The Mountain State Business Index declined 0.1 percent from its August 2015 reading, continuing its considerable fall since January. The index is in the midst of its worst performance in six years.

“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.

After generally positive results during the past three years, the index continues to hover just above the critical six-month annualized decline of 2 percent, which is highly suggestive of weakening economic activity over the course of the next quarter or two. The index 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 sluggish economic growth for the state as a whole into the first few months of 2016.

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 September MSBI reflects data that correspond to the month of August.

Four components made negative contributions to the overall index in September. Coal production had a measurable negative impact on the index, with a weaker reading for building permits accounting for the majority of this month’s drop. The stock index also saw a notable decline, with its largest month-to-month drop since the third quarter of 2011. The yield curve and unemployment insurance claims weighed on the index, but their overall impacts were small. Natural gas production made a large positive contribution to the index, while the trade-weighted dollar pulled the index up slightly. Coal production had no measurable effect on the MSBI, which marked a departure from the seven consecutive months prior it had weighed heavily on the overall index.

“The MSBI’s string of weak readings over much of 2015 have hinted at the potential of an economic downturn,” said Brian Lego, BBER research assistant professor. “However, one missing ingredient to the stronger possibility of a coming economic downturn has been the lack of depth and consistency in declines for the index’s underlying indicators. Rather than seeing sufficiently large enough declines across a majority in the key macroeconomic data points, rapidly-declining coal production was a key driving force in the index’s poor performance to date in 2015.

“Initial unemployment insurance claims continued to rise in August and are nearly 19% above levels recorded last year. The surge in claims is a signal of the labor market turmoil being experienced in portions of West Virginia, much of it related to the coal industry’s recent struggles, and does suggest the unemployment rate could nudge even higher heading into the fall. With that said, the rate of increase has come down noticeably since the spring and claims remain much lower when viewed in comparison to time periods in which the state was in a full-blown economic downturn.

“The state’s real trade-weighted dollar was a net positive this month but remains a risk to growth over the near term. Exports account for an above-average 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. The stock price measure has taken a considerable negative turn over the past few months as lingering concerns over global economic growth and other issues have weighed on equity markets. Even with potential moderate improvements in coal production over the next few months, the overall outlook for West Virginia’s coal industry remains negative due to a combination of market forces and policy uncertainty.”

“Natural gas output has been somewhat volatile, but statewide production has edged higher over the course of 2015 and will finish the year well ahead of last year’s breakneck pace. 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, please visit be.wvu.edu.

-WVU-

pg/09/28/15

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

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