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Mountain State Business Index: State has overall growth, but with wide range of regional economic health

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The Mountain State Business Index increased 0.4 percent in January and, following minor revisions to previous months, has posted gains of 0.2 percent or better in four out of the past five months. At the same time, West Virginia is a picture of a wide range of economic well-being, with some regions in the midst of a significant struggle while others appear to be stabilizing or growing at a healthy rate.

The MSBI has climbed at a 2.9 percent annualized rate over the last six months. Combined, the gains highlight that the state’s economy emerged from a sharp recession during the second quarter of 2016 and showed solid signs of improvement over the last several months.

“We are confident that the recession has ended and that growth is under way in West Virginia overall based on the last six months of readings from the Mountain State Business Index,” said John Deskins, director of the West Virginia University Bureau of Business and Economic Research, which operates within the College of Business and Economics and produces the MSBI. “Our focus now is on the extreme diversity across West Virginia where some regions are healthy, some are stable and some remain in very difficult economic circumstances.”

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 January 2017 MSBI reflects data that correspond to the month of December 2016. Due to the unavailability of several underlying series, the MSBI will not be published in February.

For January, six components made positive contributions to the overall index, with coal, natural gas production and claims for unemployment insurance contributing nearly equivalent positive amounts. Building permits for new single-family homes was the only negative contributor for the month, though the impact was negligible.

“The MSBI’s performance over much of the second half of 2016 indicates West Virginia’s economy has shown promising signs of improvement after having emerged from a deep recession,” said Brian Lego, BBER research assistant professor. “Calendar year 2017 is largely expected to be a transition year for the state’s economy as a whole, as several of the regions that have been struggling significantly over the past few years begin to stabilize and possibly begin to register measurable growth. Regional economies that have posted solid gains in recent years, such as the North-Central and Eastern Panhandle regions, will likely continue to buoy the state’s overall performance.

“Even the state’s coal industry has seen its prospects improve in recent months, though this is coming off one of the industry’s weakest years in several decades. Stronger seasonal demand, inventory rebuilding and rising natural gas prices have boosted demand for thermal coal output, largely from several highly-productive operations in the state’s northern mining region. However, output from the state’s southern mines jumped 4 million short tons overall during the second half of 2016 as market conditions for metallurgical coal improved enough to allow lower-cost producers to add shifts and a few operators to re-start idled capacity.”

Lego said he does not foresee marked improvement in West Virginia’s coal output. “For the next several years, the state’s coal industry should be in a better position compared to what it experienced in late-2015 and early-2016. However, the underlying trend of domestic utilities shifting toward other fuel sources (e.g. natural gas) will continue, and barring any dramatic changes in technology for coal-fired power plants or major shifts in the cost of natural gas, this will effectively keep a lid on domestic use of the state’s coal,” Lego said. “For Southern West Virginia coal production in particular, many utilities have already shifted the sourcing of their coal purchases to other basins in recent years. When combined with the high production costs faced by most of the region’s thermal and met coal producers, Southern West Virginia coal output will trend lower over the long term, with occasional jumps in output caused by stronger-than-expected global growth or the occasional supply disruption abroad.

“Conditions have not been anywhere near as bad for the state’s natural gas industry, but the skyrocketing production growth of recent years has not re-emerged as extremely low prices prompted layoffs, idled rigs, slashed capital investment plans and several bankruptcies. Re-fracking of existing wells and some limited new well development kept output from falling much, but the industry’s performance has been fairly volatile overall. The industry’s up-and-down movement should begin to fade as 2017 progresses, with several firms already announcing an increase in new wells. 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) offer 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 business.wvu.edu/bber.

-WVU-

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CONTACT: John Deskins; WVU College of Business and Economics

304.293.7876 or john.deskins@mail.wvu.edu

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