The Mountain State Business Index increased 0.1 percent in October, marking measurable gains in the West Virginia economy in five of the past seven months.
Economists at West Virginia University said this also represents the index’s best overall stretch of performance in nearly two years, and provides mounting evidence that even though some regions in West Virginia are still struggling, the state’s economy as a whole is in the early stages of a mild recovery.
“Our economic optimism continues to rise given the recent stabilization and, now, growth 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 the recession in West Virginia has come to an end and some growth is occurring; however, it remains uncertain as to when the state will see robust 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 October 2016 MSBI reflects data that correspond to the month of September.
For October, four components made positive contributions to the overall index, with a sizable gain in seasonally-adjusted natural gas production providing the largest positive boost. Initial unemployment insurance claims, coal production and the yield curve also added to the index. Building permits for new single-family homes, stock prices and the state’s trade-weighted dollar were negative contributors to the index in October.
“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 and extensive damage to various forms of infrastructure will continue to affect portions of the state until larger-scale rebuilding activity occurs.”
Lego said that even as the rebuilding process begins, the state’s overall outlook remains “mixed at best.” The state’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 U.S. dollar, Lego continued.
Total coal tonnage from West Virginia mines will likely end the calendar year at its lowest non-strike influenced level in many decades, he 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,” Lego said. “Unfortunately, these positive boosts are expected to be temporary and the state’s coal industry will likely mount a moderate rebound during the next few years.”
Domestic utilities will likely continue to shift toward natural gas and renewable resources in response to both market- and regulatory-related factors that favor the latter fuel sources. In addition, diminishing (profitable) reserves, particularly in the state’s southern counties, put a sizable portion of West Virginia coal at a competitive disadvantage versus other U.S. coal basins and overseas producers, he said.
“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 the price spread between the Henry Hub and the Appalachian Basin, he explained.
“Longer term, however, prospects for natural gas are overwhelmingly positive with several major pipeline projects under construction or in various phases of planning. Moreover, 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) offers additional cause for optimism in the state’s natural gas industry,” 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
304.293.7876 or firstname.lastname@example.org
Follow @WVUToday on Twitter.