ECONOMIC FORECASTING PROJECT

DRAGAS CENTER FOR ECONOMIC ANALYSIS AND POLICY

STROME COLLEGE OF BUSINESS
OLD DOMINION UNIVERSITY

PRESS RELEASE

January 31, 2018

ANNUAL 2018 ECONOMIC FORECAST AND ANALYSIS FOR

THE HAMPTON ROADS MSA

Amidst uncertainty, the Hampton Roads economy continues to crawl

The Hampton Roads MSA (formally the Virginia Beach-Norfolk-Newport News MSA) includes
Currituck County NC, Gates County NC, Gloucester County, Isle of Wight County, James City
County, Mathews County, York County, Chesapeake, Hampton, Newport News, Norfolk,
Poquoson, Portsmouth, Suffolk, Virginia Beach and Williamsburg.

Real Gross Domestic Product for Hampton Roads (up 1.19% in 2018)
We expect the Hampton Roads economy to grow at a slightly higher rate (1.19%) in 2018 than in
2017 (0.80%). However, regional growth in 2018 will once again be slower than our historical
annual average of 2.46% over the past thirty years and slower than that of the nation. The Bureau
of Economic Analysis (BEA) reports that the region's economy, as measured by Real Gross
Domestic Product (GDP), declined by 1.09% in 2016 after experiencing growth of 2.83% in 2015.
We expect the BEA to revise reported GDP growth for 2016 upwards later this year. In addition,
the Tax Cuts and Jobs Act of 2017 will have a positive effect on Hampton Roads economic growth
in 2018, with the effects of decreased withholding materializing as early as March 2018.

Whereas the inflation-adjusted U.S. GDP grew annually by a compounded rate 2.14% from 2009
to 2016, Hampton Roads real GDP actually fell by 0.19%. Major reasons for this poor
performance of our regional economy are the Great Recession and the deceleration of Department
of Defense (DOD) spending. Between 2000 and 2012, direct DOD spending in the region
increased at an annually compounded rate of 5.9%. However, DOD expenditures since that time
have been stagnant or have declined. We anticipate that DOD spending in 2017 will be about the
same as its peak in 2012.
1
Congress has yet to pass a budget and associated appropriations for FY 2018. Through February
8, 2018 the Federal Government is functioning on a Continuing Resolution. A Continuing
Resolution not only limits spending to that of the previous fiscal year but also prohibits most new
program starts. Departments and agencies are constrained from moving funds across programs.
The nation recently went through a three-day shutdown of the Federal Government and if no
agreement is reached by February 8, it is possible that the nation may have an additional series of
Continuing Resolutions. Negotiators in Washington DC have recently begun discussions on
modifying caps on discretionary spending. We expect these caps to be lifted for the Fiscal years
2018 and 2019 in the coming months; however, timing and magnitude of changes remains
unknown. If these caps are indeed lifted, given our dependence on DOD Spending, we expect these
increases will have a positive effect on our economy beginning third quarter on 2018.
At the regional level, we expect DOD spending to increase slightly during 2018. Military personnel
and federal civilian government employees are expected to receive a 2.4% pay increase at the
beginning of 2018. However, the pattern of sequester relief provided by Congress every two years
in the recent past has created uncertainty for firms and individuals that have DOD contracts and
these uncertainties continue to prevail.
The Hampton Roads economy continues to be heavily dependent on DOD spending. From a peak
of 46% in the recent past (2011), DOD spending now contributes approximately 40% of Hampton
Roads GDP. However, the private sector in our regional economy has not taken up the slack as it
did during the 1990s defense spending drawdown. The Quarterly Census of Employment and
Wage (QCEW) reports that during First Quarter of 2017, total private sector jobs in Hampton
Roads were about 13,500 below peak employment observed in first quarter of 2007.

Civilian Non-farm Jobs (+0.50% in 2018) and the Unemployment Rate for the
Civilian Labor Force (3.90% in 2018)

We forecast that annual civilian jobs in our region will increase by about 3,800 jobs during 2018.
Job growth is likely to be concentrated in firms providing professional and business services,
leisure and hospitality, and health care services.

From 2007 to 2010, the recession and its aftermath were responsible for the loss of an estimated
38,400 civilian jobs in Hampton Roads. The regional economy has been able to recover only
32,300 of those jobs. Even with the forecasted gain of jobs in 2018, annual civilian jobs in
Hampton Roads will remain below the peak level observed in 2007.

Further, it appears that many of the jobs lost due to the recession were jobs in occupations that
paid relatively higher wages. Jobs created or gained since then, on the other hand, frequently have
been relatively lower paying jobs. Thus, the changing mixture of jobs in our region has not been
favorable and is a phenomenon that decision-makers should not ignore.

2
An examination of the annual data on jobs from 2007 through 2017 show that while we continue
to struggle in creating jobs, large metro areas just south of us in North Carolina have continued to
add significant numbers of jobs. Northern Virginia and Richmond are the only major metro areas
in Virginia that have created large numbers of jobs in the Commonwealth.

Even though the jobs situation in Hampton Road has been quite grim for the last ten years, an
examination of data from Local Area Unemployment Statistics (LAUS) provides a slightly
different (and better) picture on Labor Force and number of individuals employed. The labor force
has increased from 827,000 in 2007 to 838,000 in 2017 and number of individuals employed also
increased by about 10,000 during the same time period. During 2017, while the area lost about
2,400 jobs, the number of individuals employed actually increased by 6,000. The divergence
between these two sets of information on the labor market could be explained partly by a possible
reduction in the number of part time jobs, and due to the emergence of the gig economy where
more and more individuals simply prefer to be self-employed.

We expect the region’s unemployment rate to fall from 4.25% in 2017 to 3.90% in 2018. Our
region’s unemployment rate has declined since 2010. Historically, our unemployment rate has
been much lower than the national unemployment rate. However, the gap between the
unemployment rate in the US and in Hampton Roads has steadily narrowed. Further, our
unemployment rate since October 2017 is slightly higher than the national unemployment rate

Retail Sales (Taxable Sales, +3.00% in 2018)

Taxable sales include all retail sales except new automobile and gasoline sales. Compared to their
pre-recession peak in 2007, retail sales in Hampton Roads were 8.6% lower in 2009 and continued
to decline slightly, -0.2%, during 2010.

However, retail sales began to recover slowly in 2011 and in 2014 retail sales were 2.0% higher
than the 2007 peak level. It took eight years to recover the loss in retail sales. Retail sales since
2014 have been increasing steadily. Sales increased by 3.8% in 2015, 1.8% in 2016, and by another
estimated increase of 3.0% in 2017.

We expect retail sales in the region to grow by another 3.0% in 2018. Growth in regional economic
activity, rising incomes, continued relatively low gasoline price, consumer confidence, decreased
withholding of Federal taxes, and the increase in wealth of households are all expected to result in
decent growth in taxable sales.

Tourism (Hotel Room Revenue, +3.90% in 2018)

Hotel industry revenue increased by 4.8% in 2017 after increasing by 6.7% in 2016. Factors
contributing to higher hotel revenue during 2017 were: moderate increases in federal travel; higher
3
per diem rates, relatively low gasoline prices; growth in the national economy, particularly in the
Hampton Roads’ main tourist market areas; and, a continued slowdown in additional supply of
hotel rooms. However, in real, price-adjusted terms, despite substantial increases in hotel revenue
since 2014, real revenues at the end of 2017 were only 0.5% above their 2007 level.

The Norfolk/Portsmouth sub-market has exhibited the largest growth in revenue during 2017. The
primary reason for its growth was the opening of the MAIN hotel in Norfolk The Williamsburg
market, after performing poorly relatively to other sub-markets in Hampton Roads during 2016
has continued to struggle during 2017. Revenue per Available Room (REVPAR) in
Norfolk/Portsmouth during 2017 increased by 9.1%, whereas it increased by only 2.9% in
Williamsburg.

The factors contributing to higher tourism revenue during 2018 will continue to be the same as
those observed during 2017. We expect to see moderate increases in federal travel; slightly higher
per diem rates; historically low gasoline prices; lower heating oil prices in the Northeast; growth
in the national economy, particularly in the Hampton Roads’ main tourist market areas; and, a
continued slowdown in number of additional hotel rooms in Hampton Roads.

A challenge to the hotel industry in the coming years will be increased competition from short
term rental companies like AIRBNB, FLIPKEY, VRBO and the like. Evidence suggests that
AIRBNB, largest of the online short term rental companies, has seen a phenomenal growth in
Hampton Roads in the last few years. Its monthly revenue has steadily increased from $0.06
million in December 2014 to $1.49 million in December 2017.

Port (General Cargo Tonnage, (+2.80% in 2018); TEUs, (+4.00% in 2018)

Economic activity connected to the Port of Virginia long has been an important contributor to the
region’s economic well-being. The Great Recession adversely impacted the Port and the cargo
flowing through the Port---whether measured by general tonnage or by twenty-foot equivalent
container units (TEUs). In 2009, general cargo tonnage and TEUs were 16.4% and 18.0%,
respectively, below their peak levels. The volume of general cargo and TEUs flowing through the
Port has increased every year, 2009 through 2016. Nevertheless, it took the Port almost six years
to recover the losses incurred during the recession; its volumes finally exceeded its pre-recession
peak levels in 2013. General cargo tonnage and TEUs continued to increase in 2017---by 5.3%
and 7.0%, respectively. However, excluding the movement of empty containers, loaded TEUs
increased by 5.0%.

The Port continues to set record volumes in TEUs as well as in tonnage. Tonnage and TEUs
handled at the port in 2017 are 23.2% and 33.5% higher than their pre-recession peak levels. Rail
segment of the port’s business has also continued to increase. This speaks volumes as this type of
cargo could easily move to other ports. Furthermore, average TEUs per container vessel call
continue to grow and have increased by 55.3% from 2011 to 2017.

4
In 2017, the port was instrumental in helping to generate 6,342 jobs and the development of 3.37
million square feet of space that had a total investment value of $1.6 billion in Virginia and
Northeast North Carolina. The impact of economic development efforts during the last few years
can also be seen by an increase in truck and barge containers; during 2017, such containers
increased by 9.5 percent

The Port of Virginia has gone through a transition as it has attempted to improve its relative
competitiveness, especially with respect to other East Coast ports. The port has also focused on
improving its operating efficiency. Consequently, after going through significant losses each fiscal
year (ending June 30) from 2009 to 2014, it has recorded positive operating income for each of the
last three fiscal years.

Factors that have contributed to port growth include larger ships calling at the port, its access to
round-the-clock deep water, and additional business generated by the Commonwealth’s economic
development efforts. Another factor that could help continued cargo growth at the port in future
years will be the expanded and refurbished Panama Canal capable of handling much larger ships.
Analysis of data on Container vessels calling at the Port reveals that average TEU capacity of these
ships has been increasing. For example, average TEU capacity of the largest 10 percent of these
ships increased from 5,691 TEUs in 2009 to 9,067 TEUs by 2014. We do not have data for later
years, but we have evidence that larger ships are already coming here. At present, a container ship
with 14,100 TEU capacity makes a weekly call at the port and a second service (THE Alliance –
North America East Coast –EC4) will be upgrading its vessel calls to 14,100 TEU capacity.

In 2016, the Port, supported by the Governor and General Assembly, announced two large
expansion projects that will provide momentum for continued growth and progress---Norfolk
International Terminal (NIT) South Optimization and Virginia International Gateway (VIG) II. By
2020, the Port will have the capacity to process 1 million additional container units, a 40% increase
overall. The two projects represent combined investment of $670 million: $350 million
investment from the Commonwealth for NIT South modernization and $320 million of private
investment for VIG II. In February 2016, the port executed a 40-year lease with the City of
Richmond for the operating rights at Richmond Marine Terminal allowing the port to improve
service and further diversifying the port’s service offerings.

The port recently finished its work on the construction of the North Gate at NIT, providing a 26-
lane gate complex doubling the terminal’s gate capacity and linking it with the I-564 Connector.
This project provides motor carriers faster access to market and reduce idle time in traffic.
Construction has begun on both the VIG phase II and NIT expansion projects. By June 2018, there
will be another five additional stacks at VIG (two in April and another three in June) increasing
Port’s capacity by 10 percent from 3 Million TEUs to 3.3 Million TEUs. Another nine stacks are
expected to be online at NIT by December 2018 that will further increase Port’s capacity to 3.6
million TEUs.

5
Housing (Value of Single Family Housing Permits (+2.40% in 2018)

The residential construction industry in Hampton Roads is expected to grow moderately in 2018.
The sale of newly constructed homes---except for 2014---have been rising each year since 2010.
The relatively small inventory of existing homes in the market, low mortgage rates, and continued
moderate prices should help stimulate the growth in new construction homes.

The market for existing residential homes in Hampton Roads has also been steadily improving
since 2011. Measures of supply and demand indicate that it would take approximately 3.8 months
to clear the existing inventory based on the current absorption rate. This is much lower than the
Hampton Roads’ historic average of 5.6 months. Even so, we continue to be concerned with the
volume of distressed (short sales and bank-owned) homes in the local residential market.
Distressed homes, whether measured in distressed sales as a proportion of all existing homes sold,
or in listings as a proportion of existing homes currently on the market, continue to represent a
significant proportion (nearly a seventh) of residential market activity. The problem is that bank-
owned homes, for example, often sell at prices barely more than one-half of non-distressed
properties.

Although mortgage interest rates are expected to continue to be at relatively low historic levels
and household income in our region is recovering, recent changes in the tax code providing fewer
benefits for homeownership and the persistent large proportion of the distressed market activity
likely will mean only a modest recovery in sales prices of homes in Hampton Roads in 2018.

###

The Dragas Center for Economic Analysis and Policy in the Strome College of Business at Old
Dominion University undertakes a wide range of economic, demographic, transportation and
defense-oriented studies. For eighteen years, the Center and its predecessors have produced the
highly regarded State of the Region Report for Hampton Roads and economic forecasts for the
region. If you would like more information about this topic, please contact Dr. Vinod Agarwal at
757 683 3526 or email at vagarwal@odu.edu