|
Federal spending spurs Northern Virginia's booming economy
by
Stephen S. Fuller
Virginia Business
February
2005
Northern
Virginia’s economy grew 5.1 percent in 2004, its
best performance since 2000. In fact, the region outperformed
the state and the nation by a full percentage point.
Other indicators confirm this strong performance. Employment
grew by an estimated 45,000 jobs, ranking the region
among the top five metropolitan areas in job growth
in the country. And unemployment in Northern Virginia,
which reached only 3.4 percent in January 2002, ended
the year (November) at 1.9 percent. This strong performance
is expected to be repeated this year even though the
U.S. and Virginia economies are expected to moderate,
starting a slowing trend that likely will continue for
the rest of the decade.
At
the start of 2004, some forecasters expected national
gross domestic product growth to exceed 5 percent (with
a consensus anticipating 4.7 percent growth), but the
actual growth rate was likely in the low 4-percent range.
This underperformance can be attributed to several factors,
including lower-than-expected business investment, rising
interest rates, election-year uncertainty and security
threats, but the major contributing factor was the 35
percent increase in oil prices. Northern Virginia’s
economy, however, could absorb these price increases
with little or no noticeable effect on its overall performance
because it was well into the expansion and its output
is less dependent on oil.
The reasons for Northern Virginia’s strong economic
performance in 2004 and 2005 are not new. The region
benefited from monetary (low interest rates) and fiscal
(tax reductions) policies that helped to jump-start
the national economy in 2002 and 2003. But Northern
Virginia’s economy already was expanding at that
time because of a significant increase in federal spending
after the Sept. 11 terrorist attacks. That spending
magnified the effects of low interest rates and increased
consumer income, pushing Northern Virginia’s economy
into overdrive early in the recovery cycle.
This momentum, fueled by continued strong federal spending
in 2004, is expected to carry Northern Virginia’s
economy through 2005 in spite of the diminished monetary
and fiscal stimuli that will result in more moderate
growth at the state and national levels.
A comparison of federal spending between Virginia and
Northern Virginia identifies very different federal
spending patterns found in the region and the rest of
the state. These differences are not new but they have
increased since 9/11. From 1990 through 2003, federal
procurement spending in Northern Virginia totaled $164.8
billion and accounted for 67.7 percent of the $243.3
billion in federal procurement spending in the state.
While these numbers explain the overall growth and vitality
of the region’s economy, the incremental annual
change in spending during the past two years has been
responsible for the rapid recovery in Northern Virginia.
Federal procurement spending increased on average by
$935 million during the 1990-2001 period, but it rose
by $3.7 billion on average from 2001 to 2003, for a
total two-year, post-9/11 increase of $7.4 billion.
In the rest of Virginia, federal procurement spending
actually declined during this period.
Besides fueling Northern Virginia’s economy, federal
procurement spending has shaped its work force. That
work force is positioned for an increasing share of
higher-salary jobs because its skills and adaptability
are increasingly attractive to leading-edge, technology-intensive
business development opportunities. The divergent occupational
structure of Northern Virginia and the rest of the commonwealth
can be seen in the types of jobs added since 1990. The
largest employment sector in Northern Virginia is professional
and business services; it accounted for about 20 percent
of all jobs in 1990. Since 1990, this sector has accounted
for 41 percent of all job growth in the region, while
for the entire state (including Northern Virginia) this
category has accounted for 33 percent of job growth.
Nationally, professional and business service jobs have
increased just 25 percent during this period. This higher
proportion of job growth has favored knowledge-based,
workers receiving above-average wages. By contrast,
other primary employment sectors in Northern Virginia
have underperformed the state’s job growth rate.
The result of this job growth mix is an economy that
is better positioned to attract more higher skills and
higher-paying jobs.
With Northern Virginia’s economy growing faster
than the commonwealth’s, vitality of Virginia’s
economy will become more dependent on the region. In
2000, the Northern Virginia economy accounted for 40
percent of gross state product while its population
represented only 30 percent and its job base accounted
for 33 percent of the state’s totals. By 2010,
Northern Virginia’s share of the state’s
economy is projected to increase to 42 percent while
its share of the state’s population and job base
will have increased to 32 percent and 36 percent, respectively.
Thus, while Northern Virginia will account for nearly
one-third of Virginia’s population by 2010, it
will have generated 49 percent of the state’s
economic growth since 2000.
The state’s growing dependence on Northern Virginia
has a downside risk. If federal procurement spending
is curtailed abruptly, Virginia’s economy would
not be able to absorb the consequences of slower growth
in the region and the effect would be felt statewide.
But for the short term, the forecast is good for Northern
Virginia and, as a result, for Virginia as well. Looking
to the end of the decade, Northern Virginia’s
economy is projected to grow 4.5 percent a year. This
level of regional growth, in combination with other
economic drivers, will support an annual growth rate
of 3.8 percent for Virginia. Both rates will support
continued employment growth, with the state expected
to add more than 520,000 jobs by 2010. Of those, about
48 percent, or 249,000, will be in Northern Virginia.
Stephen S. Fuller holds the Dwight Schar Faculty
Chair and is University Professor Director at the Center
for Regional Analysis at George Mason University.
Return to Virginia Business - February 2005 |
