Old Dominion University economists Bob McNab and Vinod Agarwal’s new economic forecast for the state and region is bleak.
Agarwal told an audience at ODU Wednesday the regional economy in 2026 will be worse than last year.
“Economic growth rate will be a little smaller,” he said in an interview after the event. “Unemployment rate will be slightly higher. Job growth will be about the same in the last year, and essentially, the overall economic activity will be slightly lower than what it was last year.”
Cuts to the federal civilian workforce, immigration, tariffs, the housing shortage and general policy uncertainty all play a role in the declining conditions, he said.
The U.S. economy expanded rapidly after the COVID-19 pandemic, McNab said. But towards the end of 2025, things slowed down. Fewer people were employed and seeking work, and fewer jobs were being added, he said.
“If we look at the data, we could see every month in 2024 employers added jobs, and in 2025 we see employers were continuing to add jobs, and then something happened,” he said.
On Oct. 1, the shutdown started when Congress didn’t pass an appropriations bill on time and the federal employees who accepted “the fork in the road” offer from DOGE left the federal service, he said.
Federal employment in the U.S. dropped by 179,000 jobs in just October, he said.
In Virginia, 23,900 federal jobs were cut in 2025. More than 6,000 of those were in Hampton Roads, according to the forecast.
Federal job losses are especially relevant to Hampton Roads, where one out every 20 jobs are held by federal civilian workers, Agarwal said.
The federal government seems committed to increasing defense spending, which will benefit the regional economy, he said. But it comes with a downside.
“The federal sector is an asset,” Agarwal said. “At the same time, it's a weakness, because decisions are made which are beyond our control and they affect our lives.”
The federal government contributed the most job loss in the United States in 2025, but the private sector cut jobs, too, McNab said.
Nationally, professional business services – a major source of federal contract jobs – and the manufacturing industry each lost more than 60,000 jobs.
“One of the things that has been driving tariff policy is bringing manufacturing into the United States,” McNab said. “But nationally and in Virginia, we've seen manufacturing shed jobs because policy uncertainty leads to manufacturers and other industries constraining employment because if you don't know what the cost of the inputs is, you're going to find it very hard to plan for employment in the future.”
Education and health services have been bright spots as the main drivers of job growth in the post-COVID economy, McNab said. But reductions in Medicaid reimbursements in the federal spending bill passed last year could affect job growth in the health industry over the next several years, he said.
To buffer against the creeping recession and policy uncertainty, McNab and Agarwal said Hampton Roads needs to diversify its economy and grow private sector jobs in areas where the region has a competitive edge, like maritime industries, echoing a warning they and others have issued repeatedly over the last several years.
One challenge: average federal wages in Virginia are higher than those in the private sector, McNab said. And people are already struggling with affordability.
Higher costs, rising debt
Measures of the economy, such as the inflation index, gross domestic product and retail sales, aren’t capturing what people are actually experiencing on the ground, McNab said.
He said that inflation data was “dramatically” impacted by the government shutdown.
For “the first time in my economic history, the (Bureau of Labor Statistics) did not go out and collect price data in October and only had about 10 days to collect it in November,” he said. “So what did they do? They made an assumption.”
Housing costs account for a large portion of the inflation index, and one of the assumptions was that housing costs didn’t change in October, he said, adding that assumption was likely inaccurate.
Housing prices in Hampton Roads continue to rise, Agarwal said. The region’s housing shortage continues to impede economic growth, he added.
The costs of everyday items, like food, coffee and electricity, are increasing “much faster” than inflation, McNab said.
For example, natural gas used in heating homes and powering gas ovens has increased by almost 11%. Electricity is up more than 6.5% and coffee has gone up by almost 20%, he said.
Those price hikes have resulted in rising debt.
“People, on average in the United States, are spending more than they're bringing home,” he said. “You can’t sustain this for a long period of time.”
McNab said the wealthiest households are driving the rising retail sales.
“If you're in the top 30% of households earning more than $130,000, your wages and consumptions outpace inflation,” he said. “If you're in the bottom 70% of households, you're barely keeping up.”
The year is off to a rough start, he said. But things can change, for better or worse, as policies change, he added.
