While largely unchanged from its February 2016 reading, the Mountain State Business Index (MSBI) suggests the West Virginia economy will remain in recession through the next several months. The MSBI has pointed to a significant deterioration in economic activity since last spring and indicates the state’s economy has likely been in recession since mid-2015.

“The outlook for the West Virginia economy is extremely weak at the moment given continued sizeable declines in the Mountain State Business Index, based in part on recent data revisions,” 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 appears that West Virginia overall is in recession and this status is expected to continue into the summer. However, we should be mindful that economic outcomes vary widely across the state and the outlook is substantially more optimistic in various parts of the state.”

The MSBI serves as an up-to-date gauge of West Virginia’s expected economic performance over the very near term by combining 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 consistent majority of the individual components also record statistically significant negative contributions during that same time period.

Seven economic indicators that were determined to lead expansions or contractions in the West Virginia economy were selected as inputs to the MSBI. 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 output. The March 2016 MSBI reflects data that correspond to the month of February.

For March, three components made negative contributions to the overall index, led by a 3.1 percent month-to-month decline in coal production. The yield curve also weighed heavily on the MSBI this month, while the seasonally-adjusted level of unemployment insurance claims also trended higher for the fifth consecutive month. By contrast, three indicators made positive contributions to the index, with solid month-to-month gains registered for natural gas production and building permits for single-family homes. The trade-weighted dollar also bolstered the index slightly, while the stock price index component had no appreciable effect on the MSBI.

“Preliminary data suggested West Virginia’s economy was quite weak throughout most of calendar year in 2015, but failed to satisfy the thresholds used to signal a recession was indeed imminent. However, subsequent revisions to the MSBI’s underlying indicators and continued worsening in several of the index’s components now point to the fact that West Virginia’s economy has experienced a sufficiently deep and broad-based enough drop in activity to suggest the state fell into recession territory by mid-2015. Unfortunately, the data also suggest the state’s economic downturn will likely continue at least into this summer,” said Brian Lego, BBER research assistant professor.

“A significant portion of the state’s economic downturn can be linked to plummeting coal production. Statewide mine output during the first quarter of 2016 will likely come in at its lowest level in decades and could be the lowest total for quarterly production outside of a strike episode since the 1930s. Environmental policy, falling export demand, warmer-than-normal winter weather and increased utilization of natural gas by electric utilities have all combined to weigh heavily on coal production. The latter two factors have led to a substantial build-up of coal stockpiles that will cause the domestic thermal coal market to remain significantly oversupplied into 2017.

“The downturn in coal output has also boosted unemployment insurance claims, particularly in several Southern West Virginia counties where coal mining directly accounts for large portions of overall jobs and as much as half of wages. In addition, a significant portion of secondary industries in these areas are dedicated almost solely to supporting mining activity. Finally, with coal severance tax collections accounting for a significant share of state (and local) government revenue, the coal industry’s downturn has helped to create a sizable shortfall in the FY 2017 budget cycle,” Lego said.

“While the other half of the state’s energy sector is not enduring the same magnitude of decline, the skyrocketing growth in natural gas production has waned. A protracted period of extremely low prices has caused most oil and gas companies operating in West Virginia and throughout the Appalachian basin to idle rigs, slash capital investment plans and delay new exploration activity in the Marcellus and Utica Shale plays. Initially, these pullbacks prompted job losses, but more recently have caused gas production to weaken as limited growth in output from new wells brought on-line during 2015 is being offset by declining withdrawals from legacy wells. We anticipate more volatility for the state’s natural gas producers to persist into 2017, with production changes remaining highly sensitive to small swings in regional spot prices. Longer term, however, prospects remain strong thanks to growing demand from the electric utility sector, the build-out of pipeline infrastructure throughout the mid-Atlantic region and the anticipated opening of LNG export terminals,” 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.



Follow @WVUToday on Twitter.