The Mountain State Business Index (MSBI) remained mostly unchanged from its September 2015 reading, as economists at West Virginia University said the future of the state economy was unclear.

The MSBI, which has fallen considerably since the beginning of the year, serves as an up-to-date gauge of West Virginia’s expected economic performance over the very near term. This month’s index indicates some stability or much smaller rates of decline, but points to the potential for sluggish economic growth for the state as a whole into the first few months of 2016.

“The outlook for the West Virginia economy remains uncertain at the moment given continued weakness in the Mountain State Business Index,” said John Deskins, director of WVU’s Bureau of Business and Economic Research, which operates within the College of Business and Economics and produces the MSBI. “The most likely outcome for the state’s economy is continued sluggishness over the next few months.”

After generally positive results during the past three years, the MSBI has fallen significantly since the beginning of 2015 and has also come in below its year-ago level in each of the last three months. The index did see its performance on the critical metric of six-month annualized change improve to a reading of -1.5 percent after falling below a 2 percent decline in the three previous months.

The MSBI combines several leading economic indicators into a single index number 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 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 October MSBI reflects data that correspond to the month of September.

Four components made negative contributions to the overall index in October, but only building permits and the stock index had a measurable negative impact on the index as coal and natural gas production fell only slightly from the prior month. Unemployment insurance claims provided the largest positive contribution to the October MSBI, marking the first month-to-month improvement in initial UI claims filings in a year. The trade-weighted dollar lifted the index slightly this month.

“The MSBI’s poor performance through the first half of 2015 and its continued sluggishness into recent months indicate West Virginia’s economy is struggling, but not quite enough for an economic downturn to be imminent,” said Brian Lego, BBER research assistant professor. “Indeed, there has been an overall lack of consistency and depth in the declines posted by a majority the index’s underlying indicators, as rapidly-declining coal production and surging initial unemployment insurance claims have been driving most of the index’s lackluster performance.

“Initial unemployment insurance claims notched their first month-to-month decline in a year and the slower rates of growth in recent months suggest the unemployment rate potentially reached its peak in the third quarter. While initial claims are relatively low from a historical perspective, they have increased 16 percent from a year ago and additional layoffs within the coal industry could push claims even higher over the near term,” Lego said.

“The state’s real trade-weighted dollar edged lower 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 globally. Should the dollar continue to appreciate or even remain at current valuations against other major currencies, it could weigh on demand for metallurgical coal and other goods destined primarily for export.”

“While coal production in West Virginia has certainly trended lower in recent years and will likely continue to do so for at least the next year, natural gas output has boosted the state’s overall economic performance. Growth in statewide production has been fairly erratic over the course of 2015 but, thanks to strong gains in the first half of the year, production for all of 2015 will finish well ahead of last year’s breakneck pace. However, the main concerns that have emerged are how long prices will remain at their current extremely low levels and how production responds to the price environment over the longer term. Rig counts, capital investment plans and exploration activity have already been cut, so persistently weak natural gas prices could lead to more appreciable losses in future production activity for 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, follow B&E on Twitter at @wvucobe or visit be.wvu.edu.

-WVU-

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

Follow @WVUToday on Twitter.