The Mountain State Business Index declined 0.1 percent for July, marking the fifth decline in the last six months.

Following revisions to several of the MSBI’s underlying indicators, the index was revised upward marginally in June from a slight decline to no change. Nonetheless, the index is currently experiencing its worst performance in six years.

“Despite another month of decline in the Mountain State Business Index, we have some guarded optimism that the West Virginia economy will emerge from this slowdown in the coming months,” 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. “It is undeniable that declines in coal production are severely hurting West Virginia’s economy and the MSBI, but our optimism stems from the fact that other economic indicators that help make up the index look more positive or at least seem to be stabilizing.”

The MSBI serves as an up-to-date gauge of West Virginia’s expected economic performance over the very near term. This month’s result for the MSBI points to the potential for weak economic prospects for the state as a whole during the months in late fall.

After only registering a handful of negative readings in three years, the MSBI has posted appreciable declines since the beginning of 2015. The decline over a six-month period stood at 2.1 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 statistically 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 July MSBI reflects data that correspond to the month of June.

While there were four components that made negative contributions to the overall index in July, continued erosion in coal production accounted for nearly all of this month’s decline in the MSBI. Unemployment insurance claims and the trade-weighted dollar were marginally worse compared to last month, while the stock index fell nearly two percent. A strong reading for building permits for new single-family homes as well as moderate increases in natural gas production and the yield curve were positive contributors and nearly offset the indicators weighing on the index.

“The MSBI is down sharply since the beginning of the year. In fact, the index’s measured 2.1 percent annualized decline over the last six months satisfies one of the main criteria needed to signal a possible economic downturn,” said Brian Lego, BBER research assistant professor. “However, the weakness seen in the index earlier this year was driven largely by significant deterioration in unemployment insurance claims and the trade-weighted dollar, while sharply-declining coal production has been the primary negative contributor the past two months. In fact, the preliminary estimate for West Virginia coal production in June was at its lowest seasonally adjusted level in nearly 31 years.

“Initial unemployment insurance claims rose for the ninth consecutive month and are more than 37 percent higher on an annualized basis in the past six months. The surge in claims is certainly a signal for labor market turmoil and cause for concern. With that said, claims remain quite low by historical standards and are lower than levels observed even as recently as last year.

“The state’s real trade-weighted dollar 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, the overall outlook for West Virginia’s coal industry remains negative. The surge in northern coal production that buoyed the industry in 2014 appears to have ended for now following announcements of idling or cuts in output at several major mining operations. Also, the long-term decline in the state’s southern coalfields should continue due to a combination of market forces, regulatory changes and policy uncertainty.”

“On a positive front, new home construction in the state appears to be improving as permit issuances for new single-family homes has increased sharply on a seasonally-adjusted basis in the last two months. Also, though natural gas output has been somewhat volatile over the course of 2015, statewide production for calendar year 2015 is still expected to finish above its pace from last year. The main concern remains how long the extremely low prices seen for natural gas and other parts of the energy complex will persist and to what extent they could lead to further delays or cancellations in investment and exploration activity in the Marcellus and Utica Shale plays,” 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.

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CONTACT: John Deskins; WVU College of Business and Economics
304.293.7876, John.Deskins@mail.wvu.edu

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