The Mountain State Business Index declined 0.1 percent in June 2015, marking the fifth consecutive month the index has retreated from the previous month’s reading. However, the slight decline for June was appreciably smaller compared to the previous three months.
“The outlook for the West Virginia economy remains uncertain at the moment given continued declines in the Mountain State Business Index,” said John Deskins, director of West Virginia University’s Bureau of Business and Economic Research, which operates within the College of Business and Economics and produces the MSBI. “However, we gain a guarded optimism with the June reading since the rate of decline this month was significantly diminished over the previous three months and since fewer indicators were negative for the month.”
The MSBI serves as an up-to-date gauge of the state’s expected business performance over the near term. This month’s result for the MSBI points to increasingly weaker prospects for West Virginia’s economy during the late summer and early fall months, as the index is in the midst of its longest period of retrenchment in six years.
After only registering a handful of negative readings in three years, the MSBI has notched sustained declines in the last three months. The decline over a six-month period stood at 1.9 percent and represents the largest percentage decline during a six-month period 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 enough 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 June MSBI reflects data that correspond to the month of May.
Two components made negative contributions to the overall index in June. A large decline in coal production accounted for a significant portion of the MSBI’s downward movement this month, followed by another increase in unemployment insurance claims. Building permits for new single-family homes, natural gas production and the yield curve boosted the index, but the overall impact was minor for two of the three indicators. Stock prices for the state’s largest employers had virtually no impact on the index.
“The MSBI fell for the fifth consecutive month and points to the strong likelihood of weak economic conditions for the state as a whole over the near term. In fact, with a measured 1.9 percent annualized decline over the last six months, the index is close to satisfying one of the main criteria needed to signal a possible economic downturn,” said Brian Lego, BBER research assistant professor. “However, the recent weakness in the index has been driven largely by significant deterioration in only two underlying indicators, unemployment insurance claims and the trade-weighted dollar, and not the majority needed to indicate a downturn is likely. Initial unemployment insurance claims have increased the past eight months in a row and are 37 percent higher on an annualized basis over the last six months. The recent rise in claims is certainly cause for concern as it points to suggest 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 has eased somewhat the last two months, but at current levels remains a 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. In fact, the preliminary estimate for statewide coal production in May was at its lowest seasonally adjusted level in nearly 31 years.”
“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 more than 13% 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 has been increasingly volatile over the course of 2015. 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, 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, please visit be.wvu.edu.
Follow @WVUToday on Twitter.