The Mountain State Business Index increased 0.2 percent in September, marking the index’s best overall performance since late 2014 and, in conjunction with other metrics, more strongly indicates that the state’s economy emerged from recession several months ago.
The MSBI has posted month-to-month gains in four of the last six months. However, at the same time, the index points to a lackluster recovery thus far in comparison to previous business cycles, as the massive flooding event in June and other structural economic problems weigh on statewide growth potential.
“Our optimism is growing in a guarded fashion now that we have seen four gains in the Mountain State Business Index over the past six months,” 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 economic recovery is becoming more firm, but it remains very uncertain as to when the state will see stronger economic growth.”
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 September 2016 MSBI reflects data that correspond to the month of August.
For September, four components contributed in a positive manner to the overall index, with the largest net improvements coming from coal production and initial unemployment insurance claims. Stock prices and the state’s trade-weighted dollar also added to this month’s gain in the MSBI. By contrast, building permits and the yield curve were negative contributors to the overall index. Natural gas production remained stable and had no measurable impact on the MSBI.
“The MSBI’s performance over the past several months indicates that the state’s economy is likely in its earliest stages of recovery, which comes on the heels of a relatively sharp contraction in economic activity during much of 2015 and the first several months of 2016,” said Brian Lego, BBER research assistant professor. “This summer’s disastrous flooding has certainly held back the state’s growth in recent months. Furthermore, temporary, and in some cases, permanent, job losses linked to the destruction of businesses, the displacement of residents after thousands of homes were damaged or destroyed, as well as extensive damage to various forms of infrastructure will continue to affect portions of the state until larger-scale rebuilding activity takes place.”
“But even as this rebuilding process begins, the state’s overall outlook remains mixed at best as West Virginia’s energy industries are expected to have measurably different growth prospects going forward. Data indicate statewide coal production plunged during the first half of the year, as coal’s share of domestic electricity generation fell to unprecedented levels and global demand for metallurgical coal remained weak amid an overcapacity in global steel markets and a strong US dollar. Total coal tonnage from West Virginia mines will likely end the calendar year at its lowest (non-strike influenced) level in many decades,” Lego said.
A warmer-than-normal summer has helped utilities draw down bloated stockpiles of coal and rising world prices combined with a slightly weaker dollar (relative to the Australian dollar) suggest the met coal market has bottomed out, the WVU economist said. Unfortunately, the state’s coal industry will likely enjoy only a moderate rebound at best over the next few years as utilities shift toward other fuel sources, in response to both regulatory- and market-driven factors, and high production costs put many of the state’s mines at a competitive disadvantage with other U.S. coal basins and overseas producers.
“Conditions have not been anywhere near as bad for the state’s natural gas industry, but the skyrocketing production growth of recent years has ended for now as low prices have led to layoffs, idled rigs, slashed capital investment plans, and delays in new exploration activity for Marcellus and Utica Shale assets,” Lego said. “Re-fracking of existing wells and some limited new well development has kept output from falling much thus far, but the industry’s performance has been fairly volatile. The industry’s up-and-down movement will likely persist into 2017 as production will remain sensitive to relative prices between the Henry Hub and the Appalachian Basin.”
Lego said in the longer term, however, prospects for natural gas are overwhelmingly positive with several major pipeline projects under construction or in various phases of planning. Moreover, he said, these pipelines along with LNG export capabilities from the East Coast will enable regional gas production to satisfy rising global use of natural gas, while the eventual development of downstream processing facilities in neighboring states (and perhaps in West Virginia) offer additional cause for optimism in the state’s natural gas industry.
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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