Virginia represented 11.2 percent of the total gross regional product of $473.2 billion during the fiscal year that ended Sept. 30, 2015.

That ranks Virginia No. 1 in the nation for its dependence on defense.

By comparison, only 2.1 percent of California’s gross regional product came from defense during the same time period. That ranked California the 24th most dependent state on defense spending.

The buildup in defense spending helped fuel Virginia’s growth in the first decade of this century.

The state’s dependence on defense contributed to the relatively smaller decline in employment during the Great Recession when compared to the nation.

Going further back in history to the Reagan-era Cold War build up in defense, the state saw similar benefits largely because of spending in Northern Virginia.

Northern Virginia was once considered recession proof — that was until the Cold War draw bore down on the region.

The draw down from the war in Afghanistan and sequestration related to the Budget Control Act of 2011 also dampened economic activity in Virginia.

Employment growth in the state slowed from a year-over-year pace of 1.4 percent in December 2012 to a contraction of 0.2 percent in February 2014. During the same time, national employment growth continued to recover from the Great Recession and hovered around 2 percent on a year-over-year basis.

The year-over-year pace of employment growth has picked back up to 1.3 percent in Virginia based on the latest data for December 2016.

However, cutbacks in defense spending contributed to a slower-growing state economy that lead to budget shortfalls in Virginia and calls for diversifying the economy.

With the prospect of an acceleration in defense spending, Virginia is poised to benefit more than other states.

However, the state should take this opportunity and continue its diversification effort to achieve sustained long-term growth, with an understanding that defense spending inevitably runs cycles as well.

(This column first ran in the Richmond Times Dispatch on March 6, 2017)

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About Christine Chmura

Christine Chmura is president and chief economist at Chmura Economics & Analytics. She can be reached at (804) 649-3640 or at chris@chmuraecon.com.
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