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Mountain State Business Index: West Virginia economy headed toward moderate growth

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Mountain State Business Index for April 2017
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The Mountain State Business Index increased slightly in April, posting its eighth improvement in the last nine months. Economists at West Virginia University said the MSBI has jumped 2.5 percent on an annualized basis over the last six months and is 1.5 percent above the level registered in April 2016.

“These metrics highlight the fact that West Virginia’s economy is clearly in recovery and should post moderate growth over the next several 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.

At the same time, while conditions are improving for the state’s economy as a whole, performances remain very different across many of West Virginia’s regions. Several regions are struggling to stabilize from a steep economic downturn, while others are recording solid growth in jobs, income and other key measures.

“We are encouraged that the recession has ended and that growth is under way in West Virginia overall, based on the last eight months or so of readings from the Mountain State Business Index,” Deskins said. “However, on the down side, we see relatively modest growth overall and the economic struggles continue in some regions of the state.”

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 April 2017 MSBI reflects data that correspond to the month of March 2017.

For April, four components made positive contributions to the overall index, but building permits for new single-family homes provided the largest addition to the MSBI by a wide margin as initial unemployment insurance claims, natural gas production and stock prices improved only slightly from their previous readings. The yield curve had the largest negative impact on the April MSBI. A higher value for the state’s trade-weighted dollar and a downtick in coal production weighed on the index, though these impacts were small.

“West Virginia’s economy continues to make positive steps forward after emerging from recession nearly a year ago and is poised for additional growth over the next couple of quarters,” said Brian Lego, BBER research assistant professor. “Although the state’s economy will require a sustained period of growth to recover from its recent bout with recession, the majority of the state’s economic regions should move in a positive direction.

“Stronger seasonal demand, inventory rebuilding and higher natural gas prices have boosted demand for thermal coal during the last several months, though most of that supply is being filled by several highly productive operations in northern West Virginia. At the same time, conditions have improved measurably for the state’s beleaguered southern coalfields, as mined tonnage increased nearly 20 percent on a year-over-year basis during the first quarter of 2017 on the weight of increased metallurgical and thermal coal production.”

Lego said he does not foresee West Virginia’s coal output rising substantially higher than the pace registered during the first quarter of 2017. “For the next several years, the state’s coal industry will be more in line with what prevailed during early-2015 rather than the dismal times that prevailed in late-2015 and much of 2016. Unfortunately, given that many domestic utilities still have plans to shift even further toward natural gas for baseload power in the coming years, and absent any dramatic changes in technology for coal-fired power plants or upward shifts in the cost of drilling for or burning of natural gas, the state’s thermal coal production will face an uphill battle from a market perspective,” Lego said. “Southern West Virginia coal production will trend lower over the longer term as production costs rise due to a dwindling base of reserves, but the region could enjoy periods of stronger growth in tonnage due to stronger-than-expected global thermal and/or met coal demand or supply disruptions from Australia or other global suppliers.

“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 a significant decrease, but the industry’s performance has been fairly volatile overall. The industry’s up-and-down movement has generally faded, with several firms already announcing an increase in new wells and the addition of four rigs since the beginning of the year. 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. Finally, the eventual development of downstream processing facilities in the Marcellus and Utica plays offers further upside beyond natural gas production and jobs, including enhanced opportunities for several manufacturing industries,” 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. For further information about the WVU College of Business and Economics, follow B&E on Twitter at @wvucobe or visit business.wvu.edu.

-WVU-

CONTACT: John Deskins; WVU College of Business and Economics
304.293.7876 or john.deskins@mail.wvu.edu

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