The November Mountain State Business Index, produced by the West Virginia University Bureau of Business and Economic Research in the College of Business and Economics, increased 0.2 percent, marking the index’s first month-to-month gain of the year and the first since December 2014. The index is still nearly 1 percent below its level from November 2014.
“The outlook for the West Virginia economy remains uncertain at the moment given the year-over-year decline in the Mountain State Business Index,” said John Deskins, BBER director. “However, this improvement certainly gives us some cause for optimism that a better economy is on the horizon.”
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 sluggish economic growth for the state as a whole into the first few months of 2016.
Following a solid improvement between the third quarter of 2012 and fourth quarter of 2014, the MSBI experienced a significant decline over the first several months of 2015. Although the index continued to trend lower, the drop-off was much smaller in percentage terms and in the past two months the MSBI’s critical metric of 6-month annualized change has improved considerably and now sits at -0.6 percent.
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 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 November MSBI reflects data that correspond to the month of October.
Five components made positive contributions to the overall index in November, but building permits by far provided the largest positive impact as the level of seasonally-adjusted permits for new homes jumped nearly 13 percent compared to October 2015. Unemployment insurance claims, the trade-weighted dollar index, coal and natural gas production contributed small positive amounts to the MSBI. The stock index weighed on the MSBI for the 8th consecutive month while the yield curve had its first appreciable negative impact on the index since the first quarter of 2015.
“Even with this month’s healthy increase, the MSBI’s performance in 2015 points to an economy that has struggled, but not quite enough to indicate the state has fallen into a recession or that one is clearly 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 of the index’s underlying indicators, with rapidly-declining coal production and surging initial unemployment insurance claims causing most of the index’s steepest losses earlier in the year.
“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 will likely 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 natural gas production has been fairly erratic over the course of 2015. Concerns remain about the persistence of the current extremely low price environment seen for the entire fossil fuel energy complex and how production is ultimately affected over the longer term. Rig counts, capital investment plans and exploration activity have already been cut, so persistently weak natural gas prices will likely lead to appreciable losses in future production activity for the Marcellus and Utica Shale plays as legacy well production declines overwhelm productivity growth,” Lego said.
Technical documentation related to the Mountain State Business Index and other BBER publications is 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.
CONTACT: John Deskins; WVU College of Business and Economics
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