Mountain State Business Index: West Virginia recession likely over, but disastrous flooding will affect state's economic performance
West Virginia’s recession is over, at least for now, but last weekend’s flooding could weigh heavily on the state’s future economic performance, according to the monthly Mountain State Business Index released Thursday.
“Our optimism that this recession is ending continues to rise in a guarded fashion given the stabilization that we see occurring in the Mountain State Business Index,” said John Deskins, director of the WVU Bureau of Business and Economic Research, which operates within the College of Business and Economics and produces the MSBI. “It appears that the recession in West Virginia is coming to an end; however, it remains very uncertain as to when the state will see robust economic growth.”
The MSBI remained unchanged in June, but slight revisions to several of the index’s underlying data sources reveal a slight uptick over the past three months. Specifically, two primary benchmarks for the MSBI that help to determine whether the economy is at a turning point have generally been in positive territory. The June 2016 MSBI reflects data that correspond to the month of May.
For June, three components made positive contributions to the overall index, with the largest improvement coming from stock prices for the state’s largest publicly-traded employers advancing by 3.5 percent. Small advancements for building permits of new single-family homes and initial unemployment insurance claims offset moderately weaker readings on the trade-weighted dollar, natural gas production, and rate spreads on the three-month Treasury note (short term) rate and the 10-year Treasury note (long term) rate. The index would have registered an appreciable gain had statewide coal production not experienced another large decline (down 4.8 percent) between April and May.
“The MSBI’s performance in recent months indicates the state’s economy has likely emerged from recession, at least for the time being, which should allow for some sense of cautious optimism going forward,” said Brian Lego, BBER research assistant professor. “However, this month’s disastrous flooding events in portions of central and southern West Virginia will weigh on the state’s economic performance over the near term, as residents in these areas deal with the fallout associated with the widespread destruction of businesses, homes and infrastructure.
“Even as the rebuilding process begins, the state’s overall growth potential will be limited as the coal industry, one of the key drivers that has weighed so heavily on its economic performance in recent years, continues to see significant struggles. Indeed, after a poor first quarter, preliminary data point to the level of output from the state’s coal mines falling to almost unprecedented levels as both domestic and export demand continue to fall. Absent any unexpected improvements over the remainder of the year, total coal tonnage in 2016 could fall to its lowest (non-strike influenced) level in nearly a century.”
“The other half of the state’s energy sector is not enduring the same problems, but the skyrocketing growth in natural gas production has waned and a protracted period of extremely low prices has led to rigs being idled, capital investment plans being slashed and new exploration activity being delayed through the Marcellus and Utica Shale plays. Re-fracking of existing wells or new wells has kept output growing moderately since 2015, but the industry will see volatility persist into 2017 as production is highly sensitive to small upward or downward moves in regional spot prices. Prospects remain strong over the long term as natural gas use rises, given the plans for numerous new gas-fired power plants in the U.S. and the build-out of pipeline and LNG export terminal infrastructure. Also, the eventual addition of downstream processing facilities offer cause for optimism in the state’s (and region’s) natural gas industry over the long term,” Lego said.
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 2 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.
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
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