Most of the underlying economic indicators for the Mountain State Business Index suggest a turning point could be possible in the short term for West Virginia’s economy, according to economists at West Virginia University.
The MSBI for May was unchanged, as slight revisions to underlying data in the previous two months show the index has been, essentially, flat for the past three months. And while one of the MSBI’s key benchmarks — the overall index’s six-month annualized rate of change — continues to indicate the economy is in recession, there may be some hope.
“The outlook for the West Virginia economy remains weak, but we gain some optimism that the recession could end this summer given a recent stabilization in the Mountain State Business Index,” said John Deskins, director of the Bureau of Business and Economic Research, which operates within the WVU College of Business and Economics and produces the economic index.
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 May 2016 MSBI reflects data that correspond to the month of April.
For May, four components made varying degrees of positive contributions to the overall index, led by appreciable declines in initial unemployment insurance claims and the trade-weighted dollar. Natural gas production also increased at a solid 2.2 percent pace in April, while stock prices for the state’s largest publicly-traded employers increased 1.1 percent from the previous month. At the same time, coal production fell by a seasonally adjusted nearly 5 percent in April, a negative contribution that essentially outweighed the indicators that improved over last month. The spread between 10-year Treasury note rate, or long-term rate, and the three-month Treasury bill rate, or short-term rate, was unchanged between March and April.
“Although the MSBI’s performance in recent months offers some room for cautious optimism in West Virginia’s economy going forward, the persistence and depth of struggles for the coal industry will ultimately limit any upside potential for growth in many parts of the state,” said Brian Lego, BBER research assistant professor. “Final data show statewide coal mine output plummeted to a seasonally-adjusted annualized rate of 79 million tons during the first quarter of 2016 and the preliminary figures for April and May suggest the second quarter could be even weaker. 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 growth to weaken as growth in well output has been limited to the re-fracking of existing wells or new wells brought online at some point in 2015. We anticipate volatility to persist for the state’s natural gas producers into calendar year 2017, as production will be highly sensitive to small upward or downward moves 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 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 industries 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.
CONTACT: John Deskins; College of Business and Economics
Follow @WVUToday on Twitter.