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Hampton Roads Economic Monthly

Where is Defense Spending Headed in the Future?

by Greg Grootendorst, Chief Economist, James Clary, Senior Economist and Beth Vandell Program Support Specialist

The Department of Defense (DoD) plays a significant role in the Hampton Roads economy, with uniformed military personnel constituting 8.1% of regional employment (in 2016, 84,089 personnel stationed in Hampton Roads), and 9.5% of regional incomes. Direct spending by the DoD, including federal civilian pay and contracts, constituted 22.8% of all regional economic activity; thus the growth or decline of DoD budgets has a tremendous impact the region’s economy.

On August 13, 2018, President Trump signed the John S. McCain National Defense Authorization Act for Fiscal Year 2019, the first time in more than a decade that the defense bill was signed into law before the start of the federal fiscal year, which begins October 1st. The overall funding level for the DoD was set at $674 billion, an increase of $19.8 billion from the FY18 level (note the total funding authorized by the bill was $717B). Additionally, the bill funds a personnel pay raise of 2.6% and provides $24.1billion for shipbuilding, including two Virginia-class submarines. The Congressional Budget Office indicates that if the 2019 Navy Shipbuilding Plan was adhered to, the DOD would spend an average of $2.9 billion on carrier construction between now and 2048 (inflation-adjusted 2018 dollars).

At the same time, we are facing uncertainties that may affect these levels of defense spending. The current budget deficit stands at 3.9% of Gross Domestic Product for FY18, which is extremely high given the relative health of the national economy. As interest rates rise and major programs such as Social Security and Medicare become increasingly expensive, Congress will face pressure to either raise taxes or to cut spending. As defense expenditure constitute almost half of discretionary spending, any significant cuts are likely to impact defense. Thus, even as current defense spending seems to point to strong opportunities for regional growth, the long-term federal budget will likely provide a challenging environment for economic growth in Hampton Roads.

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Long-Term Federal Budget Spending as a Share of GDP

Projected by the Congressional Budget, June-2018

 

Line graph depicting Long-Term Federal Budget Spending as a Share of GDP

 Source: Congressional Budget Office, HRPDC

 

 

 

 

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Annualized Growth in GDP

Annualized Growth in GDP

Gross Domestic Product combines consumption, investment, net exports, and government spending to determine the size and general health of the economy.  GDP growth increased in the second quarter to 3.0%, from 1.7% in the first quarter of 2017. The most important news for Hampton Roads results from a 4.7% expansion in national defense expenditures between the first and second quarter.  Additionally, personal consumption expenditures continued to strongly expand.

 

Retail Sales

Retail Sales

Retail Sales in Hampton Roads, as measured by the 1% local option sales tax, serve as an indicator for consumption in the region. Hampton Roads’ taxable monthly sales totaled $1.92B in August of 2017 (seasonally adjusted), the third consecutive month at this level. August sales were 2.2% above 2016 sales, and if this growth continues into the fall and winter, would provide an excellent catalyst for regional expansion.

New Car Sales

New Car Sales

Car sales, as a durable good, may be put off until individuals’ economic prospects improve; thus, the number of new car sales indicate the level of confidence that households in Hampton Roads have in their financial future. Car sales declined slightly in September, falling by 200 vehicles per month, but remain slightly above the region’s long-term average.

Hotel Sales

Hotel Sales

Hotel sales indicate the performance of the region’s tourism sector. Tourism significantly contracted during the Great Recession and has been following a slow steady growth trend ever since. Seasonally adjusted hotel sales increased significantly in the third quarter of 2017, reaching $202M (3.9%).

Employment

Employment

Non-agricultural civilian employment figures are considered the best estimate of labor market activity by the National Bureau of Economic Research. Regional civilian employment fell to 765,600 in September 2017 from 768,800 in August, and a decline of 11,700 jobs since September 2016 (-1.2%). Over the same time period, the state added 42,400 jobs, an increase of 1.1%.

Employment Growth by Industry

Employment Growth by Industry

As the job market grows or declines, there will be some industries whose experience does not resemble the regional trend. Regional employment in retail trade and leisure & hospitality have declined precipitously year-over-year according to the employment data released by the Bureau of Labor Statistics; however, these lower levels of employment do not align with strong retail sales seen over the summer.

Unemployment Rate

Unemployment Rate

The unemployment rate is the percentage of the population actively seeking work, but unable to obtain a position. Hampton Roads’ unemployment rate came in at 4.20% in August 2017, the third consecutive month at this level. Over the past six months there has not been sustained change in either the size of the regional labor force or in the number indicating that they are employed.

Initial Unemployment

Initial Unemployment

The number of Initial Unemployment Claims is a leading economic indicator, reflecting those who are forced to leave work unexpectedly, and thus revealing the strength of the job market with little lag time. The region’s initial unemployment claims inched down to 2,789 in September 2017. Regional Claims have fallen to their lowest level since Dec 2016, and fourth lowest in the history of the region.

Housing Permits

Housing Permits

Permit data signals the level of construction employment and confidence regarding the future trajectory of the local economy. Single family permits popped up to 336 in August 2017, after declining to 260 in July (seasonally adjusted). The region continues to lag below the long-term average of 453 single family permits per month.

 

Home Price Index

Home Price Index

The home price index measures the value of homes by evaluating changing price levels through repeated sales of properties. The index provides the highest quality data available on the trends in the real estate market. Hampton Roads’ home prices increased in the second quarter of 2017, and are 2.86% above the price levels last year, though this growth rate was below that of the nation and the state.

Settled Home Sales

Settled Home Sales

Settled home sales measure the level of transactions on the real estate market over time, and a healthy real estate market should have a consistent level of activity. Existing home sales decreased to 2,005 in September 2017, in line with the recent trend of approximately 2,000 per month. New home sales edged down to 263 per month from 278 in August, in line with the recent trend of 250-260 sales per month.

Foreclosures

Foreclosures

Foreclosures have a significant impact on the real estate market and the community, and depress home values on both a neighborhood and regional level. Distressed homes’ share of total sales has particularly been shown to have an impact on the sale price of existing homes. During the housing boom, foreclosures were a negligible part of the local real estate market, but rose to 5.0% of all sales in July 2011. Distressed sales increased to 4.7% of all Hampton Roads existing home sales in August 2017 from 3.3% in March.

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