Although the Mountain State Business Index was flat during April, the economic indicator for West Virginia still points to recession conditions persisting in the state over the next few months.
The initial March 2016 reading was revised downward slightly and the index appears to have shown some signs of stabilizing over the past two months. However, the MSBI shows that the ongoing plunge in West Virginia coal production continues to weigh heavily on broader economic conditions in several parts of the state.
“The outlook for the West Virginia economy remains weak and we can expect recession conditions to continue into the summer,” 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. “However, we should be mindful that economic outcomes vary widely across the state and the outlook is substantially more optimistic in some regions. Also, we gain some optimism because most of the indicators that comprise the index have turned more positive.”
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 April 2016 MSBI reflects data that correspond to the month of March.
For April, six components made varying degrees of positive contributions to the overall index, led by a 7.3 percent month-to-month increase in single-family building permits and a second consecutive month of strong growth in natural gas production. A drop in initial unemployment insurance claims also provided a solid boost to the MSBI, while the trade-weighted dollar index, stock prices component and yield curve contributed modest amounts to the index. At the same time, coal production fell by a seasonally adjusted 6 percent in March, a negative contribution that nearly outweighed all of the other indicators that improved over last month.
“Although the MSBI’s performance, particularly for a few of the indicators that comprise the index, offers some room for cautious optimism in the state’s economy going forward, the persistence and depth of the coal industry’s struggles weigh significantly on any possibility of the state emerging from recession before the summer months,” said Brian Lego, BBER research assistant professor. “Preliminary data show statewide coal mine output plunged to a seasonally-adjusted annualized rate of 72 million tons during the first quarter of 2016. Absent any large increases in production activity over the remainder of the year, total production recorded for 2016 as a whole could fall to its lowest (non-strike influenced) level in nearly a century. The combined effects of environmental policy, falling export demand, warmer-than-normal winter weather and increased utilization of natural gas by electric utilities are causing unprecedented weakness in coal production.
“While the other half of the state’s energy sector is not enduring the same problems, 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, we do see prospects remaining strong as demand for natural gas rises with many new gas-fired electric utilities scheduled to come online in the coming quarters and years to offset waning coal use. Furthermore, the build-out of pipeline infrastructure throughout the mid-Atlantic region, the anticipated opening of LNG export terminals and eventual addition of downstream processing facilities also offer cause for optimism in the state and regional natural gas sectors over the long term,” 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.
CONTACT: John Deskins; WVU College of Business and Economics
Follow @WVUToday on Twitter.