The Impact of Defense Contracts on Virginia

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Virginia’s dependence on defense contracts puts it in both an enviable and awkward position.
It is enviable because firms in the state received more revenue from defense contracts performed than any other state in the nation in the federal fiscal year that ended Sept. 30, 2017, except for California.
It’s an awkward position because with 4.4 percent of the state’s gross domestic product dependent on defense contracts, the state’s economy can take a hit during defense downsizing — as it did in 2013. During that year, employment stalled in the state and grew only 0.7 percent compared to 1.6 percent growth in the nation.
In light of the state’s dependence on defense contracts, the U.S. Department of Defense’s Office of Economic Adjustment awarded Virginia a grant in 2012 to create a tool that gave the state and localities an understanding of the regions and industries that would be adversely affected by cuts in Defense Department spending. The tool was created to allow users to estimate the impact of reductions in DoD spending on localities so that mitigating strategies could be employed.
The fiscal year that ended September 2012 turned out to be the peak year of DoD spending for contracts performed in the state at $43.2 billion. The latest data available for fiscal year 2017 puts contracts performed at $34.6 billion, or a drop of 19.9 percent from the peak.
Moreover, in 2012, Virginia received more Defense Department contract spending for work performed than any other state. That changed in 2016 when California, with $35.5 billion in defense contracts, slipped ahead of Virginia’s $34.4 billion. In the most recent fiscal year, California performed $34.9 billion in contracts.
Gov. Ralph Northam announced last week that the Office of Economic Adjustment provided Virginia with another grant to release the next generation of the Defense Department contract spending impact tool on Virginia. The tool, which can be accessed at http://dod-va.chmuraecon.com, shows that 5.5 percent of the state’s workers are directly or indirectly dependent on defense contracts.
Many of those employees work in professional, scientific and technical services firms and possess computer-related skills.
In fact, the Northern Virginia portion of the Washington metropolitan area performed $22.0 billion in Defense Department contracts in the most recent fiscal year, the most of any region in the state.
Three-fifths of these contracts were in professional, scientific, and technical services firms. Northrop Grumman Systems had $1.4 billion in contracts, followed by Booz Allen Hamilton at $1.2 billion and Leidos Holdings (formerly Science Applications International Corp.) at $800 million.
The Virginia portion of the Hampton Roads metro area received at $9.7 billion in contracts – the second-largest amount of contract spending for work performed in 2017. As one might expect, shipbuilding firms received a large amount in contracts ($4.2 billion) with Huntington Ingalls Industries performing $3.3 billion of contracts last fiscal year.
Looking ahead, President Donald Trump’s defense budget calls for a 15 percent increase in defense spending from the current fiscal year through the fiscal year that will end Sept. 30, 2023.
That bodes well for Defense Department contractors in the state, where we forecast contracts to rise 12.6 percent from the last fiscal year to the 2019 fiscal year.
(This article first ran in the Richmond Times Dispatch on June 4, 2018)
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