The Mountain State Business Index registered its third consecutive month-to-month decline in April, falling 0.4 percent from its March reading.
The index is produced by West Virginia University’s Bureau of Business and Economic Research, which operates within the College of Business and Economics. The Mountain State Business Index serves as an up-to-date gauge of the state’s expected business performance over the near term.
This most recent result for the MSBI suggests increasing uncertainty for West Virginia’s economy in coming months, as the drop in the index was its largest percentage decline since February 2014. The two-month decline in the index is the largest decline in three years.
“The short-term outlook for the West Virginia economy is uncertain at the moment, as evidenced by competing pressures on the Mountain State Business Index,” said Bureau of Business and Economic Research Director John Deskins. “We believe the state’s economy warrants very close monitoring to determine whether this is a short-term blip or whether we are entering a more substantial slowdown. However, we do continue to expect economic growth over the longer term, despite this volatility in 2015.”
After only registering two slightly negative readings over the past 28 months, the MSBI saw a 0.5 percent annualized decline in April compared to six months ago. This represents the largest six-month annualized rate of decline since September 2012 and points to the possibility of weakening economic 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 two 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 April MSBI reflects data that correspond to the month of March.
Four components to the MSBI made negative contributions to the overall index, with three of these indicators notching large declines from the previous month. Rising unemployment insurance claims made the largest negative contribution to the index, followed by continued upward movement in the state’s real trade-weighted dollar and further declines in coal production. Building permits for new single-family homes also declined, but the overall effect on the index was minor. By contrast, natural gas production, stock prices for the state’s largest employers and the yield curve positively impacted the index.
“The MSBI fell for the third consecutive month and, for the second month in a row, three underlying indicators weighed heavily on the index. However, we need to maintain a big-picture view of the index and its components and keep these recent negative outcomes in perspective,” said Brian Lego, BBER research assistant professor. “For example, initial unemployment insurance claims increased on a seasonally-adjusted basis for the sixth consecutive month, and are 29 percent higher on an annualized basis over that time period. The recent rise in claims is certainly cause for some concern as it suggests the unemployment rate could rise in the coming months. With that said, claims remain quite low by historical standards and are roughly on par with levels observed in 2007.”
Lego said, “The state’s real trade-weighted dollar continues to pose 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 and commodities 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, regulatory changes and policy uncertainty hurt demand for coal.
“Broader market perspectives of the state’s largest publicly-traded employers remains quite positive as the composite of stock prices for these businesses increased modestly and is more than 18 percent above its reading from one year earlier,” said Lego. “This growth reflects continued optimism for the broader U.S. economic outlook as well as healthy expectations for a majority of the state’s largest businesses.
“Natural gas output rebounded in March as the effects of colder-than-normal winter weather ended and rig counts ticked higher from the previous month. Low natural gas and crude oil prices have raised concerns about investment and new drilling activity in the state, particularly for regions with higher levels of rich gas production. Nonetheless, statewide production for calendar year 2015 is still expected to finish above its pace from last year thanks to highly productive wells in the Marcellus and Utica shale plays, and dedicated sources of final demand from the power and manufacturing sectors as well as several key pipeline projects,” Lego said.
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, College of Business and Economics
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