Increasing Defense Contracts Good News for Virginia Economy

Virginia firms handled more defense contracts than any other state except California in the most recent fiscal year.

The $37.4 billion performed in Virginia during the fiscal year that ended Sept. 30, 2018, makes up 4.6% of the state’s gross domestic product compared with 1.7% in the nation.

These Department of Defense contracts provided jobs for an estimated 139,483 workers in the state.

But by using a multiplier effect, employment rose to 224,797, or 5.8% of the state’s workers. The multiplier is an economic estimate to reflect suppliers to defense contractors and local establishments where households who work at these firms spend their income.

Defense contracts performed in the state have been rising since fiscal year 2016 when the contracts totaled $33.8 billion.

That’s good news for the state economy, but such a high dependence is bad news during defense cuts or economic downturns.

Defense Department contracts in Virginia are still 13.2% from the peak of $43.1 billion in contracts performed in the state during the fiscal year that ended in September 2012. That fiscal year also was when Virginia received more Defense Department contract spending for work performed than any other state.

During fiscal year 2013, contracts fell by $3.8 billion and employment stalled in the state, growing only 0.7% compared to 1.6% growth in the nation.

In light of the state’s dependence on defense contracts, the 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 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 tool can be accessed at http://dod-va.chmuraecon.com.

Many of the employees who work on defense contracts 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 $23.1 billion in these contracts in the most recent fiscal year, the most of any region in the state.

Sixty-five percent of these contracts were in professional, scientific, and technical services firms. Professional services and consulting giant Booz Allen Hamilton had $1.4 billion in contracts, followed by Northrop Grumman Systems Corp. at $1 billion and Leidos Holdings (formerly Science Applications International Corp.) at $881 million.

The Virginia portion of the Hampton Roads metro area received $11.4 billion in contracts — the second-largest amount of contract spending for work performed in fiscal year 2018. As one might expect, shipbuilding firms received a large amount in contracts ($6.0 billion) with Huntington Ingalls Industries performing $4.9 billion of contracts last fiscal year.

Firms in the Richmond metro area performed $938.3 million in defense contracts during the last fiscal year, which represents 0.3% of gross domestic product. Almost 7,500 people, or 1.2% of all workers in the region, are dependent on defense contracts when including the multiplier effect.

Looking ahead, President Donald Trump’s budget calls for a 9.6% increase in defense spending from the current fiscal year through the fiscal year that will end Sept. 30, 2024.

That bodes well for Defense Department contractors in the state, where we forecast contracts to rise 10.1% from the 2018 fiscal year to the 2020 fiscal year.

A version of this commentary originally appeared in the July 7 issue of The Richmond Times-Dispatch.

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