1. Virginia Association of Chamber of Commerce Executives June 27, 2013 The Impact of Sequestration on the Virginia Economy Stephen S. Fuller, Ph.D. Dwight Schar Faculty Chair and University Professor Director, Center for Regional Analysis George Mason University

2. Quarters After Trough % Change in GDP* Recession Recovery Patterns of GDP Past Four Recessions Sources: Bureau of Economic Analysis, GMU Center for Regional Analysis *in 2005 Chained Dollars

3. The National Economic Climate Four Years Into the Recovery Head Winds The sequester Weaker growth in emerging markets is hurting manufacturing (exports) Business is cautious re: hiring and capital spending The Sequester $85b reduction in budget authority $44b in actual spending reductions in FY 2013 $66b in spending reductions in calendar year 2013 Spending cuts lag cuts in budget authority

4. The National Economic Forecast Sequester and payroll tax increases in January may reduce overall GDP growth in 2013 by 1 percentage point. DoD spending down 7% in 2013; up 0.8% in 2014 Non-DoD spending down 5.9% in 2013; up 0.4% in 2014. Sequester replaced in FY 2014 Budget agreement plus tax increases (caps on deductions) and entitlement reductions beginning January 2014. GDP in 2013 = 1.8-2.0%; in 2014 = 2.9-3.0% GDP in 2015 = 3.4%

5. U.S. Gross Domestic Product Quarterly Change: 2007 – 2015 % Forecast > > > > Source: Bureau of Economic Analysis, Global Insight June 11, 2013

6. The Potential Impacts of the Sequester on the Virginia Economy

7. Area 2000 2010 %Change % Total ** United States $1,637.2 $3,276.4 100.1 100.0 District of Columbia 28.2 61.9 119.2 1.9 0.2 Maryland 45.1 96.3 113.5 2.9 1.9 Virginia 62.7 136.1 117.0 4.2 2.6 Total Area $136.0$294.3 116.4 9.0 4.7 Source: Consolidated Federal Funds Report, 2010 **population as a percent of US Federal Spending Trends in DC, Maryland and Virginia, 2000- 2010 (in billions of dollars)

8. Area Total $s DoD $s % Total $s %US DoD United States $3,276.4 $557.0 17.0 100.0 District of Columbia 61.9 8.7 14.0 1.6 Maryland 96.3 18.7 19.4 3.4 Virginia 136.1 58.1 42.7 10.4 Total Area $294.3 $85.5 29.0 15.4 Source: Consolidated Federal Funds Report, 2010 Total Federal and DoD Spending in DC, Maryland and Virginia, 2010 (in billions of dollars)

9. The Employment Impact of Sequestration Budget Cuts on the Maryland-DC-Virginia Region in 2013 StateJob Losses* Job Losses* Total Job* DoD Cuts Non-DoD Cuts Losses Maryland 29,677 54,499 84,156 District of Columbia 11,419 81,126 92,545 Virginia 102,525 51,593 154,118 Totals 143,621 187,218 330,819 % U.S. job losses 17.5 24.7 21.0 *actual or equivalent job losses based on reductions in payroll spending Source: “The Economic Impact of Sequestration Budget Cuts to DOD and non-DOD Agencies as Modified by the American Taxpayer Relief Act of 2012,” Stephen S. Fuller, March 14, 2013.

10. The Virginia Economy: Recent Performance

11. Job Change by Sector May 2012 – May 2013 Virginia (000s) Total 50,000 Source: Bureau of Labor Statistics (Not Seasonally Adjusted), GMU Center for Regional Analysis

12. Job Change by Sector April 2013 – May 2013 Virginia (000s) Total 19,200 Source: Bureau of Labor Statistics (Not Seasonally Adjusted), GMU Center for Regional Analysis

13. 8.5 – DC 7.6 – U.S. 6.7 – MD 5.3 – VA Unemployment Rates in the WMSA By State Area, 2006-2013 Source: Bureau of Labor Statistics (Seasonally Adjusted)

14. Federal Spending Trends in the Washington Area and Its Current Performance

15. 2010 Structure of the Greater Washington Economy Local Serving Activities 34.8% Non-Local Business 12.0 % Total Federal 39.8% Procurement 19.1% Assn 1.8% Hosp. 2.1% Int’l 3.5% Other 1.5% Other Federal 10.7 % Health/Ed. 4.5% Fed Wages & Salaries 10.0% Source: GMU Center for Regional Analysis

16. Federal Procurement in the Washington Metro Area, 1980-2012 $ Billions | | TOTAL = $1,023.5 Billion Source: US Census, Consolidated Federal Funds Report 2011 $80.0 B $75.6 B 2012

17. Professional & Business Services Washington MSA (000s) Annual Data Annual Month over Year 2008 2009 2010 2011 2012 Tot 2012 = 702,300 Source: Bureau of Labor Statistics (Not Seasonally Adjusted), GMU Center for Regional Analysis

18. Federal Employment in the Washington Metro Area, 1950-2012 000s Eisenhower Kennedy – Johnson Nixon - Ford CarterReaganBush 1ClintonBush 2 - 5 + 74 + 35 + 170-8.6 - 37 + 24 Obama +17.5 Source: US Bureau of Labor Statistics (Not Seasonally Adjusted), GMU Center for Regional Analysis

19. Federal Government Washington MSA (000s) Annual Data Annual Month over Year 2008 2009 2010 2011 2012 Tot 2012 = 377,400 Source: Bureau of Labor Statistics (Not Seasonally Adjusted), GMU Center for Regional Analysis

20. Summary for Federal Spending Trends in the Washington Metropolitan Area, 2010-2012 Federal Procurement Outlays declined 8.4% between FY 2010 and FY 2012. Federal employment has declined since peaking in July 2010, losing 8,700 jobs or 2.25%. Federal payroll declined by 0.6% between FY 2010 and FY 2011 and will continue to decline as the workforce shrinks and older workers retire and are replaced by younger workers.

21. The Relative Importance of Federal Spending in the Maryland-DC-Virginia Region The Region’s Share of U.S. Population 4.7% The Region’s Share of All Federal $s 9.0% The Region’s Share of All DOD $s 15.0% Share of Total Federal Spending Subject to Sequestration21.0% Federal Spending as a Percent of the Region’s GRP in 201139.0%

22. Annual Job Change Northern Virginia, 2002-2013 (000s) Annual Data Annual Month over Year 2009 2010 2011 2012 Source: Bureau of Labor Statistics (Not Seasonally Adjusted), GMU Center for Regional Analysis

23. Job Change by Sector May 2012 – May 2013 Northern Virginia (000s) Total 23,900 Source: Bureau of Labor Statistics (Not Seasonally Adjusted), GMU Center for Regional Analysis

24. Job Change by Sector April 2013 – May 2013 Northern Virginia (000s) Total 9,800 Source: Bureau of Labor Statistics (Not Seasonally Adjusted), GMU Center for Regional Analysis

25. Federal Budget and DoD Spending Trends and the Outlook for the Virginia Economy

26. Federal Budget Trends and Outlook (dollars in billions) YearAnnual % ChangeBudget Deficit 20071.2 $161.5 20087.2 454.8 20096.1 1,415.7 20104.5 1,294.2 2011 - 2.8 1,296.8 2012 - 2.2 1,089.2 2013 - 5.9 767.2 2014 0.4 618.6 2015 - 0.9 540.1 2016 - 1.4 511.2 2017 - 0.7 584.5 Source: IHS Global Insight “US Executive Summary” June 11, 2013

27. DOD Procurement Forecast (in billions of current dollars) Year Products Services Total 2011$277.6 $250.2$527.6 2012 261.9 232.9 494.8 2013 228.4 222.8 451.2 2014 213.6 212.1 425.7 2015 210.4 207.6 418.1 2016 211.8 207.2 419.0 2017 211.8 209.1 420.9 2011-13* - 8.8 - 5.5 - 7.2 2013-17* - 1.8 - 1.5 - 1.7 *average annual % change Sources: Deltek; GMU Center for Regional Analysis

28. DOD Procurement Forecast: RDT&E, Equipment, MILCON,O&M (in billions of current dollars) Year RDT&E Equipment** MILCON O&M 2011 $67.7$130.2 $20.9$191.4 2012 63.7 121.3 14.2 133.6 2013 60.5 103.7 11.2 127.3 2014 60.2 101.4 11.8 104.8 2015 59.2 102.2 12.5 106.8 2016 57.5 104.4 11.0 109.9 2017 57.1 105.4 10.0 113.0 2011-13* - 5.4 - 10.2 - 23.1 - 16.7 2013-17* - 2.7 + 0.4 - 2.7 - 2.8 *Average Annual % Change **space, missiles, ships, ordinance, tactical vehicles, aircraft, C4ISR, support systems Sources: Deltek, GMU Center for Regional Analysis

29. The Impact of Projected Changes in DoD Spending In Virginia, 2012-2017 Total potential changes in DoD procurement outlays over 5-year period: $36.9 billion in 2012 down $5.5 billion to $31.4 billion in 2017. This loss of DoD procurement spending represents $21.7 billion in lost Gross State Product (GSP). The potential decline in DoD procurement spending will have an associated negative impact on the state’s employment base: - 333,197 jobs or 9.3%; 192,431 direct jobs, 32,170 indirect jobs, and 108,597 induced jobs at risk.

30. Year Gross State Product Annual % Change 2000 $298.3 2007 366.8 3.3 2010 374.7 0.7 2013 383.5 0.8 2018 $445.3 3.2 Source: IHS Global Insight; GMU Center for Regional Analysis Virginia’s Economic Performance and Outlook, 2000-2018 (in billions of 2005 dollars)

31. Year Total P&BS* Federal Military PY** 2000 2007 1.0 3.5 0.3 - 0.6 3.9 2010 -1.1 2.2 3.8 - 1.7 0.2 2013 1.3 2.4 - 0.2 - 0.1 2.4 2018 1.6 1.1 - 1.4 0.2 3.1 Source: IHS Global Insight; GMU Center for Regional Analysis *professional and business services includes federal contractors **total personal earnings Virginia’s Job Growth, 2000-2018 (annual percent change)

32. Year T&U* Health Retail L&H** Construction 2000 2007 0.4 3.60.6 2.32.0 2010 -2.3 3.4 -2.3 -0.4 -7.9 20131.4 2.5 1.0 2.3 -0.6 20181.1 3.2 0.5 0.28.2 Source: IHS Global Insight; GMU Center for Regional Analysis *transportation and utilities **leisure and hospitality Virginia’s Job Growth, 2000-2018 (annual percent change)

33. Federal Spending Trends in the Washington Metropolitan Area: 2010-2017 (in billions of current dollars) Year GRP %Change* Fed $s % GRP Procurement 2010 $425.0 3.0 $169.0 39.8 $82.5 2011 433.7 2.6 168.2 38.8 80.0 2012 447.9 2.4 165.6 37.0 75.6 2013 466.9 2.1 162.7 34.8 71.8 2014 489.8 3.0 161.1 32.9 70.0 2015 517.2 3.6 162.7 31.4 69.3 2016 544.1 3.3 164.3 30.2 69.0 2017 $ 571.8 3.2 $166.8 29.2 $68.6 *real (inflation adjusted) percent change Source: GMU Center for Regional Analysis

34. Thank You Questions cra.gmu.edu

35. The Economic Impact of Sequestration Budget Cuts in 2013 ($s in billions) Sources of GDP Labor Job Impact Impact Income Losses DOD Budget Reductions ($42.7) $71.1 $35.0 820,825 Non-DOD-Agency Reductions ($42.7) $87.1 $45.5 757,035 Total Impacts ($85.4) $158.2 $80.5 1,577,860 Federal Workers* 36,245 165,607 201,852 Contractors** 421,548 247,176 668,724 *actual or equivalent based on reductions in payroll; **total supply chain effect Source: “The Economic Impact of Sequestration Budget Cuts to DOD and non-DOD Agencies as Modified by the American Taxpayer Relief Act of 2012,” Stephen S. Fuller, March 14, 2013.