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Mountain State Business Index: West Virginia continues on path of economic recovery

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MORGANTOWN, West Virginia — The Mountain State Business Index recorded a trace increase in May, marking the ninth time the index has improved on a month-to-month basis out of the last 10 months. Economists at West Virginia University said the MSBI has risen 1.9 percent on an annualized basis over the last six months, and has also notched a 1.6 percent gain over its May 2016 reading.

“Even though the rate of growth in the MSBI slipped this month, these metrics illustrate that West Virginia’s economy remains firmly in recovery territory 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.

Nonetheless, while conditions are improving for the state’s economy as a whole, economic performances for many of West Virginia’s regions continue to vary, quite substantially in some cases. Indeed, several regions are struggling to stabilize from multiple years of steep economic declines, while others have recorded fairly consistent 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 readings from the Mountain State Business Index over the last nine months,” Deskins said. “On the downside, we see relatively modest growth overall and the economic struggles continue in certain parts 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 May 2017 MSBI reflects data that correspond to the month of April 2017.

For May, three components made measurable negative contributions to the overall index, led mostly by sizable month-to-month declines in building permits for new single-family homes and coal production. The yield curve also contributed negatively to the MSBI. Initial claims for unemployment insurance and natural gas production were the two positive contributors to the May MSBI and their improvements ultimately lifted the index to a gain. The state’s trade-weighted dollar and the index of stock prices for the state’s largest public employers had negligible impacts on the MSBI’s performance.

“West Virginia’s economy continues to make positive steps forward after emerging from recession nearly a year ago and appears to be headed for additional growth during the next several months,” said Brian Lego, BBER research assistant professor. “Although the state’s economy will need solid and sustained growth to recover from its recent episode of recession, the majority of the state’s economic regions are expected to move in a positive direction during 2017.

“Notwithstanding this month’s weaker reading, coal production activity has improved measurably since late last year. In addition, while most of the new supply is being filled by several highly-productive operations in northern West Virginia, activity has also picked up in some instances within the state’s beleaguered southern coalfields. In fact, the region’s mined coal tonnage has increased by an estimated 10 percent on a year-to-date basis in 2017 compared to the same timeframe a year ago.”

At the same time, Lego said he does not foresee West Virginia’s coal output increasing much, if any, beyond its current pace. “For the next several years, the state’s coal industry will likely be more in line with what prevailed during early-2015 versus the extremely dismal times that prevailed in late-2015 and much of 2016. Given that many domestic utilities still have plans to shift their generation portfolios even further toward natural gas and/or renewables in the coming years, and without any expected shifts in technology for coal-fired power plants or the cost of drilling for or burning of natural gas, thermal coal production will face an uphill battle from a market perspective in many of the states that are traditional destinations for West Virginia coal shipments,” Lego said. “Furthermore, Southern West Virginia coal production will trend lower over the longer term as production costs rise, but the region could see some periods of improvement depending on the health of global export markets. 

“The state’s natural gas industry has emerged from a sustained period of weakness, and though its performance is not anywhere close to what was observed in 2014, several firms have increased drilling activity and four active rigs have been added since the beginning of the year. In addition, recent increases in midstream capacity, such as the Rover pipeline, new compression stations and other facilities, have (or will shortly) eased regional bottlenecks and enable local hub prices to rise more in line with broader spot prices, incentivizing more drilling and exploration activity. Longer term, the prospects for natural gas are exceedingly positive as domestic use continues to rise, infrastructure constraints continue to be alleviated with new pipeline capacity and LNG exports from the East Coast commence within the next couple of years. Even beyond that timeframe, downstream processing facilities in the Marcellus and Utica plays offer further upside for natural gas production and jobs, but also in other areas as they enhance opportunities for the state and region’s manufacturing base,” 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-

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

Follow @WVUToday on Twitter.