The Mountain State Business Index fell for the fourth month in a row during May 2015, dropping 0.4 percent from its April reading.
This month’s results for the MSBI point to increasingly weaker prospects for West Virginia’s economy during the third quarter of this year, as the index has now experienced four consecutive monthly declines for the first time since mid-2009.
The MSBI serves as an up-to-date gauge of the state’s expected business performance over the near term, and is produced by West Virginia University’s Bureau of Business and Economic Research, which operates within the College of Business and Economics.
“The outlook for the West Virginia economy is uncertain at the moment, as evidenced by several sources of pressure on the Mountain State Business Index,” said BBER Director John Deskins. “The negative indicators are not strong and persistent enough at present to signal a coming downturn and there is reason to believe that some of the negative pressures on the state’s economy may subside in the near term.”
After only registering two slightly negative readings over the prior two-plus years, the MSBI has notched six-month annualized declines during each of the last two months. Indeed, the rate of decline accelerated to 1.7 percent in May and represents the steepest drop in this metric since September 2009. Ultimately, this 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 by a sufficiently large and consistent rate 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 May MSBI reflects data that correspond to the month of April.
Six components to the MSBI made negative contributions to the overall index, but only three of these indicators experienced appreciable negative changes from the previous month. The state’s trade-weighted dollar made the largest negative contribution to the index for the third consecutive month, followed by similar magnitudes of downward pressure from statewide coal production and unemployment insurance claims. Building permits for new single-family homes, natural gas production and the yield curve also weighed on the index, but the overall impact was minor. Stock prices for the state’s largest employers positively impacted the index, but the effect was minor, the index indicated.
“The MSBI fell for the fourth consecutive month and all but one of the underlying indicators weighed on the index. These results are suggesting weaker conditions could surface going forward, but one still needs to maintain a big-picture view of the index and its components by keeping some of 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 seventh consecutive month, and are 34 percent higher on an annualized basis over the last six months. 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 lower than levels observed even as recently as 2013.
“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 appears to have ended following announcements of idling or cuts in output at several major mine operations, while 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,” Lego said.
“On a positive front, broader market perspectives of the state’s largest publicly-traded employers have generally remained positive as the composite of stock prices for these businesses increased slightly and is nearly 16 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 a majority of the state’s largest businesses.
“Natural gas output ticked lower in April and has not appreciably increased since last fall. 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 rise above its pace from last year thanks to highly productive wells in the Marcellus and Utica shale plays, dedicated (and growing) sources of final demand from the electric power and manufacturing sectors and several key pipeline projects that are under way or scheduled to be built during the next two years,” 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, visit be.wvu.edu.
CONTACT: John Deskins; WVU College of Business and Economics
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