The Mountain State Business Index has slipped in each of the last two months, and the rate of decline observed in March marked the largest percentage contraction for the index in more than a year.
The MSBI, which serves as an up-to-date gauge of the state’s business performance and recorded a solid increase in January, registered a 0.3 percent decline in March. Overall, the index suggests some uncertainty, but generally points to slow growth for West Virginia’s economy as a whole in the late-summer and early fall of this year.
“The outlook for the West Virginia economy is relatively uncertain at the moment, as evidenced by competing pressures on the Mountain State Business Index,” said BBER Director John Deskins. “Overall we believe the state’s economy will grow at a slow pace in the late-summer into early-fall, but conditions warrant close monitoring of the Index.”
After modest downward revisions to some of the underlying data used to calculate the index, the MSBI averaged 1.6 percent growth over the course of 2014. However, the MSBI has fared less well in recent months as it notched a 0.3 percent annualized increase in March compared to six months ago. This represents the smallest such gain in a year and points to possible slow increases in activity over the course of the next quarter or two.
The MSBI combines several leading economic indicators into a single index that provides a convenient way to gauge the likelihood of swings in economic activity over the next four to six months. Signals of a coming contraction in the state’s economy can be identified if the index declines by at least 2 percent on an annualized basis over a six-month period and a majority of the individual components also decline over that same time period.
The index comprises seven economic indicators that were determined to lead expansions or contractions in the West Virginia economy. Each indicator will make positive, negative or no contribution on a monthly basis to the overall index. The seven indicators are related to the following factors: building permits, unemployment insurance claims, the value of the U.S. dollar, stock prices related to West Virginia employers, interest rates, coal production and natural gas production. The March MSBI reflects data that correspond to the month of February.
A majority of index components made negative contributions to the MSBI, and three of these four indicators posted unusually large declines on a month-to-month basis. Coal and natural gas both saw large decreases in production during February, while the state’s real trade-weighted dollar climbed sharply last month. Stock prices for the state’s largest employers provided the largest positive contribution to the index, followed by the yield curve and building permits for new single-family homes.
“Although the MSBI fell for the second consecutive month and three of its underlying indicators weighed heavily on the index’s March reading, a broader perspective of the index and its components does not paint such a negative picture,” said Brian Lego, BBER research assistant professor. “Natural gas output did drop in February, but some of this decline was driven by poor weather conditions that caused some production to be shut in over the course of the month. Also, a low price environment for natural gas has raised concerns about investment and new drilling activity in the state, particularly for smaller independent producers and/or those with higher levels of operating debt.
“However, production is still expected to rise overall going forward thanks to highly productive wells in the Marcellus and Utica shale plays, as well as dedicated sources of final demand from the power and manufacturing sectors in addition to several key pipeline projects,” Lego said.
“Broader market perspectives of the state’s largest publicly-traded employers remains quite positive as the composite of stock prices for these businesses increased more than 3 percent and is roughly 18 percent above its reading from one year earlier. This growth reflects continued optimism for the broader U.S. economic outlook as well as healthy expectations for many of the state’s largest businesses.
“Initial unemployment insurance claims increased on a seasonally-adjusted basis for the fourth time in five months, but these increases have generally been small and the current level of claims is 17 percent lower than the same time last year. Furthermore, claims remain quite low by historical standards and are roughly on par with levels observed during the mid-2000s. The recent rise in claims will be closely monitored, but this current level does not point to any appreciable deterioration in statewide labor market conditions over the near term,” Lego said.
“On the downside, the state’s real trade-weighted dollar poses an increasingly larger risk to growth over the near term. Exports account for a larger-than-normal share of economic output in West Virginia and the strong upward movement in the dollar has made many goods produced in the state less competitive on international markets. Finally, although statewide coal production stabilized in 2014, thanks to large increases in several northern counties, the overall outlook for West Virginia’s coal industry remains negative. The surge in northern coal production will slow and the long-term decline in the state’s southern coalfields will continue as a combination of market forces and regulatory changes and uncertainty hurt demand for coal.”
Technical documentation related to the Mountain State Business Index and other BBER publications are available for free download in PDF format at be.wvu.edu/bber. For further information about the WVU College of Business and Economics, please visit be.wvu.edu.
CONTACT: John Deskins; WVU College of Business and Economics
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